The challenges and opportunities for foreign startups entering Japan

Despite its status as the world’s third-largest economy, Japan has only produced four unicorns to date. Relative to its gross domestic product, the island nation should actually have 50 to 60 of them.

A traditional bias for big corporations means local banks are more willing to loan money to established companies rather than startups – even Japanese venture capital giant SoftBank Group puts most of its money into overseas ventures.

Funds and partnership opportunities from foreign sources aren’t readily available for Japanese firms either, with the nation’s aging population and stagnant economy turning off many investors. This completes a vicious cycle: With many Japanese startups “shielded” from overseas influence, there’s quite a low ceiling for their potential to grow and expand.

Photo credit: Jason Ortego

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But change is afoot. Local VC funds are getting bigger and are providing more opportunities for Japanese startups to grow before going public. Additionally, the Japanese government has recognized the need for cooperation with foreign startups to help with digitalization and has set up a framework to provide support to do so.

In other words, the country is starting to take action to open the doors to foreign startups and their ideas and innovations.

“We have observed that Japan is a technology-savvy market, and though there may be hurdles, there is definitely much potential for foreign startups with innovative products and services to expand and succeed in the market,” says Yoong Li-Foong, representative director and assistant country manager for Mirxes. The Singapore-headquartered biotechnology company offers multicancer early detection solutions to its customers.

nProblems are opportunitiesn

The inconveniences that businesses have felt due to the Covid-19 outbreak have revealed the need for digital transformation in Japan and many parts of the world.

“Due to the pandemic, many Japanese companies are starting to shift away from traditional business norms and are willing to conduct business online, also opening up to solutions that foreign companies have to offer,” says Khoo Kiewai. She’s the director of business development and public relations at the Japan External Trade Organization (JETRO), a government-related entity that promotes mutual trade and investment between Japan and the rest of the world.

For Mirxes, the country’s renewed openness to working with foreign companies – along with its high incidence of gastric cancer (a disease it treats) – was one reason it decided to introduce its flagship product, GastroClear, in the nation.

Yoong Li-Foong, representative director and assistant country manager for Mirxes in Japan / Photo credit: Mirxes

Singapore-based smart mobility solutions firm Swat Mobility also saw a market opportunity in the country, particularly in the areas outside of the main cities such as Tokyo and Osaka.

“Japan is facing issues in transportation due to a declining birth rate and an aging population,” says Masashi Suehiro, country head of Swat’s Japan operations. “Local bus companies face operational losses due to low ridership, which eventually led to many of them halting operations altogether.”

The mobility company offers high-precision route optimization technology that enables the efficient pooling of multiple passengers in high-capacity vehicles. It is running ongoing trials of urban on-demand buses in Niigata city, as well as collaborating with Jupiter Telecommunications, a leading media company in Japan, to offer ride-sharing services for sales employees to get to and from business appointments.

nOpportunity for problemsn

For foreign firms, making the move to Japan is not without its challenges. Much of the information on regulatory guidelines and administrative processes are only available in Japanese. Unless the firm already has employees who speak the local language, this will likely be the company’s first hurdle.

“Additionally, understanding the proposal-making and decision-making process is important for successful business collaborations with Japanese companies,” says Khoo, referring to the chain of command-like approval process that may draw out the time it takes to move a project along.

With the country’s pharmaceutical sector being highly regulated, Mirxes also needed assistance on very specialized topics such as obtaining regulatory approvals and licenses to distribute its GastroClear product in Japan.

JETRO, being the bridge between the country and foreign startups that wish to expand there, was able to help in these aspects, and it also provided public relations support and introductions to pitching and business-matching events. “We received a lot of advice and insight from JETRO on local practices and culture,” says Yoong.

Masashi Suehiro, country head of Swat’s Japan operations / Photo credit: Swat

As for Swat Mobility, its solutions require detailed infrastructural information on Japan’s roads, which means that getting in contact and cooperating with local, prefectural, and city government offices was a necessity.

“Maps and roads in Japan are quite unique, and there are a number of complex traffic regulations,” explains Suehiro. “JETRO helped a lot by introducing us to municipalities, such as helping to organize a meeting with various cities’ governments, to present our on-demand bus technology and its benefits.”

These are, of course, in addition to the administrative hurdles of setting up a company, such as legal issues, tax, labor, and welfare matters. The incorporation procedures and regulations are common issues for most foreign companies who plan to set up in Japan, says Khoo. She adds that startups should keep in mind that setting up an entity in the country might be necessary if they intend to pursue long-term business relationships with local partners.

“In most cases, it is not possible to strategize the same way as [startups] would for other markets,” she cautions.

nConviction and patiencen

Within a year of establishing its Japan entity, Swat Mobility has been able to onboard four clients and conduct several trials across the country. It has also successfully raised funds in a round led by Global Brain, one of the largest Japanese VC firms.

For Mirxes, despite some delays caused by the Covid-19 pandemic, it has been able to make progress in advancing its clinical study collaborations and in introducing its research products and services to academic institutions and potential industry partners in Japan. The firm has also taken major steps forward in the process of gaining regulatory approval for a few of its products.

“Since entering the Japanese market, we have participated in several startup events, many of which were organized by JETRO,” Yoong says. “We’ve seen that there are many startups which are proposing tech solutions to unmet needs and issues that governments, companies, and consumers face.”

Despite the difficulties in making the transition, success in Japan for foreign startups is evidently achievable. That said, maintaining the right mindset and approach is crucial.

“Foreign startups must be very clear on the strength of their technology or what they’re offering and their position in the Japanese market,” Khoo advises. “Be aggressive, but also be patient and precise in what you offer.”

JETRO is a one-stop center for foreign startups interested in exploring market potential, setting up, or further expansion into Japan. Currently, it is actively engaging in facilitating international open innovation activities between Japan and other countries.

Reach out to JETRO and find out more about how it can help with your startup’s plans to expand into Japan by filling out this form.

This content was produced by Tech in Asia Studios, which connects brands with Asia’s tech community. Learn more about partnering with Tech in Asia Studios.