Foreign Funds Find New Opportunities in Japan's Growing Startup World

March 2024

Venture capital investors are finding fresh opportunities in Japan, seeing a new generation of entrepreneurs eager for capital, less competition than in more established startup markets, and government support programs designed to kickstart the startup ecosystem.

The startup market in Japan has continued to grow. According to research firm Preqin, "dry powder" cash reserves, funds raised but not yet invested, for investment in Japan have increased more than sevenfold over the past decade. The growth is being driven by young Japanese seeking greater challenges in an entrepreneurial world. They are being joined by foreigners taking advantage of Japan′s stability, transparent regulatory environment and the chance to find new opportunities outside of heavily saturated markets such as Silicon Valley.

But at the same time the number of startups remains relatively small in comparison to the size of Japan's economy. In 2022, even as the world′s third-largest economy, Japan ranked ninth in the world for startups, according to startup research group StartupBlink. This means that it is not too late to look for excellent prospects, according to those active in the market.

"I would love to have some more competitors," said Mark Bivens, founder of Shizen Capital, who has been a venture capital investor since 1999, and in Japan since 2016. "There is still insufficient capital to support the startup ecosystem," he said, adding that he turns down 30% of the potential investments he would like to make only because he does not have the resources to manage more. "This is a blue ocean when it comes to startup investing," he said of Japan.

The government is stepping in to help foster this important sector for Japan's economic future, with a wide range of programs and ambitious targets. Under a five-year plan announced in 2022, the government plans to invest ¥10 trillion ($67.6 billion) by FY 2027, with a goal of creating at least 100,000 new startups and 100 of the elusive "unicorns" that reach a valuation of $1 billion or more without being listed on the stock market. The broader goal is to make Japan the largest startup hub in Asia and one of the world’s leading clusters for startups.

The measures are aimed at every stage of the startup process, from helping founders develop their ideas, to encouraging venture capital investors from abroad, and offering tax breaks when companies are bought out.

And progress is being made. According to the Nikkei newspaper, its annual survey on startups in 2023 shows 13 unlisted companies in Japan are approaching unicorn status, the highest number since the survey started in 2017.

One of the big success stories was the sale of the Japanese payments platform Paidy to PayPal in 2021. Russell Cummer founded Paidy in Tokyo in 2014 to look for opportunities in the cashless payments market in Japan. "Japan has been a vibrant environment for our growth to date and we're honored to have our team's hard work and potential recognized by a global leader," Cummer said at the time of the transaction.

The startup market is also proving to be fertile ground for foreign expertise. Bivens of Shizen Capital shares his view that foreigners are involved in startups at a much higher rate than their overall presence in Japan.

Attorney Eric Marcks, founding partner of Tokyo-based law firm Southgate, says the trend is growing. "More and more of our startup clients are founded by foreigners living in Japan, whether students completing PhDs at Japanese universities or long-term residents of Japan. It is perhaps the diverse backgrounds of these founders that allow them to identify opportunities that may not be evident to others," he commented.

A good place to begin is at the doorstep of JETRO. JETRO helps any overseas investors including accelerators, venture capital and corporates to access Japanese ecosystems and to start their business in Japan. JETRO coordinators based in both Japan and worldwide are ready to support business tie-ups and relevant negotiations.

Now more than ever, Japan is the place to be. Come take advantage of the new spirit of innovation, the advanced infrastructure and support systems, not to mention the chance to be in some of the world’s most livable cities.

($1 = ¥147.86, Feb 7, 2024)