Is now a good time to create a startup in Japan? Or join one? The short answer is yes. If you’re in Japan, and considering to start a business, or join a growing one, now is the best time to do so. Why? I’ve delved into the current market conditions, all those detailed numbers, and after analysis the conclusion is that, the timing could not be better for Japan’s startup!
As a potential founder, you should be considering the ease to start a company, how to secure investment, as well as whether you can sell your company at some point in the future or make a valuable exit through IPO.
Now let’s jump in to my analysis:
Investment into Startups in Japan.
At the beginning of this decade, investment into startups in Japan was relatively non-existent and bootstrapping your own startup was the only option available. Fast forward to today, and investment in startups is booming. The number of companies created each year is on the rise! From 2011 onwards, total investment has been steadily growing by more than 30% year over year, reaching almost 4 billion USD in 2018. See below:
Certainly a good signal to start a company in Japan. Let’s see if there is more.
On top of that, Japan has two trends which differentiate it from the rest of the world.
1. Corporate Venture Capital (CVC)
With a few exceptions, most established businesses around the world have stopped investing into startups as a way to innovate, instead saving cash for possible M&As. This is great for startup exits, but it sucks if you’re seeking support to grow your business. Big companies in Japan, however, still follow this trend and CVC investments in 2018 was equal to 0.9 billion dollars, nearly 25% of the total investment into Japanese startups. This is great news if you’re Japan-based founder! Instead of going the traditional route and seeking venture capital, in Japan you can approach the market leaders in your area and get investment from there. For example, if you are working on autonomous vehicle technology, chances are high that Toyota or Nissan would be happy to invest in your startup. Or at least take a serious look if you’ve got something good. If you’re working on hardware or IoT, then Softbank or Rakuten might be willing to help at early stages.
2. Massive Cash Reserves
Despite extremely low interest rates on deposits, and a continuously weak Yen to support exports, total savings, as a percentage of GDP in Japan, is still at a staggering 28%. Most developed countries only save at 10-15% of GDP. It’s not too much of an exaggeration to say that Japan has twice the amount of cash than anyone else. If you compare Japan’s M1, M2 and M3 money to the rest of the world, Japan consistently lands in 2nd place, yielding 1st place only to China where an even weaker Yuan makes cash saving the only viable strategy against an unpredictable future. This leaves a lot of cash available that needs to be put to work to create an environment where Angel Investment is easier and more prevalent. Again great news if you’re a Founder. It’s not uncommon to meet people in Japan who take loans to fund expensive purchases (e.g. apartments) because using cash for this purpose is inefficient and ROI can be much better elsewhere, like investing a small share in to a variety of different businesses
These two trends make securing funding for your startup in Japan unique, in that it can be equally sourced from Venture Funds, Corporations or Angels.
Exits and IPOs in Japan
Ever since the 2008 Financial Crisis (known as “Lehman Shock” in Japan), the market in Japan has been slowly recovering. It remained flat for 5 years and only started to grow in 2013. See Nikkei Index below:
That’s reassuring news because if the market is growing and your startup is funded by a CVC, then chances are good that your investor’s company is doing well too and exiting through M&A becomes more likely. If your startup is doing reasonably well, your CVC should have no issues continuing to fund you or acquiring your share. Of course, the other option is to go through an IPO process which is also a possibility in a growing market. You can see that the number of IPO’s in Japan have been steadily rising since 2013:
The more interesting trend here is that the number of IPOs in Japan is not growing as fast as investment into Startups and, if anything, the number of IPOs seem to be flattening out at 100 IPOs per year. That’s another trend which is specific to Japan and which should be factored in: just because you want to go IPO in Japan does not mean you can actually do it. For one, there is a 2-year preparatory period for any company which wants to do so and two, the amount of companies which can go public is artificially limited by the Tokyo Stock Exchange to approximately a hundred companies per year. That’s an unspoken rule of the Japanese IPO market, which above everything is trying to focus on being stable and predictable. By limiting the number of listing companies gets two birds with one stone:
a) the quality of the companies that do go public is quite high because you need to compete for your spot with others
b) the market has a steady “pipeline” of IPOs for years to come, meaning fewer worries about possible downturns
In summary, preparing for an IPO in Japan can take anywhere between 2-5 years.
Government Support for Entrepreneurs:
The startup ecosystem in Japan remains underdeveloped and the government has a number of initiatives aiming to help new companies. For example, TOSBEC helps with business consultations, company setup and allows you to submit all corporate documents in one place, as opposed to going to 7 different offices across Tokyo which was the normal way until very recently. There is also a Startup Visa, which allows you to live and work in major cities for up to 12 months once your business plan is approved. Shinzo Abe along with the government has set a target of creating 20 unicorns in Japan by 2023 by touting the Venture Challenge 2020 as an important milestone on this journey.
Taking all of these factors into consideration, the time has never been better to start a company in Japan. If you’re not looking to take that risk and become a founder right away, why not learn with someone else’s money and join an existing startup? Check out the list of jobs on Justa.
As of today, Japan has only 3 unicorns, the market trends are right, and this is your chance to help Abe out and create the next one!
by Oleg Koval
Sources and references: