Innovative region: Japan

Japan is the world’s third-largest economy, with a gross domestic of nearly $5 trillion, the country has been home to some of the most successful electronics and automotive businesses, such as Canon, Casio, Nikon, Sony, Panasonic, Nintendo, Hitachi and Fujitsu for electronics, and Yamaha, Toyota, Nissan, Mitsubishi, Honda, Suzuki and Mazda for automotive, to name a few.

Many of these have conducted strategic investments, and some have their own specialised corporate venture capital (CVC) vehicles. Japan Venture Capital Association (JVCA) has some 90 CVC members, most of whose publicly disclosed deals have been tracked by Global Corporate Venturing Analytics.

Ken Asada, Japan head for Salesforce Ventures, the corporate venturing subsidiary of US-headquartered enterprise software provider Salesforce, said JVCA only had a handful of CVC members five years ago but has grown considerably. “It is estimated that over 300 companies in Japan are currently involved in some form of corporate venturing activity,” Asada said.

Regarding the Japanese innovation ecosystem, Gen Tsuchikawa, chief executive and chief investment officer for Sony Innovation Fund and Innovation Growth Ventures, vehicles for electronics manufacturer Sony for which he also serves as corporate vice-president, told GCV: “We can attribute the recent significant growth of Japan’s venture capital market, to the size gap of the VC market compared to the whole economy and infrastructure of large companies.

“As more people are vaccinated, I expect more global talent to jump in and take advantage of the arbitrage opportunity here.”

Naoki Kamimaeda, UK-based partner and Europe office representative for Global Brain, a Japan-headquartered VC firm that oversees multiple corporate venturing vehicles, said: “In my view, compared to the US or Europe, Japan has three major unique points.

“First of all, there are not that many foreign investors active in Japan, especially in early stages. Most investment rounds are led by Japanese investors and the syndicate also consists of Japanese investors and corporations.

“Secondly, angels or family offices are less active. There are some very famous angel investors; however, it is not yet common for wealthy people to invest in startups in Japan.

“Lastly, we have fewer series A and B-focused pure VC funds than in the US, the UK or Europe. Only a handful of VCs have big funds sufficient to lead series A and B rounds. Therefore, syndication is more common and more CVCs are involved in early-stage deals.

“There are more chances for corporations to be involved in early-stage deals if they wish. I believe this unique environment also leads more corporations to form their CVC funds.

“We are seeing this trend continue in Japan – covid-19 even has accelerated this trend because of a lack of international travel and investors being a bit conservative and focusing more on local markets.”

Japan ranked 16th most innovative economy in 2020 in the Global Innovation Index compiled by Cornell University’s SC Johnson College of Business, Insead and the World Intellectual Property Organisation. It came after Israel, China and Ireland, and was ahead of Canada, Luxembourg, Austria and Norway.

Notably, the country came in the third position in terms of innovation quality, following the United States and Switzerland and before Germany, the Netherlands and the United Kingdom. It also has some of the top science and technology clusters with Tokyo-Yokohama being named first in the top 100 list, while Osaka-Kobe-Kyoto came sixth. Other Japanese cities – Nagoya (12th), Hamamatsu (85th) and Kanazawa (91th) – featured the roster.

Kazuhiko Chuman, head of KDDI Open Innovation Fund and KDDI Mugen Labo, which were formed by telecommunications firm KDDI, pointed out that in Japan, the most common exit method for startups is via initial public offerings on the Tokyo Stock Exchange’s Mothers Index. “Compared with western countries, the number of startups acquired by large enterprises is still small,” he said.

Salesforce Ventures’ Asada added: “The Mothers Market, which allows companies with sales of ¥2bn to ¥3bn (about $18m to $27m) to list on the stock exchange, functions similarly to the series B market in Silicon Valley in terms of fundraising. That said, as more and more investors in Japan are able to increase their ticket size to more than ¥1bn (roughly $9m), more and more companies will be aiming to go public at a larger scale.”

