IPO not the only goal

The J-Startup program has so far selected a total of 139 companies to support. I now feel we need to diversify their growth paths, in addition to creating an environment conducive to their growth.

In Japan, the mainstream way of exiting investment is an initial public offering, but in the United States, nearly 9 out of 10 exits are through mergers and acquisitions.

We think startups should be able to take the strategy of raising large amounts of money before listing their shares, in addition to listing, so that they make their presence felt dynamically in the global market.

For this, we have high hopes for the role of larger businesses tying up with startups and the active role of corporate venture capital investment. The recently launched Open Innovation Promotion Tax System is aimed at promoting tie-ups between large companies and startups. We believe we can create a significant impact on society by combining technologies and business models of startups with the business resources of large companies and help them develop as bases of larger growth.

The Ministry of Economy, Trade and Industry’s J-Startup program has been providing significant support to 139 promising startups since its inception in June 2018. Its aim is to produce companies that can compete in the international arena.

Companies receiving the program’s support include many that have grown into unicorns — unlisted companies that are evaluated highly by the market and whose corporate value or market capitalization is at least $1 billion.

They include Spiber Inc., which develops next-generation fibers inspired by spider silk, and Preferred Networks Inc., known as PFN, that boasts artificial intelligence technology that sees high demand from large companies.

At first look, companies under the J-Startup program may appear mainly to be those in businesses that take advantage of cutting-edge technologies in sectors such as AI, robotics, drones and aerospace. But in fact the businesses are more varied, from businesses in resource recycling or environment- and energy-related areas that impact regional economies, to companies with technology that can support an aging society and services that help people solve issues they face in their daily lives.

In particular, with the spread of coronavirus transforming society and people’s living environments, new needs and lifestyles are emerging, and there is growing demand for technology and services that can address them.

“Society’s needs are increasingly diverse,” Hajime Furuya, director of METI’s Startup and New Business Promotion Office, said. “That’s why the role of startups that provide services that are fine-tuned to such needs is growing in importance.”

In its early period, the J-Startup program’s focus was on increasing the legitimacy of startups in society’s eye and producing role models, but three years in, officials are starting to feel the need to enhance its support by tailoring measures to each developmental stage of the business and to different growth strategies.

Kenya’s Nairobi is referred to as Silicon Savannah. A hub for startups, the city has seen a rapid growth similar to Silicon Valley in the U.S.

One startup representing Nairobi is M-Kopa Solar Kenya Ltd. Utilizing M-Pesa, a mobile money gradually expanding in Africa, the company sells a solar power generation system through an installment payment plan of 50 cents a day. If a customer continues payment for 420 days, they will own the power generation system.

A SIM card is installed into the power-generating unit and generation stops if payments fall behind. It serves to prevent both theft of the system and payment loss.

The business provided by M-Kopa Solar is a leapfrogging service that supplies electricity via off-grid solar power generation to areas that have no access to conventional power grids.

Leasing over purchasing

“Now it is the era of rental economy. People can rent housing or cars if they cannot afford to buy,” M-Kopa Solar CEO and co-founder Jesse Moore said. “With our business based on such a concept, we sell expensive goods such as radios and smartphones in installments after supplying electricity with the solar power generation system.”

Through the sales of TV in installments, he believes he has contributed to the development of democracy in a broader sense, saying: “Voters in Kenya are able to know more about candidates in an election compared to before. They can choose a candidate after watching debates on TV.”

A springboard leading to the launch of the business came in 2002 when Moore, a Canadian, visited Kenya as a member of a nongovernmental organization. Observing that cellphones were widely used in remote agricultural communities, he thought, “I can do something with mobile phones in the future.”

After obtaining an MBA, Moore started a job in an association working with mobile network operators in Africa and Asia. While working there, he and his colleagues came up with the idea of a business utilizing installment sales.

M-Kopa has rapidly expanded since its founding in 2011. Currently, 750,000 customers, which account for about 10 percent of all households in Kenya, utilize the company’s solar power generation system. The firm has succeeded in raising $19 million, with Mitsui & Co. and Sumitomo Corp. among the investors.

It appears that the company is continuing its expansion strategy. “We’d like to expand our services to West Africa, including Nigeria, and South Africa. We’re hoping to operate our business in eight to 10 countries in 10 years,” Moore said.

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.