Capital flows to Japanese start-ups on the rise

The Yomiuri Shimbun

December 4, 2021

For Japanese start-ups, the parched investment landscape is finally getting some rain.

Amid a global cash glut, domestic and foreign investment funds have begun looking to Japan as they grow wary of China’s heavy-handed regulation of tech industries. Yet even so, the size of the available investment funds and the number of promising start-ups are much smaller in Japan than in the United States and China. The government is hurrying to beef up its support.

Tailwinds

“The first Japanese company [we will invest in] has been decided. The number of Japanese brands will start to grow,” Masayoshi Son, chairman and president of SoftBank Group Corp., said at a press conference in November, announcing the group’s financial results.

The group operates the SoftBank Vision Fund, the world’s largest start-up investment fund. In October, the fund invested in a Japanese company for the first time since its inception in 2017. The recipient is a biotech venture firm based in Kanagawa Prefecture.

As China appears more risky, Japanese companies have gained new attention.

SoftBank Group has major companies including the mobile phone giant SoftBank Corp. and Yahoo Japan Corp. under its umbrella.

Kentaro Matsui, head of the fund’s investments in Asia, said, “We can contribute to Japanese start-ups by using the [group’s] network.”

Other large domestic companies, including KDDI Corp. and Mitsui Fudosan Co., are also expanding their investments as a way of incorporating the ideas and technologies of start-ups.

Monetary easing around the world due to the pandemic has caused cash to flow into the country.

In July, Google of the United States announced it would completely acquire Pring, a Japanese start-up that operates a payment and remittance app. U.S. payment giant PayPal announced in September that it would buy Paidy Inc., a Japanese buy-now-pay-later provider, for about ¥300 billion. That is an unusual amount for a Japanese start-up.

A major U.S. investment fund involving large corporations such as Kohlberg Kravis Roberts & Co. and Carlyle Group Inc. also invested in a Japanese start-up this year.

Late to the game

However, Japan is lagging far behind the rest of the world in nurturing start-ups.

An unlisted start-up with a corporate value of more than $1 billion (about ¥110 billion) is called a unicorn — and such creatures are especially rare in Japan.

U.S. research firm CB Insights has counted 424 unicorns in the United States and 165 in China, versus only six in Japan. This is even fewer than the 41 in India and 11 in South Korea.

In 2020, ¥16.6 trillion was invested in start-ups in the United States, as opposed to only ¥150 billion in Japan, a 110-fold disparity. Investments in the United States have been on the rise in recent years, further widening the gap.

Start-ups have difficulty growing in Japan because of the overall low mobility of human resources and a strong national disposition toward stability, analysts said.

Yosuke Tsuji, president of Money Forward Inc., a company that aids start-ups, said: “Although the funding environment is improving, high-level professionals are concentrated in large companies in Japan. It is essential to mobilize human resources, including women and foreigners.”

In Europe, the United States and China, start-ups create innovative services and push economic growth. It is because of this that Prime Minister Fumio Kishida has advocated fostering entrepreneurs and supporting start-ups as pillars of his growth strategy.

In 2022, the government plans to introduce a framework to provide financial support for large companies when they hire people who plan to later start businesses, and for start-ups that ask to borrow human resources from large companies.