Ikkei Matsuda, CEO of accelerator operator SARR – which stands for Science, Art and Research for Reconstruction – and the Japan advisory partner of US-based venture capital firm Benhamou Global Ventures (BGV), and Shiyo Takeoka, vice-president of professional and innovation services firm Ignition Point and an investment professional at its IGP X unit, pointed out several characteristics of the Japanese ecosystem:

“A: Players – In any ecosystem, VCs and CVCs play an important role. There are several characteristics of Japan compared with Silicon Valley and other ecosystems.

“(1) Excellent seed VCs: Japan has a large number of VCs that specialise in small seed and early-stage companies, mainly in the internet field. Investors who have studied at many top-tier VC firms in Japan tend to go independent as seed VCs first. They sometimes make a commitment even before founding the company. This role is probably filled by business angels in the Bay Area.

“(2) Lack of large VCs and IPO market for startups: While seed VCs are great, the number of investors managing funds sized larger than $300m is limited. The IPO market in Japan, called Tokyo Stock Exchange Mothers, is a market for startups. In this market, even companies with less than $100m can go public. This has made it difficult to create unicorns, which are companies that are not yet public and have a high valuation.

“(3) Corporate VC as a service: In Japan, many CVC funds are formed as a limited partnership with a professional VC firm as the GP, and the VC firm provides fund management services to large companies to pursue strategic returns as well as financial returns. This is probably due to the mobility of human resources. In Japan, it is difficult for large companies to hire venture capitalists.

“(4) Government support is focused on R&D-based startups: Japan is a country with a high level of science and engineering. For a long time, the leaders of science and engineering in Japan have been universities (that is, at the laboratory level) and large corporations.

“On the other hand, recent trends have recognised the importance of science-based technology startups. For this reason, the Japanese government has given a lot of funding to the commercialisation of applied research.

“Perhaps in the past decade, the thinking of the Ministry of Education, Culture, Sports, Science and Technology has undergone a major transformation, and it is now strongly focused not only on scientific research but also on the commercialisation of its results. Similarly, the Ministry of Economy, Trade and Industry (METI) has strengthened its policies for startups, moving away from industrial policies that focus on large corporations. Most of these policy investments in startups were made in R&D-based startups and VCs that invest in them.

“B: Market and Exit Strategy – Japanese startups’ market development and exit strategies are often focused on the Japanese market. Japan is fortunate to have the second-largest market in the west after the US. And because of the language barrier, the market development and exit strategy is sometimes isolated from the global market.

“The language barrier can be a hindrance for Japanese startups to expand overseas, and at the same time, it can be a barrier for foreign startups to expand into Japan. For this reason, Japanese entrepreneurs sometimes take businesses that are trending in the US and adapt them to the Japanese context.

“Main exits are IPOs, and the number of M&A and buyouts are increasing, but much less than in the US. As you know, there is an 18-month rule if you want to be a global startup, or you need to create a global culture when you are a small team, such as 10 to 15 members. From this aspect, the majority of Japanese startups are out of this scope, that is why only a small number of startups are active outside of Japan. This is why I (Matsuda) became a member of BGV to create a global startup from Japan.”

Anis Uzzaman, founder and CEO of Pegasus Tech Ventures, a US-headquartered venture capital firm that serves multiple Japanese corporate limited partners, noted: “In terms of the CVC ecosystem, Japan is far ahead compared to many of its Asian rivals.

“Japan has a very mature corporate culture and they are open to adopting the US–Silicon Valley-style innovation concepts into their corporate innovation scheme. So, many Japanese corporations have been able to adopt US–Silicon Valley-style corporate innovation programmes from the last few decades.

“The number of large, mid and small-sized Japanese corporations who have adopted Silicon Valley-style corporate innovation are many. Some of the Chinese and Korean mega corporations outstand with the amount of their spending as part of the CVC programmes, but still, the participation from Japanese corporations into innovative programmes are seen in many more corporations compared to China.

