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Japan’s Thriving, Yet Often Overlooked Startup Ecosystem is a Rising Force in Global Innovation

Japan's Startup & Innovation Ecosystem

Japan, renowned for its cultural heritage and industrial prowess, has long been a cornerstone of the global economy. With a rich history of powerful trading conglomerates and a resilient GDP ranking consistently in the top five worldwide, Japan’s economic landscape has remained steadfastly robust and stable. Known for its leading-edge technological advancements and innovative spirit, Japan has long been at the forefront of industries such as electronics, automotive, and robotics.

 

Japan is currently working to achieve a level of prominence similar to other major global startup innovation hubs. The gap that has existed is not due to a lack of potential, resources or talent, but rather the structural and cultural challenges that have hindered the rapid development towards the full potential of its startup ecosystem. Despite these obstacles, Japan is now sprinting to catch up and making significant strides in advancing its innovation landscape.

 

Structural and Ecosystem Challenges

 

One of the primary barriers to innovation in Japan is its corporate-led structure and the associated low-risk, lifetime employment culture. This environment has historically stifled entrepreneurial endeavors, making it difficult for smaller players to thrive. The rigid corporate structure and the societal expectation of job security over risk taking have created an ecosystem where innovation is often de facto driven by large corporations rather than nimble startups.

The need for a more flexible infrastructure that not just supports but proactively encourages the successes of smaller enterprises is crucial. Unlike in Silicon Valley or New York, where startups are a significant and celebrated force driving innovation, Japan’s ecosystem has been slower to adapt. The relatively insular nature of the Japanese job market— historically characterized by limited global talent influx—further exacerbates this issue. Language barriers, cultural differences, and unique business practices contribute to this insularity, often making it more challenging for foreign talent to integrate into the Japanese innovation ecosystem.

 

Cultural and Mindset Shifts

 

Cultural shifts and changes in mindset are essential for fostering a more dynamic innovation environment in Japan. Traditionally, the Japanese workforce has been reluctant to leave stable corporate jobs to start new ventures. However, this is slowly changing. There is a growing recognition of the value of entrepreneurship and the need for a more vibrant startup culture. In recent years, Japan has witnessed a remarkable surge in entrepreneurial activity, fueled by a new generation of innovators challenging these traditional norms. Today, Japanese startups are well known to be at the forefront of fields such as biotech, robotics, and artificial intelligence (AI), amongst others. 

The current bottleneck in Japan’s startup ecosystem is not just about encouraging people to leave their corporate jobs, but also about developing a robust pool of talent as new ventures scale, as well as post exits. Japan has yet to see a significant number of serial entrepreneurs—those who have successfully exited one startup and go on to start another. Building this pool of experienced entrepreneurs is vital for creating a “flywheel effect” and self-sustaining innovation ecosystem.

 

The Current State of Japan’s Innovation Landscape

 

Historically, the journey of launching a startup, from securing initial funding to establishing a solid foundation for these new and early-stage ventures, has looked much different in Japan than in other parts of the world. One notable difference is the country’s private capital market, where banks play a proactive role in all stages of venture funding. They act as LPs, GPs, and lenders, injecting capital into domestic and overseas VC funds, as well as directly sourcing and investing in Japanese startups through corporate venture capital (CVC) arms. In 2022 for example, Japanese banks were involved in 213 domestic venture rounds with an aggregate deal value of $1.7 billion.

Beyond financial institutions, Japan’s innovation ecosystem has a high percentage of CVC compared to traditional VC investment. This has both advantages and disadvantages. On the positive side, CVCs bring significant financial resources and stability, allowing startups to leverage the extensive networks and market reach of established corporations. However, this corporate dominance can also stifle the independent spirit essential for disruptive innovation. The reliance on corporate structures can limit the flexibility and risk-taking ability of startups, which are crucial for breakthrough innovations.

