China and India have traditionally been the natural choice for venture capitalists looking at investment in Asia. This leaves little room for other countries in the region to stand out. Despite its developed economy status, mature financial market and 127 million inhabitants, Japan has struggled to attract private market financing for startups. From 2014 to 2018, an average of 110 early-stage venture capital deals are completed annually in Japan, compared with more than 490 in India.
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Such statistics have not gone unnoticed by the Japanese Government, which has taken action by putting regulations and institutional changes in place to encourage venture capital inflow. These changes have already built a more favourable and accessible environment for startup investments, as Preqin data demonstrates.
In 2017, the government invested $35mn in a Japan-focused venture capital fund managed by US-headquartered 500 Startups – the first time the state has provide financial backing to a non-Japan-based venture capital manager operating in the country. The Ministry of Economy, Trade and Industry then launched a support program called J-Startup in 2018, which promotes local startups to international investors, and provides longer visa durations for talented entrepreneurs that are planning to move to Japan. Such a move is especially important given Japan’s perennial struggle with an ageing population. The government has also reduced corporate tax from approximately 35% to 30% in the same year, a move which benefitted both managers and entrepreneurs.
The more favourable environment for startups that the government changes have curated has stimulated the growth of corporate venture capital (CVC). Japanese corporates are now seeking startups that are synergistic and aligned with their business strategies. According to Nikkei, the number of investments carried out by CVCs doubled in 2018, and the Japan Venture Capital Association reported a rise in registered CVC membership from just two in 2013 to 51 in 2018. The active participation of local CVC investors is an indication of untapped potential in the market. One prominent deal made earlier this year was QD Laser’s venture funding round, which raised JPY 3.7bn from domestic venture capital firms and well-known CVCs such as NTT Docomo Venture.
The environment for inbound investments is also improving: inflows have grown 4x in the past five years to reach JPY 19bn in 2018. International GPs like Visionnaire Ventures have expanded their business in Japan and have shown a keen interest in the market. Notably, inbound investments in Q1 2019 recorded 20 deals for a total of $59mn in value, including injections from US-based GP DNX Ventures and Singapore-based BEENEXT.
By welcoming inbound capital flow and fostering startups, Japan is an emerging force in the early-stage venture capital space. The country now offers both local and overseas investors interested in Asia a strong alternative, with a growing track record of success as well as a wealth of opportunity to continue this forward momentum in the venture capital industry. With positive changes happening in the industry, Japan could soon rival China and India as an attractive destination for startup investment.
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Article by Vivian Sit, Preqin
