Connect & create: New players advance Japan’s startup market

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When you think of innovation hubs, Silicon Valley, Berlin, and Amsterdam may come to mind. In these places, startups are a crucial cog in the economic machine. In Japan, however, large corporations still dominate business, and startups must battle just to get noticed.

But change is afoot. As testament to Tokyo’s growing startup community, the American Chamber of Commerce in Japan (ACCJ) Alternative Investment Committee has hosted a number of events that showcase the efforts of entrepreneurs and their relationship with startup wonderland: Silicon Valley.

The most prominent challenges are access to capital and creating the right environment for innovation. Enter Tokyo’s innovation incubators. These companies provide not only opportunities for partnerships, but also an environment that fosters new ideas.

NURTURE

The ACCJ Journal spoke to three innovation incubators situated in Tokyo: Venture Café Tokyo; Hotaru Inc.; and WeWork Tokyo, which opened its first Japan location on February 1 in Ark Hills South Tower.

Venture Café Tokyo, owned by Cambridge Innovation Center from Cambridge, Mass., recently partnered with Mori Building Co., Ltd. to open in Toranomon Hills. It was initially imagined as an innovation community where people could gather to share ideas. But today the non-profit organization has a global network, with locations in Cambridge, Boston, St. Louis, Miami, and Rotterdam. The Tokyo branch, which opened March 22, is the first in Asia and the sixth overall.

Yasuhiro Yamakawa, executive director and associate professor from Babson College in Massachusetts, leads Venture Café Tokyo. The aim, he said, is to create a “comfortable and safe environment to network.” This includes a Thursday Gathering from 4:00 p.m. to 9:00 p.m. and office hours with entrepreneurs, investors, accountants, and lawyers.

While Venture Café takes a broad approach, Hotaru Inc. specializes in bringing together cryptocurrency startups and listed companies looking to partner, and WeWork focuses more on spaces themselves.

Miguel McKelvey, Adam Neumann, and Rebekah Neumann, started WeWork in 2010 to build a community to support large and small businesses through shared office spaces. The company offers flexible hot desks, designated desks, and private offices.

“We provide a community platform that connects people and encourages collaboration. Our community is both local and global. For example, our locations frequently host cultural, business, and social events for members, and we also provide a powerful tool to allow members to interact with each other and seek business advice via the WeWork app,” explained Chris Hill, chief executive officer at WeWork Japan.

BUDS OF GROWTH

In 2017, the Ministry of Economy, Trade and Industry published a white paper titled Small Enterprises in Japan, Conveying the Buds of Growth to the Next Generation. It finds that startups in Japan still face a number of barriers. “Entrepreneurial hopefuls and people making startup preparations face different concerns according to gender, age, and other such attributes, but even those who have become entrepreneurs had not been able to receive the startup support they needed, in many cases.”

The white paper also notes that, in 2016, business conditions for small enterprises and industry saw “. . . voices of concern about the deceleration of the economy in emerging countries, the decline in domestic demand due to the falling population, and the shortage of workers.”

Hotaru CEO Hiro Shinohara mentioned the shortage of workers in the cryptocurrency space. “Hiring engineers is the most difficult part for [cryptocurrency or blockchain] startups, even if they have enough budget.”

Shinohara added that funding is particularly challenging. “There is no real angel investment ecosystem in Japan. There are some options, but they are quite limited. Venture capital funds are investing at later stages.”

One way many startups are raising money is through an initial coin offering (ICO). This option allows startups to circumvent the rigorous process of working with venture capital funds and banks by using bitcoin and other cryptocurrencies. However, commentators have noted that the lack of transparency and the unregulated nature of ICOs could be problematic.

Aside from ICOs, the lack of investment companies means many are going public with low valuations. In fact, according to early-stage venture fund 500 Startups, 70 percent of companies in Japan with an initial public offering have a market cap of $30 million or less. Only 8 percent of companies in the United States face such a limitation.

In addition, there is the question of corporate tax, with the net operating loss (NOL) carryover period and the deductibility of directors’ bonuses being of particular concern for startups in Japan.

“The NOL carryover period is nine—will be 10—years in Japan, which can be relatively short for startups who generate losses for many years,” said Brian Douglas, a member of the ACCJ Taxation Committee. “Both the United States—after the most recent tax reform—and the UK have unlimited carryover.”

MINDSET

Among the multiple barriers that startups face in Japan is a particularly endemic one: corporate culture. Venture Café’s Yamakawa explained it this way: “People’s perception of failure has to change. We believe growing the tolerance of failures is the foundation of success in a thriving startup economy. Alongside this is a lack of expertise in the technology sector, of which a generous number of startups find a prerequisite to success on a larger scale.”

