Japan VC Investment – The Perfect Storm

Japan accounted for the most Asian CVC backed deals in 2019 surpassing all other countries in the region.  A trend that is likely to continue well into the future.  However, as we alluded to in the title of this post, Japan is capital long but ideas short. 

Short Ideas

In a survey conducted by GEM Adult Population Survey in 2019, Japan ranked the lowest (10%) in Asia when asked the question “Entrepreneurship as a Good Career Choice?”

In terms of total entrepreneurial activity, Japan ranked 47th out of 50 countries surveyed and 32nd out of 33 countries in the “high income” bracket.

As you’ll see below, Japanese culture has a very strong tradition of saving but relatively speaking doesn’t seem to have much of a propensity towards entrepreneurship.  Japanese investors recognize the best blueprint for success is to mimic Masayoshi Son’s (Softbank’s CEO) strategy.  Hailed as a cultural hero in Japan, Son san received many plaudits for his investment in overseas start-ups such as Alibaba, turning $5M into $60B USD in the process and paved the way for Japanese investors to seek innovative companies far and beyond Japans borders.

Long Capital

As of 2020, 53% of TOPIX companies are net cash, out of all the major markets across the globe, this is by far the highest ratio of net cash companies.  Compare this to the 14% net cash companies listed on the S&P and it gives you a glimpse into the mentality of Japanese corporate management.

As a somewhat extreme example of this, Keyence has a 92.9% capital to assets ratio which converts into 17 years of operating cost without a yen in revenue according to their calculations.  This phenomenal achievement is in no small part helped by the “moat” that Keyence has built around their business and outsourcing large parts of their manufacturing to smaller companies across Japan. No doubt, the concept of running your company for close to 2 decades on pure cash reserves is the holy grail for Japanese corporations conceptually, however, it’s not a case of one size fits all. 

As Winston Churchill once famously remarked “the farther backward you can look, the farther forward you are likely to see”.  Japanese investors understand all too well the paradox of spending money to make it.  Cast your mind back over the past few decades and you will recall a number of fallen giants that once decorated the billboards of our cities across the globe, Japanese household names like Sega, Sharp or NEC, the fallen giants left behind by an inability to innovate or reinvent themselves.

Japan’s culture of “the nail that sticks out gets hammered down” is completely at odds with the concept of restructuring businesses or investing capital into high risk start-ups where a CEO has to stick his neck out in a culture that frowns heavily upon mistakes and live with the consequences in the aftermath, but that’s exactly what companies like Hitachi, Panasonic and others have done to survive.  Conversely, NEC and Sega lacked the leadership and vision to see them through tumultuous times.  Japan culturally may not want to change, but its hand is being forced.

Current circumstances would dictate that Japan now more than ever has an opportunity to cherry pick investments and no doubt, pick up those investments at bargain level valuations.  This point in time is reminiscent of Mitsubishi’s massive $9 Billion USD investment into Morgan Stanley during the last financial crisis which by our estimates, has yielded them triple their initial investment.

With no trade wars on the horizon, geopolitical stability, economic stability, investors that are very reasonable to deal with, and a mountain of cash waiting to be invested to future proof Japan Inc., it’s hard to look past Japan as “the investor” of first choice for any start-up.  Now more so than ever is the perfect time for the Japanese sleeping giant to step out of the shadow and flex its muscle.