Entrepreneurship in Japan

entrepreneurship, essay, japan, startup dot

2010/03/01
1995 words
by Fredrik Olsen

Update: I thought I would do a really professional and good-sounding audio version of this blog post for those who don’t want to read so much or just want to be able to take in the blog post while doing other things. Unfortunately, it turns out, I suck at speaking English. I made an attempt so I might as well put it up here but I strongly recommend you read it anyway. Click below to play the audio version.

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Since I’m going to Japan for a year I’ve decided to study up a bit on my all-time favorite hobby and hopefully future career; entrepreneurship, specifically how entrepreneurship is viewed and how it is done in Japan.

I’ve already ordered the book “Comparative Entrepreneurship: The UK, Japan, and the Shadow of Silicon Valley” by D. Hugh Whittaker but in waiting for that book I’ve started to try to gather up some information on the internet. The biggest problem I’ve had though is that most articles I can find online are quite dated, 5+ years old. I’ll try to summarize what I’ve found so far though.

The popular opinion of entrepreneurship in Japan is that it is hard, getting funding and finding venture capital seems to be have been hard in the past and incubators seem rare. When discussing the problem it is generally put into three categories; political, cultural and the Japanese perception on entrepreneurship. What I’ve found when reading is however that the future seems extremely bright. Japan has had enormous success in the past taking western concepts to adapt and improve them.

Cultural problems

To understand why the Japanese entrepreneurial market looks like it does I think you need to understand the Japanese working-culture. Until very recently, life-time employment was the norm at Japanese companies, meaning that once you got out of school and started working you kept that job until you retired^[1]. This system has been given up more and more during the recession of the 90′s and have been moving more toward a more dynamic workforce. Japanese companies have a strictly seniority-based wage system, so entry-level workers will all make the same amount of money regardless of competence or productivity. It is argued^[1] that this will prevent Japanese people from taking the risks of entrepreneurship when they can get a good salary and guaranteed increase in pay with time.

But I don’t see how this would really prevent people from starting companies. For me, entrepreneurship has never been a way to earn more money, I’ve always seen it as a sure way to make less money and work much longer hours, but with the possibility of changing something; peoples way of life, solving a common problem or revolutionizing the world!

A cultural and workplace related problem is however that if a Japanese person fails with his startup it is hard to get hired into the normal workforce^[1]. This is completely in line with the “The protruding nail gets hammered” mentality, you’re not supposed to do things differently. In different words, failure is more serious than it is in the west.

None of these cultural problems should make it difficult for a foreigner to try and create something in Japan though.

Political outlook

Japan has a history of most kinds of startups, from starting to-be industry giants in the 50′s to the equivalent of Microsoft^[2] in the 70′s. Everyone knows that after World War II, Japan had tremendous success starting up companies that liberally borrowed technology and concepts from the Unites States and made them even more successful. Until the 90′s this worked perfectly, but it seems as though they caught up at that point and was forced to start creating by themselves; something they were not set up to do.

During the 90′s government regulations were definitely stifling entrepreneurial activity, but they quickly realized that to be able to get out of the recession and continue their economic growth they needed entrepreneurs in all fields. “The government is beginning to recognize their importance and is easing regulations to give the ventures more room to maneuver.”^[3] A quote from BusinessWeek in 2000, so 10 years ago they already started making it easier for new companies.

Japan Venture Capital Association was started in 2003 with the purpose of getting better data on the venture capital market as well as help to develop and improve investment firms^[4]. This is something that has existed in the U.S. since 1973 and has been long needed. No doubt will it help change the Japanese VC market.

Similarly in an article describing the 2003 Venture Fair in Tokyo it said that “To start with, I counted no less than 14 different government-affiliated new business support organizations in the first row of booths inside the exhibit hall. [...] I confirmed that yes, they lend money to any qualified corporation in Japan, regardless of the nationality of the founder.”^[5] So it seems there are big changes taking place and it paints a picture that it is no harder for a foreigner than a native to start a business in Japan.

Japanese perception of entrepreneurship

I think the biggest cause for Japanese people to not start companies is not because of the workplace culture or because of the political troubles they would have to go through. I think it is because of the view Japanese people have of the entrepreneur. It seems that much of the entrepreneurial view is still based in starting a convenience store or restaurant. Which is not what I would call entrepreneurial at all. Japanese citizens still seem very cautious and don’t seem to be wanting to take risks.

