by Timothy Motte
How one of the most innovative countries on earth almost forgot to build a startup ecosystem
A post-war miracle
On par with South Korea, Japan’s economic recovery post-WW2 qualifies as nothing short of extraordinary. The millennial old archipelago rose from its nuclear ashes to become, in a couple of decades, the world’s second-largest economy. The globe’s fascination with Japan’s unique insular culture, orderliness, and technological innovation undoubtedly places the country in the “successful nations” category.
Everything seems smoother when seen from the outside. For all of its qualities, Japan is constantly battling internal turmoils and demons, just like any other nation. In July 2022, the country was stunned by the unexpected assassination of Abe Shinzo, Japan’s longest-serving prime minister, a shock in a country known for its low criminality. The country is also facing a severe demographic decline. And, as we’ll see in this piece, Japan’s traditionally tech-forward economy almost missed the turn of one of our era’s major economic forces: startups.
Broad economic context
The Japanese economy, and subsequent workforce, traditionally rest on the backs of the country’s mega-corporations. Fed by Japan’s academic elite, the country’s corporate behemoths (Mitsubishi, Panasonic, Sony, Toshiba, Toyota…) have grown into uncontested global leaders. The rigid Nippon work culture oen meant that jobs were meant to last a lifetime, with internal promotions oen relying on seniority rather than merit. This process even has a designated term: Shūshin koyō.
In the 1990s, Japan suffered a dire economic recession, the result of an overheating economy characterized by an overvalued stock market and outlandish real estate prices. The bursting of the so-called “asset price bubble” grounded Japanese economic growth to a relative halt, leading to the infamous “Lost Decade” (1991-2001).
The resulting societal earthquake shook the country’s foundations to its core, including its job market. The latter began to loosen as Japanese companies struggled to stay afloat.
“Beginning in the late 1990s, Japan’s norms of lifetime employment began to weaken. Large firms slowly reduced employment levels, releasing pools of workers into the labour market as they offered early retirements, severance incentives, and reduced new graduate hiring—given the difficulty of layoffs in Japan” – Carnegie Endowment
The Japanese economy would experience another major economic revamp a couple of decades later. In 2012, the late Abe Shinzo commenced his second term as prime minister. Vowing to reinvigorate the country’s sluggish economy, the prime minister introduced a set of economic policies known as Abenomics. The third so-called “arrow” of Abenomics would give Japanese startups greater importance within the country’s corporate-dominated economy.
The second arrow was new government spending programs to stimulate demand and consumption—to stimulate short-term growth, and to achieve a budget surplus over the long term.
The third component of Abenomics was more complex—a reform of various regulations to make Japanese industries more competitive and to encourage investment in and from the private sector.” – Investopedia
The Japanese startup ecosystem: a brief, current overview
Before diving into the structural specificities and obstacles facing the Japanese startup ecosystem, a quick overview of the ecosystemʼs vitals is relevant.
The ecosystem has been on a bull run for the past decade, consistently increasing total funding year over year. Ever since the country’s labour market opened up in the ’90s, Japan has produced a fair amount of companies valued at $1B+, the magical number revered by startup analysts.
Buoyed by the country’s entrenched R&D expertise, the ecosystemʼs sectorial strengths reside in advanced manufacturing/robotics, fintech, and life sciences. While founder backgrounds generally stem from an international corporate and/or elite university baggage, the Nippon ecosystemʼs recent growth is slowly making startups a considered career choice for previously corporate-enamored university graduates.
“In 2022, investments in Japan’s startups surpassed $6.7B, an over 13-fold increase from $500M in 2012. The size of deals has increased, too. The median size of funds raised by a startup jumped to $921,500 in 2022, from $131,000 in 2013, while the mean has quadrupled to $3.4M over the past decade.” – JETRO
The current government, led by Prime Minister Fumio Kishida, also seems enthusiastic about building up a vibrant local startup scene. Epitomized by the “Startup Development Five-Year Plan” launch, the ruling cabinetʼs clear objective is to replicate Japan’s post-WW2 company creation spree for startups. In a cryptic statement that probably got lost in translation, the government officially named 2022 the “first year of startup creation”.
The Great Japanese Paradox
Parallels can be drawn between the Italian and Japanese ecosystems in the sense that, while internal growth has been steadfast, a comparative analysis with other countries paints a duller reality.
