Riney: I think it has gotten much better. In 2016, total venture investment was nearly ¥200 billion, but it increased to about ¥300 billion in 2017. Even though my friends in Silicon Valley and China point out that the amount is still small, it has definitely grown substantially in just a year. We have also seen an increasing number of ¥1 to ¥2 billion funding rounds, which has played a crucial role behind the growth in investment.

We’ve entered “phase one” of a positive cycle. More talented people are beginning to start or join new ventures, and now there is more money to support them.

Question: Nonetheless, China has been producing startups many times faster than Japan and some of them have taken a leading role in the world. Is there anything that Japan can learn from China?

Riney: Japan can learn a lot from China. First of all, in China, there is significantly more capital available for entrepreneurs. In China, and also the U.S., startups go public after they have grown to a fairly large size. This is primarily because they are able to raise more capital in the private markets, and forgo short-term profitability in pursuit of long-term growth. This enables them to think and go bigger.

In Japan, companies don’t have as much capital in the private markets and therefore tend to go public much earlier. This is great from a liquidity perspective. But as a result, there are a limited number of unicorns (privately held companies valued at $1 billion or more). In a way, it is a premature initial public offering. I hope Japanese startups and investors can be more patient and pursue larger outcomes.

Question: Do you think there could be a trend where investors choose China over Japan?

Riney: That has already been the trend. But recently, as prices in China have gotten frothy, investors have begun to pay more attention to Japan. I actually received an inquiry from a well-known Chinese investor wanting to know about the startup environment in Japan. I guess they feel there must be some good deals in Japan after hearing about Mercari Inc. and other big IPOs. I’ve also started to receive inquiries from the U.S. These are signals that Japanese startups are becoming more globally recognized.

Question: What do you think are some of the prospective fields for startups in Japan?

Riney: We like large, traditional industries that are under-penetrated by technology. For example, logistics or law. Usually, legal transactions are conducted on paper, and lawyers are expensive. “Legal-tech” firms, on the other hand, can replace much of the work that associate lawyers do with software. These kinds of firms have gained traction in the U.S., but have only recently emerged in Japan.

Additionally, we look at government tech, or so-called gov-tech, which work to incorporate better information technology infrastructure within government operations. The current software used by governments and municipalities is incredibly outdated and cumbersome. Software-as-a-service applications can alleviate this by providing intuitive software while reducing operational inefficiencies. As there are an increasing number of “gov-tech” startups in Japan, we see opportunity here.

What it takes to go global

Question: Are globalization and a diversified workforce essential for a startup if they are aiming for the global market?

Riney: If a company has ambition to compete globally, it needs to create a foundation for going global from the onset. We often see companies only employing Japanese speakers in the early days, and so the organization inevitably turns into a Japanese-only environment. They may try to hire non-Japanese later, but by then it is often too late. There are already too many language and cultural barriers to effectively communicate with foreign staff and build a global company.

Our portfolio company, Infostellar Inc., had a smarter approach. They are building a satellite transmission infrastructure. As space is inherently a global business, the two Japanese founders worked to build a global environment from the beginning. They made English their primary language from the onset and hired non-Japanese early. Now about half of their employees are non-Japanese.

Question: Meanwhile, what do you think Japan lacks in terms of having more unicorn companies?

Riney: First of all, the term “unicorn” refers to an unlisted, private company. But in Japan, there are many firms that see their value exceed $1 billion after they go public. Some people say, “IPOs in Japan are ‘Series Bs’ (late-stage funding rounds)” due to the typical valuations and amounts raised. If you consider the IPO a Series B, and look at company valuations after they go public, you’ll see a different picture. There are more companies that are valued at over $1 billion.

As I said earlier, Japanese startups and investors could use more patience; raise capital in the private markets and think bigger.

Cycle with J-Startup Program

Question: The J-Startup Program was launched to intensively nurture startups that have a serious ambition of going global with overall public and private support. What do you think about it?

Riney: I’m not sure about whether the program will help startups compete globally, but I do think government support is essential. Having the government, especially in Japan, promote entrepreneurship encourages talented people to startup and investors to support them.

