The large companies that now drive the Japanese economy were once startups founded in the postwar period. We hope to realize a second boom in business startups through these efforts.
From a nation known for bold economic moves back hampered lately by a lack of new market innovation, The Land of the Rising Sun has sought to revitalize its startup economy. Now, thanks to favorable market conditions and dedicated public-private partnerships, Japan is set to be ground central for some exciting new global ventures.
A proud nation famous for its drive and energy, Japan has long maintained a global identity that is uniquely its own. This profile is one driven by a distinct cultural ability to embrace an ancient past on one hand, while maintaining a joyful enthusiasm for the future on the other.
Everywhere you look, you find pleasing contradictions. Japan has a youthful ‘kawaii’-obsessed culture, alongside the longest-living people on earth. It is a nation that reveres its temples, harmony and timeless tradition – while boasting a thriving deep-tech export industry and world-class industrial robotics capabilities.
Yet to fans of the Land of the Rising Sun and its countless offerings, one stark contrast remains far less welcome than others. While Japan is the planet’s third-largest economy today, it is only its 13th most innovative nation.
Harder still to take perhaps is that among nations ranked above it in the Global Innovation Index 2023, are neighbors like Singapore, Korea and China, who while drawing ample inspiration from Japan’s famous economic miracle, have seemingly managed to update it.
Yet we need not look too far back to see that proving forecasts wrong is something well within the cultural and economic DNA of this industrious nation. In what became known as the Japanese Economic Miracle, Japan from 1945 to 1991 turned around a beleaguered economy, enjoying 46 consecutive years and rapid and sustained economic growth between post World War II and the end of the Cold War.
Today, these epic achievements seem to be the mind of the nation’s current leader, as he explores bold plans to rejuvenate his country’s powerhouse economy, by revitalizing the startup sector.
"The large companies that now drive the Japanese economy were once startups founded in the postwar period. We hope to realize a second boom in business startups through these efforts," said Japanese Prime Minister KISHIDA Fumio, speaking in late-2022 upon the release of a new five-year plan – which among other things is aimed at increasing investment in new business startups tenfold.
The government plans to invest 10 trillion yen ($65 billion) worth into the startup ecosystem by 2027, nurturing innovation: “The aim will be to make Japan the largest startup hub in Asia and one of the world's leading clusters of startups,” the report says.
According to recent reports, funding to startups is indeed on the move.
Research group Initial notes that startups in Japan received 877.4 billion yen ($6.2 billion) in investments in 2022, up from 850.8 billion yen ($6 billion) in 2021.
The startup ecosystem must of course move at first from a low base.
Whereas for instance, Japan-based startups received an estimated at $625 million in funding in 2013, startups in New York alone raised $2.9 billion in the same year.
According to 2021 research from the World Bank Group, Japan’s start-up ecosystem has historically been small for the size of the economy. Mostly domestically oriented, it has produced few globally recognized startup brands. Japanese Venture Capital (VC) investment in 2019 accounted for just 1.4% of the global market share: while unlike other leading ecosystems, Japan has been a net exporter of start-up investment.
Japan is the best country in Asia to live in and entrepreneurs recognize that. As the government creates a more start-up friendly environment, we expect great things.
Ben Horowitz, co-founder and general partner at venture capital firm Andreessen Horowitz (a16z), is one of these international VCs currently exploring the revitalization of the country’s startup ecosystem.
“When you compare it to the size and talent level of Japan, it’s underwhelming,” agrees Horowitz. “But that's why the Japanese government is working so hard to create the right incentives and environment to take advantage of the amazing intelligence and industriousness of the Japanese people.”
As Horowitz and his a16z team prepared to attend the Moment 2023 show in Tokyo in October 2023, he tells Bloomberg that he can already see positive change ahead for the Japanese startup ecosystem.
“Japan is the best country in Asia to live in and entrepreneurs recognize that. As the government creates a more start-up friendly environment, we expect great things.”
The Japan External Trade Organization (JETRO) sponsors of the Japan Pavilion at TechCrunch Disrupt 2023 from September 19-21 in San Francisco, showcased 10 carefully selected Japanese startups across a variety of industries: including enterprise technology, Web3, and generative AI. JETRO conducted a bootcamp for participating startups with the support of Silicon Valley accelerator US Market Access Center (USMAC) to help the entrepreneurs hone their networking and English- language pitch abilities.
New-look Startups in view
Included in the exhibitors were:
As rival markets face their own set of competitive pressure in the current international marketplace, the world’s third-largest economy has meantime emerged from the global pandemic with renewed respect for its hard work and dedication to maintaining a functioning and successful marketplace.
Japan has received numerous plaudits for its measured and effective response to the global pandemic, climbing to second in the world in the Global Softpower Index, behind only Germany, and first in the world in terms of its Future Growth Potential.
Horowitz believes that now is a perfect moment to re-energize the Japanese startup ecosystem: he sees a market propelled by an intelligent population, in a culture driven by what he calls “tremendous consideration for each other – and a relentless commitment to doing things the right way.”
He cites the nation’s demonstrated skillsets in fields such as manufacturing, material sciences and artificial intelligence as being of specific interest to international VCs such as himself.
“We think that these positive changes in Japan will make Japan the most attractive country for entrepreneurship in Asia.”
“Today, we are seeing a very significant emergence and growth of deep-tech and sustainability-related startups. They include life science and biotech, energy tech, smart city, advanced materials, and robotics. These are deep-tech domains where Japan has significant academic assets. We are seeing interesting startups emerge in these areas.”
What are some interesting markets for VCs to focus on?
What are four of the most interesting startups in Japan?
To achieve such heady goals, Japan’s government has recognized the need to open its doors to the world’s best and brightest innovators. In a move intended to attract more foreign investors, it intends to scrap a key restriction on overseas investments by domestic venture funds who are dedicated to backing startups. While Japan’s domestic startup funds must limit investment in foreign companies to below 50% of their portfolio holdings, the Industrial Competitiveness Enhancement Law allows for some flexibility.
Aligned with these moves, the government has shown a renewed commitment to fostering innovation within its various industry sectors. In early 2023, it announced new funding for R&D at universities and centers of excellence, as well as efforts to support local governments to establish start-up hubs and clusters.
Three centres, Tokyo, Sapporo and Sendai, have emerged as the focal points for start-up hubs in Japan. Elsewhere, Osaka, Hiroshima, and Fukuoka are utilising funds to attract business start-ups to their prefectures.
Change is in the Air
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