From a birdʼs eye view, the state of the Japanese startup scene is a true paradox. The country is one of the world’s most technologically advanced nations, pouring monstrous amounts of its GDP into R&D, topped only by Israel, South Korea, and Sweden.
However, the country lags behind the quasi-entirety of its socioeconomic peers when measuring venture capital as a share of GDP. In nominal terms, French startups raised twice the amount raised by Japanese startups in 2022, despite France housing half of Japan’s population. As the World Bank aptly describes it, Japan is a “leading innovation hub with a lagging startup ecosystem”.
“The (Tokyo) ecosystem also attracts 19 times less start-up funding per capita and produces 12 times fewer unicorns per million inhabitants than New York, 16 and 9 times less than Berlin, and almost 1.4 and 2 times less than Seoul” – World Bank
Another Japanese startup paradox manifests itself in the form of corporate/banking involvement. While other ecosystems around the world fight to get the local and corporate banking scene involved, Japan almost has too much of it. This is a topic I address in my Thailand piece.
In Japan, the economic firepower corporates possess makes them inevitable and useful players in the startup ecosystem. As demonstrated by high R&D expenditure, the Japanese economy isnʼt one to shy away from investing in the future. Today, Corporate Venture Capital (CVC) takes up the largest share of the Japanese startup funding makeup.
However, CVCsʼ interests diverge from traditional, independent VCs when it comes to their rationale for investing. Corporate dominance of the ecosystem also illustrates itself in who runs the country’s incubator/accelerator space.
This scarcity of startup-focused support systems, institutions, and programs is prone to have an adverse effect on the development of the ecosystem.
“The non-specialized actors do not typically cater their services to support the rapid growth of startups; they tend to be more risk averse; and they do not provide additional networking to access further supportive resources, such as specialized mentors, angel investors, or other growth-oriented VCs.” – World Bank
The Great Paradox spreads to talent as well. Japan is far from facing a dearth of talented and highly-skilled potential Japanese founders and operators. Once again, however, the scarcity of startup-oriented incubators/support programs makes the pool of startup-literate talent limited. And as we’re about to see, a particularly Japanese trait continuously hampers the growth of such a pool.
The insularity issue
Anyone remotely familiar with Japan knows that the peninsula prides itself on its cultural singularity. For all of its qualities, the centuries-old empire doesnʼt top the charts when it comes to inclusion and multiculturalism. It is a well-known fact that Japan is not the most welcoming place for other cultures. Corporate Japan is trying to change that, while also seeking to make up for its laggard performance in terms of gender equality.
The country’s insularity is one of the biggest hurdles to the development of its startup ecosystem. While the best startup ecosystems, Silicon Valley chief among them, thrive on attracting and mobilizing the world’s best talent, Japan has ways to go in that aspect. Japanese business culture is a world of its own, and for the best Asian founders, cosmopolitan Singapore seems to be way more attractive than Tokyo. As far as attracting non-Asian startup talent goes, the Japanese language and cultural barrier outweigh the current benefits of incorporating in Japan.
Maybe the play lies in the nation’s historical R&D strengths. By internationalizing its already excellent universities, Japan could attract global talent from a young age and use the Japanese quality of life to incentivize them to stay. The University of Tokyoʼs $536M startup fund hints to be a step in the right direction.
Benefitting from a dynamic innovation economy, excellent infrastructure, and a vibrant talent pool, Japan now has to tweak its economy to make it enter the startup era.
So far, the ecosystem has been monopolized by the economy’s traditional actors. While necessary as a starting point, the ecosystem will need independent VCs and incubators to truly take off. An entire ecosystem serving the interests of the local banks and corporations can only grow so far.
The development of Japan’s ecosystem also ushers in the thorny issue of multiculturalism. One can certainly argue that the country’s post-WW2 solidity has been the result of an insular, and therefore compact, societal structure. However, the world’s increasingly tech-driven, globalized, and ultimately cosmopolitan economy might require a “software update” to Japan’s social makeup.
Japan is truly one of the most unique ecosystems I’ve analyzed so far and is adequately encapsulated by the title of this piece: a paradox. By embracing the economic and cultural changes described above, Japan could finally become the startup superpower it was also supposed to be.