“In terms of the tech ecosystem, Japan has always been a technology hub for multiple decades. Japanese universities have produced hundreds of thousands of PhDs each year. Japan definitely experienced a slowdown in recent years, but there has been a push for the last 10 years to accelerate innovation overall. Starting from the government, the private sectors have also done a fabulous job in nurturing the startup and innovation ecosystem and we have been able to see new technologies coming out of top startups in Japan.”

Sony’s Tsuchikawa agreed and said: “When we started Sony Innovation Fund in 2016, we did not expect to invest much in Japan. But as we progressed, we were pleasantly surprised with the quality of the startups here and now have 30% or more invested in Japan. It is a rapidly expanding and very open community.”

While Sony Innovation Fund has teams across Europe, India, Israel and the US in addition to its home country, some of its most recent deals have been Japan-based companies: emergency medical support system developer Smart119, know-your-customer technology provider TrustDock and food delivery service Chompy.

Global Brain’s Kamimaeda cited the findings in a report entitled 2021 first quarter startup fundraising trend published by corporate database and curated news app provider Uzabase’s startup information platform Initial in April this year, saying that the amount of startup investment in the first few months of 2021 was almost the same as in 2020.

“The number of startups getting investments decreased between 2020 and 2021,” Kamimaeda clarified. “This indicates later-stage companies are securing bigger funding. In contrast, the number of startup investments is decreasing.

“We can see this kind of trend in other countries like the US and Europe, probably due to covid-19 restricting international travel and investors being more conservative.

“However, we at Global Brain have kept our investment approach the same as pre-covid-19, as we rather think now is the chance to find and invest in greater companies.

“We strongly believe the potential of the Japanese startup ecosystem stays huge and the underlined trend of people shifting more towards startups and corporates shifting more towards startup investments has not changed and will continue. We can expect more corporations to establish CVC funds and start collaborating with startups.”

Shinichiro Hori, CEO of Z Venture Capital (ZVC), a corporate venturing arm of internet group Z Holdings that was formed through the merger between YJ Capital and Line Ventures’ parent groups: internet company Yahoo Japan and messaging app operator Line, noted three trends differentiated Japan from other global markets.

“The first is the increase in the supply of capital,” Hori said. “We have observed a rapidly growing number of CVCs in the Japanese market, with 63 newly established vehicles between 2018 and 2020. In addition, there is an increase in overseas investors and funds targeting investments in late-stage startups within Japan.

“Second, the amount of financing for startups are also increasing. Each year, we see the previous year’s record being broken on the amount of funding for serial entrepreneurs as well as late-stage startups.

“Third, because of the abundance of capital for startups compared to prior periods, startups themselves have more opportunities to acquire smaller companies to accelerate their growth. We, therefore, believe that the Japanese VC market is significantly expanding.”

KDDI’s Chuman explained that the covid-19 public health emergency shaped KDDI Open Innovation Fund’s recent investment strategy in technologies that merges cyber and physical spaces. “One of the outstanding cases of co-creation with our portfolio was Virtual Shibuya, the metaverse project launched in May 2020.

“This was the first case of virtual city certified by the local government and got recognised by several awards in terms of new entertainment [possibilities] under the covid-19 crisis.”

KDDI Open Innovation Fund not only targets companies operating in the domestic market – such as virtual reality game developer Thirdverse, robotics technology developer Telexistence and Ginkan, the owner of gastronomy social network SynchroLife – but also cross-border deals, backing global startups including Germany-based private online browser and search tool creator Xayn and South Korea-headquartered short video production company Whynot Media.

Asada was quick to point out that with the increase in the number of VC funds and CVCs, the competitive environment on the investor side has become more intense. “We at Salesforce Ventures believe that the more players there are, and the more CVCs are entering the VC market, the more positive it is for innovation, but the question for investors is what value they can bring to a startup other than money. We try to provide more value than money through post-investment collaboration and more specific advice on software-as-a-service (SaaS) business management.”

