Topic: Startups in Japan

Challenges to entrepreneurship in Japan

There are several reasons why Japan is a late bloomer in developing a suitable environment for entrepreneurs to start high-growth potential companies. The postwar economic growth has traditionally been attributed to the Japanese large-firm centered system, with stable corporate groups focused on keiretsu structure around large companies. Since big corporations relied primarily on in-house research and development, the need to purchase products or services from startups was limited. It was rather unattractive for venture capitalists to invest in Japanese startups. Instead, they focused on investing in foreign ventures, preferably in Silicon Valley. The political system was also optimized for favoring large firms. A peculiar regulatory system, as well as a lack of financial support by the government, were obstacles for young entrepreneurs. Finally, the social norms of postwar Japan did not serve as an incentive for setting up new, risky ventures, as an elite career meant aiming at working for large firms or top government agencies with long-term employment and seniority-based wages.

New opportunities and a changing startup ecosystem

Since the burst of the asset bubble in the early 1990s and the following period of slow economic growth with several recessions, a slow economic structural shift can be observed that has contributed to building a better environment for establishing ventures in Japan. A new breed of young entrepreneurs who grew up in Japan’s slow-growth era is emerging. The performance crisis of large firms has made it less attractive to work there, and many startups today have been founded by elite university graduates. Even though the venture capital market is still small compared to other countries, it is steadily growing. The rise of independent venture capital funding and the participation of large corporations in venture capital have stimulated entrepreneurship. Established companies no longer see startups as investments, they also start to view them as possible partners in tech to help their core business. Seeking open innovation, many large corporations have established corporate venture capital funds. Moreover, the Japanese government is eager to support young entrepreneurs by promoting cooperation between startups and larger firms and setting up funds and other financial incentives to spark investments.

As of 2020, Japan had produced three unicorns and the government is aiming to raise this number to 20 by 2023. The first unicorn was Mercari, an online marketplace app for secondhand goods, followed by the deep learning startup Preferred Networks, even valued higher at over three billion U.S. dollars, and SmartNews. High-growth ventures have also emerged in fintech, artificial intelligence (AI), and SaaS (software as a service), with Tokyo still being the geographical center for startups. However, other cities are appearing on the scene: the southern Japanese city Fukuoka, for example, that had been selected National Strategic Special Zone for Global Startups and Job Creation in 2014, has recorded the highest ratio of new business starts.

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