Global Venture Capital Firms Add Spark to Japan’s Startup Ecosystem

A decade ago, Japan’s startup market was too small for a prominent US startup accelerator and venture capital firm like Plug and Play to bother with. There were too few trailblazing startup enterprises, investment deals were small and billion-dollar valuations for new ventures were unheard of.

Not anymore. Japan now boasts more than 10,000 startup ventures––and even several worth 1 billion dollars, the rare so-called unicorns.

In 2022, investments in Japan’s startups surpassed 877 billion yen (US6.7 billion dollars*), an over 13-fold increase from 64.5 billion yen (US500 million dollars*) in 2012. The size of deals has increased, too. The median size of fund raised by a startup jumped to 120 million yen (US921,500 dollars*) in 2022, from 17 million yen (US131,000 dollars*) in 2013, while the mean has quadrupled to 445 million yen (US3.4 million dollars*) over the past decade.

* Converted at 130 yen to the US Dollar

Phillip Seiji Vincent, a managing partner with Silicon Valley-based Plug and Play’s Japan unit, has witnessed this expansion firsthand. His firm––whose seed-stage venture capital investments have funded more than 1,700 startups globally since its founding in 2006––entered Japan in 2017, just as the influx of talent and investments into startups was beginning to attract attention. “Japan has a great support system for startups. Now we just need more entrepreneurs to take advantage of the system,” said Vincent. Plug and Play Japan’s own three-month accelerator programs for startups in eight sectors mentor entrepreneurs in financing and business development and connect them with major Japanese companies, including Dentsu, Hitachi, ENEOS and financial firms like SMBC and MUFG. “We use our accelerator program to help large corporations with open innovation. We connect them with startups and navigate their open innovation journey. By bringing together corporations and startups in the eight sectors, we have built an industry-specific consortium model, which works well for our investments, too. We can source deals from the accelerator program while gaining a good understanding of what startups are in need and potentially successful by working with many corporates,” Vincent continued.

The surge of interest in and money for startups in Japan reflects a shift in venture capital investing. In the past, Japanese venture capital firms preferred small, minority investments in middle-to-late-stage ventures with stable operations. Now VC firms take a more hands-on approach, investing higher sums, dispatching directors, and extending business support.

Plug and Play typically makes small investments of USD100K – 150K primarily in seed-stage and early-stage startups. “There are many amazing venture capital firms in Japan that we network with, share deals with, and trade information with, which is typical for most startup ecosystems. Because of our ticket size and value proposition as a foreign investor, we can differentiate from Japanese venture capital firms and remain a neutral player in the ecosystem.” Kiva, an extended warranty service provider for e-commerce, is a recent investment that Plug and Play made with other Japanese and foreign investors, such as SBI Investment and Arbor Ventures.

Japan’s latest startup boom coincides with Prime Minister Fumio Kishida’s renewed focus on open innovation and disruptive business ideas. Under a two-pronged policy promoting growth and sustainability unveiled in November 2022, Kishida is aiming for a tenfold increase in annual investments for startups, to around 10 trillion yen (US77 billion dollars*) by fiscal 2027 (ending in March 2028). KEIDANREN (Japan Business Federation) has issued its own pro-startup policy recommendations , encouraging big companies to aggressively explore synergies with startups and calling for the creation of 100,000 new companies.

Building up a nurturing network for startups––an “ecosystem” ––will be key. The Government of Japan is now racing to connect entrepreneurs, universities, big corporations, and venture capitalists in order to foster more collaborations and spur deals that could spawn the next Google or Amazon. Accordingly, it has acknowledged the need for changes towards upgraded childcare services and startup-focused intellectual property rules in particular.

To create better opportunities for startups, the Ministry of Economy, Trade, and Industry (METI) launched J-Startup in 2018. The program mobilizes resources for the country’s top-performing ventures, connecting them with free workspace and consultation services and assisting them in marketing their products and services at conferences overseas. In 2022, METI began offering subsidies for startups to use for staff recruiting.

Other policy measures have boosted the market’s allure. For instance: tax breaks encouraging Japanese companies to set up corporate venture capital (CVC) units as well as a government-led 10-trillion yen (77 billion dollars*) University Endowment Fund(1.0MB)  to support research and university-affiliated startups. Deregulation could fuel another cycle of expansion. In 2024, the government is expected to loosen restrictions on limited partnerships in Japan, which would allow more money from global investors to flow into Japanese venture capital funds––and ultimately to startups.

The country’s job seekers have begun to take notice of recent surveys showing that more young and mid-career Japanese professionals are hopping from big companies to startups or are open to considering the switch. That is a big deal in Japan where conventional thinking tends to equate job prestige with big-name companies.

News of substantial venture capital flows from overseas continues. In 2022, Eight Roads Ventures Japan, a Fidelity-backed unit of US-based Eight Roads, invested 2.1 billion yen (16 million* dollars) in Kyoto biotech company Thyas––part of which 75 billion yen (577 million dollars *) funds under management were poured into 49 companies in Japan’s healthcare, technology, fintech and emerging technologies sectors. Salesforce Ventures , a San Francisco-based corporate venture capital arm of a US cloud software giant, has a 100-million dollars Japan Trailblazer Fund and a solid track record, having backed career networking service BizReach and accounting software developer freee . In 2018, San Francisco-based seed-stage investment firm Scrum Ventures teamed up with Nintendo to find startups with fresh ideas for the Japanese videogame company’s Switch console. Meanwhile, DCM , a US venture capital firm headquartered in Silicon Valley, has funded 20 software, mobile and IoT startups in South Korea and Japan since the opening of a Tokyo office in 2008.

* Converted at 130 yen to the US dollar

Many of these venture capital firms view their role as more than just financiers. They’re opening their business networks to Japanese startups with global ambitions. That’s essential if new ventures are to have a shot at thriving overseas––especially because risk-averse investors in Japan tend to cash out before startups have had an opportunity to test their ideas on the global stage.

In 2021, venture capital exits accounted for roughly half of the 125 IPOs in Japan. But there were hardly any as sizable as Mercari, the flea market smartphone app operator that became one of Japan’s first unicorns when it raised 1,300 billion yen (US1.2 billion dollars**) in its 2018 Tokyo stock market debut. While unicorn startups in the US, China, and Europe now number in the hundreds, Japan still does not have even a dozen. “One of our biggest value propositions is that we can connect startups to ecosystems outside of Japan and potentially outside investors and corporations as well,” said Plug and Play Japan’s Vincent. Japan is counting on that, as it looks to solidify its place among the world’s top startup incubators.

** Converted at 109 yen to the US dollar