Some Facts About Startup Finance in Japan

Despite having high tech competence, Japan has not yet managed to create a thriving startup ecosystem. One of the main factors holding back new ventures is poor access to finance. It is estimated that on average a Japanese startup can secure about US$ 500,000, while a US startup can raise US$ 8.75 million. Most of startup investment in Japan comes from local companies. It is a win-win deal: entrepreneurs can build customer trust by relying on the appeal of their backers’ brands, and they in return can get some extra help with research and development. This kind of cooperation has contributed to Japan’s 3rd rank in R&D intensity in the 2017 Bloomberg Innovation Index.

James Riney, Head of the 500 Startups Japan fund, contrasts the capital available in Japan and the US in more detail. “If you combine angel investment, venture capital, and crowdfunding, the difference between capital available to startups in Japan and U.S. is roughly $1.2b vs $75b. Granted, Japan is a smaller economy, but it is still about 1/3 of the U.S. in terms of GDP,” he explains. According to his estimates, Japanese startups have access to US$ 1 billion of venture capital, US$ 0.17 billion of angel investment and US$ 0.01 billion of crowdfunding, while US startups can make use of US$ 48 billion of venture capital, US$ 24 billion of angel investment and US$ 2.7 billion of crowdfunding.

Riney also notes that venture capital in Japan is mainly corporate capital. He estimates that corporates contribute 80% of startup investment, while independent companies provide the remaining 20%. In the US, the figures are almost the exact opposite. In Riney’s opinion, Japanese venture returns have not yet reached the US level, which deters big investments. As a result, most of the investments are made for strategic rather than financial purposes. Also, some independent companies are reluctant to invest because they cannot find partners to spread the risk.

See also Why Isn’t Entrepreneurship So Popular in Japan?

In addition, crowdfunding in Japan is growing at a much slower pace than in the US. As Tim Romero, a Tokyo-based investor and entrepreneur, explains, one of the main factors behind this difference is the origin of crowdfunding in Japan: Initially, funds were mainly collected for charity purposes. Fundraising for business projects is still a relatively new concept there. The slow growth of crowdfunding has its own advantages, however. For example, Japanese companies have a chance to learn from the success and failure stories of US companies. Also, local crowdfunding platforms are eager to experiment with work formats in order to improve the overall service quality. For example, Kibidango, one of the newest crowdfunding platforms in Japan, conducts a thorough company screening before a campaign launch and interviews in person, provides one-on-one support throughout a campaign as well as tries to build long-term cooperation with clients or even a community. Such a business strategy means slower growth but higher success rates: Kibidango CEO Ryota Matsuzaki disclosed that 80% of campaigns reached their fundraising goals, and 100% delivered their products by June 2016.

Startup finance in Japan also does not look good from a marketing perspective. Japanese startups are reluctant to shift their marketing focus online, and stick to costly TV commercials, claims currentbiz, an Asian business news portal. Every single TV ad broadcast costs between ¥400,000 (about US$ 3,500) and ¥750,000 and (over US$ 6,500), excluding production costs. The unwillingness to follow the online marketing trend has a logical explanation. Brandon Hill, CEO of Btrax, a creative agency which specializes in Japan’s market, argues that it is difficult to attract the attention of Japanese consumers on social media and online channels. They show little trust in startups which try to reach them online, adds currentbiz. Besides, Japan’s advertising industry is dominated by TV commercials. They account for 41% of the market. For comparison: The market share of online advertising is estimated at about 23%. currentbiz makes a connection between the popularity of TV commercials and Japan’s ageing population. It forecasts that this demographic situation will need to be addressed in marketing campaign planning perhaps until the country reaches an age balance.

Despite these financial challenges, in 2015 Japanese startups raised a record high of ¥153.2 billion (US$ 1.33 billion) in total, breaking the 2006 record of ¥146.4 billion (US$ 1.27 billion), reports Japan Venture Research. Still, because of its declining population, Japan is not as attractive for international investors as China or India. There are only a few startups which have secured foreign capital, notes The Weekly Toyo Keizai, a Tokyo-based business and finance magazine. It recommends Japanese entrepreneurs to become more proactive in attracting foreign investment. Anis Uzzaman, CEO of Fenox Venture Capital, for example, suggests a 3-step action plan to convince multinational companies to acquire one’s startup. Step 1: carefully analyze a field which the CEOs of these companies often mention in their speeches. Step 2: focus on technologies which have not yet been utilized well in that field. Step 3: work hard to stand out in the market.

Moreover, Japan aims to boost fintech investment by allowing banks to own 5% of a non-financial company which develops tech solutions to finance since last autumn. It is part of the government initiative to advance financial technology in the country. It is expected that this move will encourage banks to invest millions of yen in fintech startups. This change in law is seen as an attempt to protect Japan’s banking sector. There are fears that Silicon Valley can harm it as much as it harmed the local mobile phone industry. “Japanese institutions are concerned that a Google Bank or Facebook Bank will conquer Japan,” admits Naoyuki Iwashita, Head of the FinTech Centre at the Bank of Japan. The Financial Times mentions that the Japanese Financial Services Authority is already considering other legal changes which would help local fintech companies get involved in regulated financial activities in order to improve their international competitiveness.

References:  Asia-Pacific Weeks Berlin 2016 | Michelle Jamrisko and Wei Lu, Bloomberg | James Riney, | Tim Romero, GaijinPot | Tim Romero, | Gavin Pereira, | The Weekly Toyo Keizai via Tokyo Business Today | Heidi Vella, Tech Wire Asia | Tom Braithwaite and Robin Harding, Financial Times