Startups & Venture Capitals in Japan
How the startup ecosystem has emerged in Japan? The story so far. #05
Happy New Year to all my newsletter readers: be bold or italic, never regular!
As the first newsletter of 2023, as promised, I’d like to draw an overview of the Venture Capital landscape in Japan.
When I co-founded my startup in the late 1990s, there were no angel investors familiar with the Internet-related business since it had just started penetrating society. The angels existing at the time could be successful family business owners, lawyers, doctors, foreign-affiliated company executives, etc.
What about Venture Capital? Most of the VCs at the time were subsidiaries of big financial institutions such as Mitsubishi UFJ Financial Group, SMBC (Sumitomo Mitsui Banking Corporation), Nomura Securities, Daiwa Securities, Development bank of Japan, Nissay (life insurance company), and so on.
And when the Internet bubble peaked in 2000, then the bubble burst, lots of VCs disappeared or stopped investing, and the "nuclear winter" came into the startup and VC industries. It was the same phenomenon seen in Silicon Valley.
However, in Japan, after Lehman’s Fall (financial crisis), 2009 was the bottom of the IPO market, and also, the VC investment into startups was way worst than the post-Internet bubble burst time, as my chart shows.
The question is, what made the VC industry and startup ecosystem revitalize?
I cannot conduct any experiment to validate my hypothesis because it’s not a natural science, but I believe the IPO of the startup Kakaku.com kicked off the game again. In Japanese, kakaku means “price.”
Before diving into the story of VCs in Japan, let me tell you the fascinating story of Kakaku.com.
Mitsuaki Makino founded Core Price (later changed the name to Kakaku.com) in 1997. In 2000, Yoshiteru Akita, who was running his own VC, visited Makino to invest in his startup. However, Makino refused his offer because Makino was going to sell his startup to the American fund.
Several months later, 9.11 happened. Akita wondered what had happened to Core Price, revisited him, and asked about the situation.
The result was due to 9.11, and the US fund canceled the investment. Then, Akita asked Makino to let him invest in Core Price.
Makino accepted his offer, but the condition was to buy most of the company, and Akita ran the company. So Akita purchased most of the shares and became the company's CEO.
Because of the high percentage of shares in Kakaku.com held by the VC, it was necessary to reduce the rate controlled by the VC to list the company on the emerging market.
The next question is, who purchased the shares of Kakaku.com? The company that bought the shares is Digital Garage, listed in the Tokyo Stock Exchange market.
Then, Kakaku.com went public in October 2003. I think this IPO stimulated the stock market, and then the IPO market was reactivated in 2004 and 2005 until the big inside information accident called “Livedoor Shock” happened in January 2006. Followed by Lehman’s Fall, the real “nuclear winter” came.
Please read my previous newsletter if you are interested in how the startup ecosystem recovered from the severe winter.
Now let’s start the story of VCs in Japan.
In the past 25 years, there have been lots of factors that affected the growth of the VC industry. Among those factors, I’d like to address two or three factors affecting the VC industry.
First, some of the first startup generations succeeded and started angel investments in young entrepreneurs. Also, when they began angel investment, iPhone and android were launched, and the smartphone industry emerged.
Theoretically, young entrepreneurs have no experience in business development and sales activities. Still, if they could register their smartphone apps on AppStore or Google Play, they could distribute them anywhere in the world. Then, as my chart shows, the startup ecosystem has grown rapidly and vigorously.
Below are the four generations of Japanese startups, as I defined them.
This smartphone movement has generated many successful young entrepreneurs, some of whom have become “serial entrepreneurs” and “angel investors.”
A symbolic example is the Tokyo Founders Fund, launched by entrepreneurs.
The second thing I’d like to mention is INCJ: Innovation Network Corporation of Japan started the Fund on Fund investment (LP investment) in the independent VCs with a check size are about $100M. Then, those independent VCs began over $10M investment in startups that generated some Japanese “Unicorns.”
For example, the first Japanese Unicorn, Mercari, raised $160M before the IPO.
Thirdly, I’d like to introduce the CVC (Corporate Venture Capital) movement in Japan.
Extremely disgracefully, Japan has been ridiculed for its lost 30 years. One of the primary reasons for this is that large corporations have not challenged innovation and have accumulated internal reserves.
However, eventually, many realized they needed to challenge the innovation but could not make it themselves.
Consequently, they rushed to set up CVCs to collaborate with technology startups.
A prime example is KDDI's acquisition of a majority stake in the two-year-old startup SORACOM for an estimated market capitalization of $200-300M.
Five years later, on November 18, 2022, Solacom applied to be listed on the Tokyo Stock Exchange.
The above is the rough story of how Japanese startups and the Venture Capital industry have grown.
I do hope you found it interesting.