“Unfortunately, over the past 30 years, large Japanese companies have been falling out of the world’s market capitalization rankings and have not been able to create innovation. The world has proven that startups are better mechanisms for generating innovation than existing large companies. It is important to fully develop the startup ecosystem as a catalyst for Japan’s sluggish economy,” Tomoko Namba, founder of DeNA Co., Ltd, Vice Chair of the Japan Business Foundation, and Managing Partner of Delight Ventures, stated in a recent interview. “In order for us to contribute to Japan’s startup ecosystem, we must create companies that achieve continuous growth like Tesla, NVIDIA, and GAFAM, and create a new [momentum] in the industry. I think the best thing is to create many companies that can catch up with and surpass traditional Japanese companies.”

That being said, in the past five years Japan’s startup landscape has reached an inflection point. The momentum for change is palpable, and several factors indicate a promising future with options beyond traditional bank financing. Despite being undersized, the data shows that available funding relative to the size of Japan’s economy is growing, reaching $9.7B USD by the end of 2023. Incubators and VC funds are playing a pivotal role in this transformation. These hubs provide essential lifelines for startups, offering not just financial support but also opportunities for networking and mentorship. The presence of pioneering investors and innovation hubs, like AN Ventures and Shonan iPark, is helping to address bottlenecks by directly investing in Japanese seed-stage ventures and resolving commercialization issues that have long plagued academic innovations.

Another promising development is the emergence of startups founded by international entrepreneurs in Japan that are capable of drawing on international capital and talent pools. One recent example is Sakana AI, a startup founded by ex-Google Brain researchers—including one of the original authors of Google’s landmark paper on the transformer neural network architecture—which is on pace to become a unicorn in less than a year with high-profile U.S. investors such as Khosla Ventures, Lux Capital, and New Enterprise Associates. In another success story, Paidy, a fintech startup founded by an international entrepreneur, was acquired by PayPal for approximately $2.7B USD in 2021. 

“Despite its reputation for insularity, I’ve been seeing a significant influx of international startup and tech talent and the emergence of grassroots communities to support it, with groups such as AISalon Tokyo and Tokyo AI bringing together dozens of serious entrepreneurs and engineers with participation from top international startups and companies to exchange ideas,” says Kenneth Jeng, Investor and Global Platform Lead at Headline, as well as co-founder of Startup Co-creation, a local community group for international startup founders, operators, and investors. “A recent event, for instance, brought in quantum computing experts from companies such as NVIDIA and Q-CTRL to discuss cutting-edge technical topics relevant to the intersection of quantum and AI. I’ve met incredibly impressive people here in just the last several months, some just visiting, but a surprising number quietly based here in Japan.”

The Japanese government has also increasingly taken proactive steps in recent years to support entrepreneurship and drive innovation. Initiatives such as regulatory reforms, investment programs, and grants are aimed at catalyzing the growth of startups and encouraging a culture of risk taking, including Prime Minister Fumio Kishida’s ambitious plan to revitalize the economy through partnerships with U.S. venture capitalists. By creating a conducive environment for entrepreneurship, policymakers seek to unleash the full potential of Japan’s talent pool and position the country as a global hub for innovation.

 

Venture Capital Scene: Recent Changes and Driving Forces

 

The venture capital scene in Japan has seen notable changes recently, driven by a combination of factors. There has been an increase in the availability of Series A and seed-stage funding, although scaling up remains a challenge. The exit options for startups, such as listing on the Tokyo Stock Exchange, are often not appealing enough to attract global investors. To address this, Japanese startups need to demonstrate global potential, making them more attractive to international VCs.

To bridge the gap between Japanese startups and major global VCs, several strategies can be employed. Creating clear pathways to exciting exit opportunities is crucial. Additionally, the leaders of Japanese startups need support in navigating the global landscape, from language barriers to establishing international contacts. Initiatives by pioneering VC funds and innovation hubs, like AN Ventures, Delight Ventures, and iPark, are instrumental in this regard, providing the necessary support to put Japanese startups on the global map. The managing partners of both AN and Delight Ventures live in the US providing their portfolio companies increased access. 

“One of five promises of the fund is to establish a global standard aiming to support entrepreneurs who are trying to create great value for society,” says Dai Watanabe, Managing Director of Delight Ventures. “We know that Japanese customs can be a bottleneck for that goal so we provide know-how about global standards to startups. Our Silicon Valley presence has served us well in this mission allowing us to build relationships with some of the best investors and share the incredible innovation coming out of Japan.”

