Japan’s startup surge

Japan is at an essential moment in its history. After three decades of slow economic growth, the country has a chance to rebuild its economy through startups and technology innovation. With a rising interest in Japanese startups from local and foreign investors and efforts by the government to support entrepreneurship, Japan can turn the corner. However, there are still many challenges the startups need to overcome.

Investments in Japanese startups have grown steadily over the last decade. In 2023, total investment reached $5.4 billion, a 25% increase since 2013. Foreign investments have also grown from $55 million in 2013 to $405 million in 2023. The number of foreign-backed deals increased from 55 to 405 during the same period.
Japanese companies, however, still dominate the local investment scene, contributing 30% of the total venture capital funding, while overseas investors only contribute 10%. Corporate-affiliated venture capital funding has also grown significantly, from $140 million in 2013 to $3.4 billion in 2023.

One standout example of a globally-minded Japanese startup is Kyoto Fusioneering. In 2023, this fusion energy startup received funding from In-Q-Tel, the U.S. government’s investment arm. This was In-Q-Tel’s first direct investment in Japan. The startup’s global outlook, including translating deal documents into English, made it easier to attract foreign investment.
The Japanese government is encouraging more startups to follow this example. Tokyo is positioning itself as a startup hub and aims to grow the number of startups and unicorns (startups valued at over $1 billion) tenfold. However, Japan currently has only ten unicorns, compared to 714 in the U.S. and 316 in China. Japan’s startup sector faces several challenges. The average Series A funding round in Japan is only $5 million, much smaller than what startups in the U.S. raise. Smaller funding rounds make it harder for startups to grow and scale globally. Additionally, Japanese startups often go public early, which shifts their focus to short-term profits instead of long-term innovation.

The government’s R&D tax credits also favor large, profitable companies, with 92% of benefits going to them. Startups, which often don’t turn profits in their early years, miss out on this critical support. Experts suggest allowing startups to use tax credits after they become profitable and adopting systems like France’s angel funds, which diversify risks for investors and unlock more funding.
Japan has a history of creating world-leading companies through bold innovation. For example, Sony began as a small startup after World War II and grew into a global powerhouse by developing groundbreaking products like the Walkman. Japan can draw inspiration from these successes to create the next generation of globally impactful startups.
However, simply copying strategies from other countries won’t work. Japan needs to focus on its strengths, like its expertise in deep tech and manufacturing, and prioritize startups that aim to create new industries from the ground up.

To build a thriving startup ecosystem, Japan must make some changes. Policymakers are encouraged to focus resources on ambitious startups and encourage more competition. Startups must also improve their ability to market themselves to global investors, telling compelling stories about what they are building and why it matters. Japan is on the right track with its growing investments, technical expertise, and government support. It seems as if there is still a big push for bold reforms, supporting risk-takers, and investing in transformative technologies. If the risk are taken correctly, Japan’s startups could help revive its economy.