Japan builds on tech foundation for VC growth

Bound by the Sea of Japan to the west and the Pacific Ocean to the east, Japan spans a territory of close to 378,000 sq km, 364,000 of which are land and the rest water. Often referred to as “the Land of the Rising Sun” because of its Japanese name “Nippon” – literally “the sun’s origin” – the country consists of 6,850 islands, the largest of which are Honshu, Hokkaido, Kyushu and Shikoku, which together make up about 97% of the territory.

The country is also home to the world’s 11th largest population, of more than 127 million people, and has often been singled out as an early demographic example of a population diminishing, rather than growing. Estimates project that by 2065, figures could plummet to 88 million – a drop of as much as 30% compared with 2015.

Not only is Japan’s population shrinking, it is also ageing. With a median age of 46.7, it is the world’s second oldest, right behind Monaco, where the median age is around 53. Recent government studies also forecast that by 2065, people aged 65 and above will account for around 38% of the population.

A mitigating factor may, however, be that Japan has one of the world’s highest life expectancy, ranking second at 85.52. It also has one of the world’s most educated populations, ranking second – right behind Canada – with 50.5% of 25 to 64-year-olds having completed some form of tertiary education, according to the Organisation for Economic Cooperation and Development.

Over 70% of the land is mountains and volcanoes, and the country has often been seen as one that offers few natural resources. It is perhaps no wonder then that the country is known mostly for its groundbreaking contributions to technology and innovation, particularly in the areas of electronics and automotive.

The archipelago is the world’s third-largest economy, with a GDP of nearly $5 trillion, and is home to some of these sectors’ most successful businesses, such as Canon, Casio, and Nikon for electronics, and Yamaha, Toyota and Nissan, for automotive, to name a few.

More recently, these traditionally strong areas have been supplemented by new technologies, which are reshaping the innovation landscape in Japan, and resurgent links between entrepreneurs and large corporations, international and local capital markets and dealmakers.

Last year’s flotation of flea-market app operator Mercari and e-commerce company Rakuten’s acquisition of US-based peer Curbside signal an important change for the Japanese innovation capital ecosystem. They also reflect the wider catch-up by M&A and public markets to the burgeoning prices paid in private capital markets, validating the later stage investors that paid to delay these exits.

Mercari’s initial public offering (IPO) raised up to $1.2bn after being priced above the top of its range, at ¥3,000 ($28), in Japan’s biggest such share sale of 2018. 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 for an undisclosed amount.

The size of Mercari’s IPO and Rakuten’s purchase of an international peer signals the cultural change needed to deliver on Japan’s innovation and entrepreneurial potential have started to take effect.

The median flotation in Japan in 2015 was $3.5m, according to Stanford’s review of the ecosystem.

The dealmaking comes with an international dimension since Japan’s prime minister, Shinzo Abe, visited Silicon Valley in 2015, and reflects a broader push into supporting entrepreneurs and innovation capital through his Abenomics strategy.

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.

New Opportunities

In April 2018’s innovative region analysis for GCV, Ken Yasunaga, managing director at the public private investment fund Innovation Network Corporation of Japan, 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, artificial intelligence and robotics that always the top the list these days.”

In a Financial Times (FT) supplement on Kansai – the region that is home to Kyoto, Osaka and Kobe cities – 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 cooperation.”

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. The FT described it as having an atmosphere of urgency.

Teranishi argued Japan’s reluctance to treat its research ambitions as global projects had for too long held back academia 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.

At the Kyoto-based Center for iPS Cell Research and Application Nobel laureate Shinya Yamanaka devotes himself to regenerative medicine research. He discovered induced pluripotent stem cells – mature cells that can be reprogrammed to an embryo-like state.

Japanese startups and listed companies in this field include Megakaryon, PeptiDream, Sosei Group and Healios. They have been aided by older corporations, such as Takeda, which has an 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.

State of the market

More broadly, Japan-based startups raised ¥280bn ($2.6bn) in 2017 across just more than 1,100 companies, according to Japan Venture Research, published by the Financial Times.

In March last year, the Ministry of Economy, Trade and Industry 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.

The pulling together of the corporate, university and government support network to the venture, angel and startups ecosystem has created fresh hope the world’s third-largest economy can play a more important leadership role in the industry.

In the second quarter, GCV Analytics tracked 781 funding rounds involving corporate venturers, near the all-time record number (796) registered in the first quarter. And while the US hosted nearly half the funding rounds (319), Japan came second with 104 deals. One out of every four of corporates was disclosing their first minority stake deal in Q2, particularly led by Japan-based groups.

Japanese corporations have also increasingly stepped up as limited partners (LPs) for VC funds. In Q2, Japan-based venture capital firm Globis Capital Partners held a ¥36bn ($321m) first close for its sixth fund, with commitments from corporate LPs.

Investment manager Reliance Nippon Life Asset Management will manage a $187m fund of funds, backed by several Japan and India based corporates. Japan-based investment firm Signifiant harnessed financial services firm Mizuho Financial Group to launch a ¥20bn ($186m) growth investment vehicle dubbed The Fund while financial services firm Mitsubishi UFJ Financial Group launched a ¥20bn ($180m) fund to focus on financial technology startups in Southeast Asia.

But Japan Inc’s biggest move has been to better support the world’s largest venture fund. In July, telecommunications and internet group SoftBank launched its second Vision Fund, disclosing it has signed memoranda of understanding for funding that will take its size to $108bn.

SoftBank launched its first Vision Fund in 2017 with a $100bn target and has confirmed $98.6bn of debt and equity financing for the vehicle, with much of the capital coming from Middle Eastern sovereign wealth funds and corporate partners.

For the second fund, SoftBank plans to contribute $38bn of the capital, with local support from insurer Dai-ichi Life, financial services firms Mizuho Bank, Sumitomo Mitsui Banking Corporation, Mitsubishi UFJ Financial Group, Sumitomo Mitsui Trust Bank and brokerage group Daiwa Securities. They may be able to offer more than financial support as SoftBank’s first Vision Fund has yet to strike a deal in Japan.

Mary Meeker, partner at VC firm Kleiner Perkins Caufield & Byers, in her review of the internet market last year, noted the $4bn-plus rise in market valuation of the top 20 internet companies over the past five years. At over $5bn now, these 20 companies alone are worth more than Japan’s gross domestic product, at least for now.