The culture required for entrepreneurs to thrive is one in which risk-taking is encouraged, something that goes very much against Japan’s risk-averse mentality. Here, safety is—in many ways—rewarded. The long-held expectation of lifetime employment combined with a declining population means the right workforce is just not available. So, creating a place for startups and entrepreneurs to connect is vital.

“We believe that there is a lack of space for people to connect

freely,” Yamakawa said. “Breaking social and organizational silos is needed here in Tokyo.”

VIBRANT SPACES

Despite the example set by SoftBank Group Corp., which has major investments in startup Uber, Japan’s big corporations are, largely, not contributing to the venture capital needed to help grow domestic startups.

Hotaru’s offering, which connects startups and larger corporations, is one step toward a more favorable startup environment that will speed up the growth of the venture capital industry.

Venture Café’s platform, meanwhile, offers events such as talks, panel discussions, and ideathons on a range of topics. “Through diverse and inclusive programming, our goal is to bring together people of different backgrounds into our cluster,” said Ryusuke Komura, program manager at Venture Café.

“Our primary targets are students of various backgrounds, women leaders, and corporate innovators. But, having experienced other Venture Cafés, it is really a true mix of people with different interests and desires from around the world.”

WeWork Japan’s Hill emphasized a change in ways of working. “Similar to how there has been a shift to a new way of working in the United States, there has also been a recent shift to offering new working styles to the creators, innovators and startups of Japan.

“We see that there is a desire to work in vibrant, empowering spaces that can also facilitate connections between people.”

The company also looks to create connections between creators in Japan and the rest of the world, which is lacking in many facets of business. This is evident in their members, who globally include the likes of Facebook, General Electric, BK Japan Holdings Co., Yahoo Japan Corporation, and SoftBank Group Corp.

“Members will also benefit from accessing our community, which includes other big companies, small and mid-sized companies, startups, and entrepreneurs,” Hill said.

FEARLESS FUTURE

Despite these issues, there are benefits and clear paths to creating a more favorable startup ecosystem. Relationships are a fundamental part of any business venture—particularly in Japan. This is something these innovation incubators are able to facilitate.

“Building good relationships with partners in private, academic, and governmental sectors is key to our business. One of our founders, Timothy Rowe, has lived and worked in Japan, so we have developed a tight-knit relationship with key partners here,” said Tak Urushihara operations manager at Venture Café Tokyo.

“Not only is Japan considered a model country within Asia, Tokyo right now is hungry for innovation and therefore a perfect candidate for the Cambridge Innovation Center and Venture Café to test the waters and grow an entrepreneurial ecosystem.”

This includes the recently announced partnership with Mori Building Co. Ltd. Masakatsu Yamamoto, manager of Mori Building’s corporate communications department, told The ACCJ Journal: “Innovators and creative people are seeking locations not just with a strong business environment, but those additionally offering creative lifestyles: high-quality residences, diverse cultural and retail facilities, a rich natural environment, and opportunities to meet with people from different industries with different backgrounds.

“Through collaboration with Venture Café Tokyo, we would like to transform Toranomon Hills into the focal point of a dynamic, innovative community where private, public, and academic innovators and other diverse players collaborate on new ideas and new businesses, thereby strengthening Tokyo’s magnetism as a whole.”

The Innovation Center, in the tentatively named Toranomon Hills Business Tower, will be a 3,000-square-meter space on the fourth floor. It will serve as a center of exchange between large companies and new ventures.

One benefit Shinohara notes in Japan’s cryptocurrency space is regulation.

“The Japanese market is the world’s largest for cryptocurrency because there are regulations for crypto investment. It is quite important to fit with Japanese regulations to come into the Japanese market,” he said.

Komura also emphasized the importance of partnership. “Collaboration between startups and established companies is the key to the nation’s future. We hope to accelerate it through our programming. As in other countries, established companies are more likely to have stronger influence when partnering with startups. There are many instances when startups cannot make decisions for themselves.”

Aside from the involvement of other larger companies in the growth of, and investment in, startups, Komura said, “It is important for startups to take on a more proactive role in their partnership, and to learn through mistakes and failures.”

Perhaps, thanks to the efforts of these innovation incubators, the seeds have been planted and the value of entrepreneurship and startups is growing in Japan. With the country being a leader in research and technology, the environments for collaboration being created will act as the launchpad for Japan’s path in the world of startups and global competitiveness.

Custom Media publishes The ACCJ Journal for the American Chamber of Commerce in Japan.

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