Question: We have seen examples of the U.S. and others where funds are raised spontaneously without government support. What are the prospects for Japan?

Riney: Government support is important in the early days to build momentum. There is probably a threshold where the startup market is big enough that it grows organically. I believe that number is ¥1 trillion. Until we get there, government support is instrumental.

Sixty-six members of a recommendation committee involved in the startup ecosystem have selected 92 of about 10,000 Japanese entities as J-Startup companies thought to have real potential.

Through the community created not only by the government, but also major companies and venture capital entities, the program is receiving intensive support from the public and private sectors. It is also expected to help fundraising and business collaboration along with efforts to raise awareness of the J-Startup brand among domestic and foreign companies, as well as investors.

The government is taking the lead in facilitating a good environment and supporting business development overseas for startups lacking concrete results, opening the door to bidding on government procurement opportunities and addressing requests on regulations.

J-Startup at overseas events

In Paris, there is a facility called Station F that is known as one of the largest incubation offices for startups in the world. It is where U.S. Facebook Inc. rents space with the aim of discovering promising entrepreneurs.

Last summer, Japanese startups visited the facility. As part of assisting in development abroad through the J-Startup Program, a networking event was created between Japanese firms seeking an overseas presence and relevant parties from France. Prior to this event, there was a government-to-government discussion, which resulted in confirmation of a plan to dispatch domestic startups to events in the other’s country.

In addition to the event in France, companies from the J-Startup initiative successively participated in other relevant events around the world in 2018.

For example, they took part in the Gitex Future Stars in Dubai in the United Arab Emirates, one of the largest startup exhibitions in the Middle East; the Web Summit themed on startups in Lisbon that typically attracts 70,000 people from around the world; and the Slush startup event in Helsinki. They showcased Japan’s innovation through a J-Startup booth at these events.

At any rate, why does present Japan need startups with high ambitions to expand their businesses globally? The answer can be found in the examples from countries such as the U.S. and China.

More and more emerging companies have been launched with digital technology as their driving force, and they have come to operate globally today. Some, like China’s Huawei Technologies Co., have grown to threaten large existing corporations and could even be poised to transform the industrial structure.

On the other hand, Japan has gradually seen the launch of companies followed by rapid growth thanks to their latest technology and services, but the number of unicorns and their scale pale against their international counterparts. Some people point out the “absence of role models” in Japan as one of the reasons behind the limited number of people who take on launching startups and of those ventures with high ambitions to make inroads in the international market.

Yosuke Nakamura, researcher at the NLI Research Institute in Tokyo, said: “Companies in Japan have managed to get listed on a stock exchange even if they didn’t develop their businesses globally through proactive investment since the country’s wide variety of business fields feature a certain market size. In other words, they don’t need to be a unicorn to see enough outcome for their growth.”

But times have changed. In the era when gigantic information technology platforms dominate the world, companies need to have a global viewpoint and impetus to survive severe competition.

‘Friction heat’ changes Japan

There have been fierce competitions internationally on generating innovation. Such an environment could push transformations among large companies that are bound by successful experiences of the past.

In order to create new values, they need to overcome existing obstacles such as organizational climates that make it difficult to trigger new ideas, difficulty maintaining staff motivation to take on high-risk tasks and management systems that are slow to make decisions.

“How to establish a network is a common challenge for companies, whether startups or large firms,” said Keidanren (Japan Business Federation) Chairman Hiroaki Nakanishi, who also serves as chairman of Hitachi Ltd.

“Japanese companies in the past lacked a culture to nurture personnel who strive to establish their own sense of values with their antennas high,” he pointed out. “That’s also a fundamental issue for Hitachi as well.”

At a social gathering among Keidanren and J-Startup companies held in Tokyo in late November, Nakanishi said, “Going beyond the boundaries of large firms, Keidanren and others, how to expand people’s networks would lead to the invigoration of the Japanese economy.” He expressed his eagerness to have active interactions among them for value creation.

Those new exchanges could produce a possibility to bring about innovation. Economy, Trade and Industry Minister Hiroshige Seko said of them, “‘Friction heat’ from (exchanges among) large companies and startups would possibly create something to change Japan.”