Regarding SARR’s investment strategy in the Japanese ecosystem, Matsuda said: “I am running an accelerator in Kyoto, supporting tech entrepreneurs and seed-stage startups. Investment is only at the seed level. Many of my portfolios are out of university research or spin-offs from corporations. Our criteria are to invest in the best and the most disruptive technology or research in a specific field – and with those technologies or research, we can change the world.

“So science innovation is quite important for us. And the development of AI, cybersecurity, crowd native, the business environment are changing, even in biotech, now it is not simply biology – rather digital x bio. These changes affect our investment approach.

“As mentioned above, there are many Japanese startups in AI, cybersecurity, DevOps and digitisation, but the US, Israel and France are more advanced from a business point of view. Our ecosystem to incubate new, disruptive technology is behind. On the other hand, we have a good pool of science and technology in academia. But we have only many seed-focused VCs and CVCs who invest at the seed stage of tech startups. No big money here.”

Still, Pegasus’s Uzzaman reiterated Japan has made immense progress with the innovation ecosystem in recent years. “The Japanese government has taken multiple initiatives to foster innovation not only in megacities but also in regional territories. The major institutional education has also adopted an innovative curriculum and created incubators and accelerators to foster innovation. The private sectors especially the corporations have done a fabulous job adopting new CVC programmes and have started to work with the startups more than ever before.

“Pegasus started investing in Japan in 2012 and worked with the Japanese startups and large corporations to promote cross innovation. Over the last few years, Pegasus was able to build CVC partnerships with more than 20 large public and private corporations in Japan. This shows a surge in corporate innovation in Japan.

“Pegasus has also been able to invest in more than 40 startups in Japan in the last few years and was able to hook those startups up with global entities and help with their globalisation, we definitely see many more startups today with high success potential compared to when we started our journey in 2012.”

Pegasus co-runs corporate venturing funds with Japanese corporates including automotive components manufacturer Aisin, amino acid product provider Ajinomoto, broadcaster Asahi Broadcasting Group, video game publisher Bandai Namco, electrical equipment maker Brother Industries, television shopping service Japanet, entertainment group Sega Sammy, construction firm Shimizu, diversified conglomerate Sojitz, newspaper publisher Nikkei, spark plug producer NGK, automation equipment manufacturer Omron and pharmaceutical and IT services group Teijin.

ZVC’s Hori added: “There has been a whirlwind of changes in the venture investment scene in Japan. As the supply of capital increases, the total amount of funding has reached $4.1bn in 2020, resulted in 5.6 times more than that of 2011.

“Furthermore, fields which now qualify for startup funding have also widened. In the past, technology, media and telecommunications-centred areas such as e-commerce and media drove its fundraising, but now it has expanded to fintech, business-to-business, space businesses and biotechnology. There are even funds that specialise and invest in those verticals that have emerged.

“The effect on us is that we now need to define our investment areas even further. In addition, we need to communicate our focus areas to the outside world and actively approach startups more than ever before.”

Chuman said while KDDI Open Innovation Fund shares deal flow with other CVC units, it also co-invests with large enterprises that do not have a dedicated vehicle or venture investment subsidiary.

In addition, KDDI’s accelerator scheme, Mugen Labo, aims for business co-creation by combining the ideas and technologies of startups with a wide range of assets from enterprise partners.

“Furthermore, we have partnered with Tokyo University to offer entrepreneurship education for master’s degree since October 2021.”

Asada said Salesforce Ventures also supports its portfolio companies in strategic ways. “Salesforce is used by a lot of Japanese companies, and through Salesforce’s sales department, we exchange information with a lot of Japanese CVCs. Salesforce Ventures is recognised as a major investor in SaaS startups and has co-investment opportunities with many VCs.”

