The yearly total investment available to startups in Japan, about $2bn, is dwarfed by the US’s $60bn. Yet, Tokyo based angel investor Dr. Tomy Kamada thinks Japan has enough venture capital.
What many people do not understand is that ordinary VCs, now joined by a growing number of corporate venture capitalists (CVCs) seeking to leverage synergies with innovative firms, focus on financing middle stage startups. However, the problems rest at the early and later stages, says Kamada.
VCs rarely invest in early stage startups, leaving the task of high risk investing to a handful of wealthy individuals. “There is almost no seed capital in Japan,” says Kamada. Perhaps $150m is available, compared with $20bn in the US.
Startups can exit in one of two ways. One is by acquisition to a larger company through merger and acquisition (M&A). The second is by an initial public offering (IPO). Few Japanese startups are acquired, so the startup ecosystem depends heavily on the ability of firms to IPO. But, Japan’s small company IPO market got off to a late start.
Tokyo Stock Exchange Mothers came into being in 1999, a full 28 years after the US’s NASDAQ (1971). During that period Apple, Intel, Microsoft and many other successful US startups went public. Exiting founders reinvested a portion of their windfall gains back into new startups. This cycle has repeated itself three or four times over, establishing Silicon Valley’s baseline investment culture. Japan is two or three cycles behind the curve, says Kamada.
He offers his own entrepreneurial experience as example: Kamada founded a startup software company in Japan in 1984 that listed on TSE-Mothers in 2001. He ran the company for 10 years after its IPO, before leaving to angel invest through TomyK Ltd, the startup ‘booster’ he founded in 2012. “I’m from the first generation cycle of experienced investors,” says Kamada, adding, “It’s still a small community.”
Preparing for IPO is a lengthy process. It can take 7 to 10 years for a startup to overcome regulatory hurdles. The typical VC fund operates for only 5 to 10 years, after which invested capital must be returned to investors. Given their limited time horizon, ordinary VCs avoid investing at the early stage. Instead, they prefer to invest 3 to 4 years before an IPO. “This limits the effectiveness of the startup ecosystem,” believes Kamada.
In time, 2nd and 3rd generation investors will add girth to Japan’s startup ecosystem. The same would be true if big companies acquired more Japanese startups. What’s blocking them? It is not for lack of money. Japanese firms sit on a mountain of over $3tn in cash.
One reason is that big, traditional Japanese companies develop new technologies in-house. They have the research facilities and people to do so. Research departments are staffed by clever university graduates working under lifetime employment. That model worked well for many years. Today, “Big Japanese firms still try to develop technology by themselves in secret,” says Kamada.
Yet the speed of innovation now outpaces the capacity of any single firm to keep up with the changes. No company, regardless of size, can innovate sufficiently or fast enough. That’s why Facebook and Google aggressively buy innovative startups. Such ‘open innovation’ allows cashed-out startup founders to reinvest windfall profits as business angels and venture capitalists, supporting the next round of innovative startups.
Kamada is hopeful Japan’s big companies will begin gobbling up innovative startups, finally embracing the ‘open innovation’ economy. It’s important they do. “If they don’t, they won’t survive,” he says, optimistically adding, “Once a symbolic company, like Sony, starts acquiring startups, others will likely follow.”
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