The emergence of private investors and independent funds is another critical development. These investors are essential for driving the growth of the ecosystem, moving away from the corporate-centric model that has dominated Japan’s innovation landscape. As economic transformation accelerates globally, knowledge, technology, and innovation have become the engines of productivity and growth. Startups, especially in deep-tech areas like AI, quantum computing, and biotechnology, are becoming central to this progression.

Additionally, many innovative ideas in Japan remain stuck in universities due to the lack of commercialization mechanisms. Professors and researchers often lack the support needed to bring their ideas to market. Affordable and resource-rich environments outside of universities, particularly for sectors requiring advanced labs like biotech and life sciences, are scarce. This limitation significantly hampers the ability of groundbreaking research to transition from academic settings to commercial viability, stifling the potential for wider innovation. Addressing these gaps is essential for unlocking the full potential of Japan’s innovation ecosystem.

 

Emerging Trends Shaping Japan’s Innovation Future

 

Looking ahead, several emerging trends are poised to shape the future of Japan’s innovation landscape. Life sciences and biotechnology are areas of significant potential, given the advanced research capabilities and scientific expertise available in Japan. Deep-tech startups, which operate on much longer timelines, also represent a critical area of growth. Additionally, there is a growing focus on sustainability and environmental technologies, driven by Japan’s commitment to addressing global challenges such as climate change. 

The balance between corporate-driven and independent startup-driven innovation is likely to evolve. While corporate-driven innovation will remain important, there is a clear need for more independent funds to create a balanced and dynamic ecosystem. Supporting startups with both funding and intellectual resources, particularly in the talent pool, will be crucial for sustained growth.

 

Overcoming Talent and Market Challenges with Innovative Investment Models

 

Leveraging its extensive track record of technological breakthroughs and robust research and development infrastructure, Japan possesses the groundwork necessary to cultivate a thriving and dynamic startup landscape.While this unrealized potential means there are opportunities for those looking to drive growth in the Japan innovation ecosystem, there are challenges as well.  

  • For global investors, there are significant hurdles in understanding local market dynamics and providing the necessary coaching and support to startups to enable them to scale outside of the domestic market. Innovative models and partnerships with local players are often necessary to kickstart a meaningful investment program in Japan.  Also, consider what you can do to address one of the stickiest key bottlenecks: talent.  As Japan lacks deep pools of serial entrepreneurial talent, global investors often hesitate when they are unable to find the next generation of leaders that can scale investments to global markets with more exciting exit opportunities. These talent pipelines need to be built, and investors can play an important role.
  • For multinational corporations, Japan offers a wealth of innovation and R&D seeds, however, connecting Japanese start-ups to global R&D and product development teams requires internal mechanisms to promote global teaming that most companies have yet to establish. This is particularly true in the biotech sector, for example, where country affiliate teams simply are not well resourced to deliver the clinical development support that Japanse biotech startups require.  
  • For innovation hubs, incubators, venture builders, accelerator programs, etc., there is still a need to increase the supply of capability building support and open-innovation space, as evidenced by the growth of innovation hubs like the Shonan iPark or CIC Tokyo. The reality is that the vast majority of such programs are being provided by corporates in Japan today, rather than independent organizations. However, at this point, fundamental needs are being met, and these programs need to be focused on addressing stubborn pain points that persist around attracting top-tier global investment to Japan and supporting leading Japanese startups to tap into international markets. 

Right now, Japan’s innovation ecosystem is at a critical juncture. While it faces historic structural and cultural barriers, the recent shifts and growing momentum indicate a promising future. By fostering a more flexible and supportive environment for startups, encouraging cultural shifts towards entrepreneurship, and bridging the gap with global VCs, Japan has the potential to emerge as a prominent innovation hub on the global stage. 

 

Neal Hansch headshot

 

 

 

 

Neal Hansch, CEO & Managing Partner, Silicon Foundry

 

 

 

 

 

Jeffrey Volinksi, Partner, Kearney

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