In addition to running SARR, Matsuda is also a judge and adviser to multiple government-affiliated organisations: Nedo (New Energy and Industrial Technology Development Organisation), Amed (Japan Agency for Medical Research and Development), space agency JAXA’s startup contest S-Booster, Scope (Strategic Information and Communications R&D Promotion Programme) and JST (Japan Science and Technology Agency).

“I regularly communicate with them, and support the startups who receive the funding from these organisations,” Matsuda added. “I used to be a member of the board of JVCA, and still have good contacts with many VCs, accelerators and incubators.”

Pegasus works closely with large corporations and helps their innovation programme with a special scheme known as VCaaS (venture capital as a service) or CVC 4.0, said Uzzaman. “Under this scheme, Pegasus has been able to hook these corporations up with top innovative startups globally so that the corporations are able to collaborate with them.

“Through this scheme, many Japanese corporations were able to import new startups, technologies, business ideas, to Japan and become distributors of those startup technologies in Japan and Asia.

“In many cases, they bought the startup technologies and create a win-win situation. It has not only helped the Japanese large corporations but also helped the startups to get matured advice and training from these large corporations.

“Pegasus also develop a special programme called Pegasus University in the last years and used it heavily for startup and innovation education of the large corporate partners and Japanese startups.”

ZVC has also formed partnerships with various institutions to create more Japanese startups, according to Hori, who said: “For university partnerships, we are working with Hitotsubashi University and Keio University to provide startup-related lectures.

“In terms of VC, we have created a fund called EV Growth with East Ventures to contribute to the growth-stage funding for promising startups in Southeast Asia.

“Also, we are participating in the Shibuya District Startup Development Program by providing technical know-how to startups.

“Last but not least, we co-host a startup school called Code Republic with East Ventures and are committed to developing and nurturing young entrepreneurs.”

As Global Brain manages eight CVC funds alongside its mothership pure VC fund, the firm works with its CVC corporate partners daily, said Kamiameda. In addition to co-managing KDDI Open Innovation Fund, the firm also helps run property developer Mitsui Fudosan’s 31Ventures funds, inkjet printer and electronics producer Seiko Epson subsidiary Epson X Investment, brewery group Kirin Holdings’ vehicle Kirin Health Innovation Fund, Norinchukin Bank unit Norinchukin Innovation Fund, logistics group Yamato Holdings’ Kuroneko Innovation Fund and Sony Financial Ventures, which is part of Sony Financial Holdings, consumer electronics provider Sony’s financial services subsidiary.

“We strongly believe collaborating with corporations is a key to stimulate the Japanese startup ecosystem, help startups grow and bring the ecosystem to the next level,” Kamimaeda continued.

“For that purpose, Global Brain has established α Trackers, Japan’s next-generation CVC labs, in late 2018. α Trackers has been attracting and inviting more corporations and has become one of the major CVC consortiums in Japan now.

“We also collaborate with other CVC peers, VCs, incubators, accelerators, universities and the government deeply. As collaborating with other players in the ecosystem is a key to grow and strengthen the ecosystem, we actively work with them, mentor their portfolio startups and co-invest together.

“As one of the largest VCs in Japan, we, Global Brain, are committed to the Japanese startup ecosystem. To bring the ecosystem to the next level and to make it more competitive to the world top startup ecosystems in other countries, we reckon we need to stimulate and improve the Japanese ecosystem further and incubate more global companies from Japan as well.

“To realise this vision, we also believe Global Brain needs to become more global to help our startups to go global. Therefore, we have been actively expanding our footprints in new markets and aiming to become a global top-tier VC. Establishing our European headquarters in the UK in 2019 was one of the steps for us to achieve this goal.”

GCV joined JVCA in 2018 to conduct a Japan-focused CVC survey released at METI, comparing local and international perspectives, before teaming up again, along with Japan Research Institute (JRI) and Sony, to co-host the GCV Asia Congress in Tokyo the year after. GCV, JRI, JVCA, Sony and electronics group TDK, among others, are set to hold a new edition of the conference in April 2022.