It feels seismic to see the recent flotation of flea market app operator Mercari and e-commerce company Rakuten’s acquisition of its US-based peer Curbside are for the Japanese innovation capital ecosystem. It also reflects the wider catch-up by M&A and public markets to the burgeoning prices paid in private capital markets, validating those later-stage investors who paid up to delay these exits and reap rewards.
Mercari’s initial public offering (IPO) is set to raise up to $1.2bn after being priced this week above the top of its range, at ¥3,000, in Japan’s biggest such share sale so far this year. The offering will fuel its push into the US and other international markets.
Curbside, backed by pharmacy chain CVS Health, mobile chipmaker Qualcomm and media firm O’Reilly Media, was acquired by Rakuten on Friday for an undisclosed amount.
The size of Mercari’s IPO (due to start trading on 19 June) and Rakuten’s purchase of an international peer signals the cultural change required to deliver on Japan’s innovation and entrepreneurial potential have started to take effect.
For context, the median flotation in Japan in 2015 was $3.5m, according to Stanford’s review of the ecosystem.
The international dealmaking comes with an international push since Japan’s prime minister, Abe, visited Silicon Valley in 2015 and reflects a broader push into supporting entrepreneurs and innovation capital through his Abenomics three arrows strategy.
And while Mercari and Rakuten represent a wave of internet-related entrepreneurs, the country’s deep tech innovation is starting to draw attention and global links.
In April’s innovative region analysis for Global Corporate Venturing, Ken Yasunaga, managing director at the public-private investment fund Innovation Network Corporation of Japan (INCJ), said: “Initially, internet services were the strongest and biggest source of entrepreneurs on the Japanese market.
“We have now started seeing new kinds of opportunities, including in the life sciences space – mostly dedicated to drug discovery – and in IT and software. But most of all, it is the internet of things (IoT), artificial intelligence (AI) and robotics that always the top the list these days.”
In a Financial Times supplement on Japan’s heartland, Kansai – the region that is home to Kyoto, Osaka and Kobe cities – this week, Yutaka Teranishi, who leads the Innovation Hub Kyoto at Kyoto University’s Graduate School of Medicine, said: “Since the advance of medical science absolutely must be global, we are building this centre on the assumption that we must deepen international co-operation.”
The facility, opened in September 2017, has sprung up between the structures of a teaching hospital and long-term care units, and hosts medical startups while they explore new avenues of research and find their feet as companies. There is an atmosphere of urgency, the FT said.
Teranishi argued in the supplement that Japan’s reluctance to treat its research ambitions as global projects had for too long held academia back from investing in facilities like this.
Kyoto has built the Innovation Hub around an area of research in which it has achieved global recognition, stem cells and regenerative medicine, according to the FT.
Shinya Yamanaka, the Nobel laureate whose discovery of induced pluripotent stem cells – mature cells that can be reprogrammed to an embryo-like state – in 2006 led him to found the Center for iPS Cell Research and Application, an organisation devoted to regenerative medicine research.
Japanese startups and listed companies in this field include Megakaryon, PeptiDream, Sosei Group and Healios. They have been aided by longer-established corporations, such as Takeda’s invigorated corporate venturing approach – a move replicated in other fields from electronics and media (Sony) to chips (Tokyo Electron) to communications (KDDI and NTT) and, above all, SoftBank, in any area it chooses.
More broadly, Japan-based startups raised ¥280bn ($2.6bn) in 2017 across just over 1,100 companies, according to Japan Venture Research published by the FT.
In March, the Ministry of Economy, Trade and Industry (METI) said that the number of startups founded to commercialise university research had risen 13% in the 2017 financial year to a record 2,093, led by Tokyo University with 245 and Kyoto’s 140, as reported by our sister publication Global University Venturing in March.
The pulling together of the corporate, university and government support network to the venture, angel and startups has seen a fresh hope the world’s third-largest economy can play a more important leadership role in the industry.
But the animal spirits are hardly confined to Japan.
In total, 434 startups raised $9.9bn via initial coin offerings (ICOs) so far this year, according to a post by Anuj Khanna, chief executive of consultancy Peak State Consulting.
Tomasz Tunguz, venture capitalist at Redpoint, in a blogpost noted 2018 has been a “blockbuster” year for M&A multiples in software with prices relative to their revenues surpassing any of those in the past seven years.
He said: “Billion-dollar plus acquisitions in 2018, [such as Microsoft’s purchase of GitHub, Salesforce’s of Mulesoft and Workday’s of Adaptive Insights,] have commanded a median 17.7x trailing enterprise value to revenue multiple. Nothing in the past seven years is close. In fact, there is not a single acquisition in that range…
“I expect substantially more acquisitions of the scale and at these multiples through 2018. The corporate tax holiday. The growing sizes of the software market. The desire for continuing growth. The pace of innovation within software. The increasing competition amongst incumbents.
“A vibrant public market that is continuing to price companies aggressively. As I wrote earlier this week, forward software multiples have reached eight-year highs at 8.5x EV/NTM [enterprise value to next 12 months] revenues.
“It is a great time to sell a fast growing billion-dollar company.”
Or, more broadly, as Silicon Valley Bank put in its second quarter review: “The bull market powers on, and money continues to flow into the innovation economy.”
Mary Meeker, partner at VC firm Kleiner Perkins Caufield & Byers, in her annual review of the internet market noted the $4bn-plus in rise of market valuation of the top 20 internet companies over the past five years. At more than $5bn now, these 20 companies alone are worth more than Japan’s gross domestic product but whether these prices reflect an unwarranted sense of perfect future performance is harder to tell but a country is certainly more diverse.