The American view of an entrepreneur in my opinion is that of a pair of founders doing what they love to improve the world; it is almost a romantic thing. The Japanese view of an entrepreneur seems to be of someone who either wants to be free of the normal Japanese lifestyle or someone who wants to compete with the existing behemoth companies, the innovative part of entrepreneurship doesn’t take as big a role as it does in the west.

Investment and exits

“Although the country is the world’s second-largest economy, it has generated only $3 billion a year, on average, in venture funding, for about 3,000 investment deals annually. [...] In the U.S., by comparison, startups get funding to the tune of $30 billion a year over deal volume of about 4,000 investments. Silicon Valley’s venture funds and their compatriots enjoy returns three to four times higher than Japanese funds.”^[6] The lack of investment is seen as a problem, but according to Michael Korver^[7] there is money to be spent and the interest to spend money is getting larger.

Angel investing is really starting to take hold^[8], but Japanese companies for some reason do not produce as high return on investment as western companies, something that’s been holding the investment market back. Other problems that almost fall into the political category are problems such as going public with your company. “Onerous listing criteria also make it extremely difficult for young companies to go public. It takes twice as long as in the U.S. — so investors have a longer wait to recoup their money.”^[8]

With an aging population unsure about their future and the future of the social security and pension system, the Japanese people are the richest people in the world. “After all, the average Japanese household sits on the world’s largest pool of savings — $116,000 per family at last count — yet interest rates are near zero, and real estate and stock prices are still 65% below their peaks of 10 years ago.”^[8] The unwillingness of Japanese people to spend and invest is a large socioeconomic problem in Japan, one that impacts the startup funding market as well.

There are essentially two exit strategies for companies, i.e. to sell the company and cash out. One way is private equity transaction, where another company or group of people buys the company. The other way is to do an initial public offering (IPO) on the stock-market; in other words to “go public”.

“The problem is that the market for private equity transactions in Japan is small. In other words, companies here simply don’t acquire each other as frequently or readily as they do in the United States, for example. [...] While it’s true the market for private acquisitions here in Japan is small, that’s primarily because the supply side is limited.”^[7] I already mentioned the difficulty of going public with your company, so if you’re looking to be a serial entrepreneur; making an exit through private equity seems to be your best bet. The reason why Japanese entrepreneurial activity is low is probably because of the mindset that you start a company and then run that company in hopes of being able to let your children inherit it. That is simply not how things are done in the west, while serial entrepreneurship is not by any means the standard in the west either, we don’t really start companies in order to be able to give our children a company when we retire.

The future

If anything, the future of the Japanese entrepreneurial venture is bright. There’s starting to pop up entrepreneurial events such as startup week^[9] and other networking meetings of that kind.

In connection with Waseda university, a kind of incubator that helps you with Japanese market feasibility studies and writing your business plan was started in 2002. “The Waseda Business Excelerator (WBX) was launched in 2002 to help non-Japanese high-growth ventures develop successful businesses in Japan, thus promoting global, technology-based entrepreneurship.”^[10] Here you get to stay for 6 months to a year and get help from MBA’s and the university.

I think this is exactly what is needed to improve the future of the Japanese startup. A mix between incubators and angel funds like the fantastic American company Y-Combinator.

I think there is a lot of talent in the Japanese people for creating new things, innovating and solving real problems. But I think the biggest problem is that the view of entrepreneurship is so different there from the U.S. This does however create a bright future for a westerner looking to start something new in Japan. I think that a foreigner looking to innovate and give the Japanese economy a boost can be welcomed with open arms.

In short, the feeling I get from U.S. venture capitalists and incubators is that they invest in people. Ideas are dime a dozen and the important thing is the entrepreneur, the entrepreneur is the one who has the ambition and the drive to make the idea a success.
In the U.S. there is a sentiment that I agree with very well that there are people who just are entrepreneurs, they are the happiest when they get to solve problems and try to change the way we think and live, the ideas are just what the entrepreneurs get to work with.

In Japan I get the reverse feeling, that ideas are worth more than people. It is shown in the way they think that entrepreneurship is a way to become free of the drudgery of normal salaried life-time employment. It is also the way Japanese companies currently work. People are considered plentiful and they don’t seem to spend much time trying to really find the most creative and productive worker, they blindly trust that the best schools will churn out the best employees; which in my opinion is seldom the case.

I am positive about the Japanese entrepreneurial atmosphere because it seems to be on the verge of changing and is certainly developing more to the American way of thinking. Much of this development might already have happened, since I can’t seem to find that much new information. The book I’ve ordered is written in 2009 so hopefully that will shed some light on recent changes.