Amplifying Japan's Entrepreneurial Spirit

Japan’s startup ecosystem has been built on a bull run for the past decade. The number of deals in 2013 has doubled, and investments have increased tenfold, reaching JPY 850 billion in 2023, indicating a stark increase in the average deal sizes. Since 2018, 12 companies have had valuations superior to JPY 100 billion when they’ve gone public. What key factors do you attribute to this decade-long bull run, and how do you expect those metrics to evolve over the next two years?

Over the past decade, significant changes have shaped the investment landscape.  One notable shift is the rise of smart devices as a crucial channel, fundamentally altering the environment. The emergence of smart devices has created a demand for new engineering capabilities, leading some companies to face the innovator’s dilemma and a reshuffling of industry players. For instance, SmartNews, a startup, achieved rapid growth by focusing on smart device-specific applications, making news and information more accessible to users of these devices. 

The next major theme is “SaSS (Software as a Service).” With Japan’s overall digital transformation and the appeal of subscription-based, scalable business models, several unicorn companies have emerged. However, the SaaS sector has faced adjustments in the capital markets since late 2021. Additionally, since new investments in category killers became saturated a few years ago, the frontier of investment has shifted toward areas where Japan has a competitive edge, such as deep tech, manga, and digital content in the consumer internet domain.

The success of Japan’s startup market over   the past decade can be attributed to two key factors:  strong, compelling investment themes and the Japanese government’s firm commitment to supporting startups. Large corporations have also recognized that collaborating with startups is essential for driving innovation, beyond merely generating profits. 

You mentioned the idea of diversification of themes. Japan has obviously historically had a series of advantages. In specific fields, we have seen big diversification all the way to energy and aerospace. When you look at Japan today, and you consider the strengths of startup hubs across the world, what areas do you think are the most interesting to your company?

There are two key areas. The first is for “non-verbal cross-border fields”, such as entertainment, particularly content like anime and games. These have a strong global appeal.  From a domestic perspective, however, there is a sufficiently large market for SaaS and digitalization.

The Japanese startup space has been on a bull run for the past year, increasing in both average deal size and total deals. Nevertheless, when you look at it, it remains smaller by companies, success stories, and case studies than the big spaces in the world. However, this has certain advantages, such as operating in a less crowded market with less competition. What do you consider to be the advantages of Japan as a startup location today? Why should entrepreneurs come here to start a business?

Starting a business in Japan offers both advantages and challenges. One advantage is the relatively large domestic market, which provides ample opportunities for growth. However, this large domestic market can also be a drawback, as it may hinder globalization by reducing the urgency for companies to expand internationally.  Another aspect is that Japan currently perceived as “affordable”, especially in the labor market. However, this affordability comes with a significant challenge- low labor market mobility, which can create structural issues.

In the field of deep tech, Japanese companies often lead in specific areas, demonstrating their strength and innovation.

One of Globis Capital Partners’ key investments, SmartNews, presents an interesting case. In Japan, people share news across political preferences, fostering a sense of shared understanding. In contrast, the US shows a strong tendency towards political polarization. SmartNews provides personalized news tailored to users’ interests, regardless of location. Its algorithm is designed as a universal product, easily crossing borders between countries like Japan and the U.S. 

Former Prime Minister Kishida’s startup plan, which was developed in 2022, was designed to create 100 unicorns plus 100,000 startups by 2027. This was also set to increase invested dollars by ten times from the 2022 baseline amount. This was set to be done through government reforms and government support in three key areas: HR, funding and exit strategy, and the promotion of innovation. How realistic do you believe these objectives to be?

The reason the plan aimed to increase the investment amount tenfold is that Prime Minister Kishida called for significant change. Currently, while the number of unicorn companies is rising, the capital markets are undergoing adjustment. As a result, more companies are waiting for the right moment to go public.  Due to declining   stock prices, they are holding off until the timing is favorable. While creating 100 unicorn companies in such a short period may be challenging, with 12 already in existence, I believe achieving at least around 50 is realistic.  

Within your company, you have three core pillars, the first being HR. Japan has historically been very risk averse, and according to surveys, only 25% of college graduates in Japan consider entrepreneurship as a viable career path. Fortunately, with a number of recent success stories, this is starting to change. How do you think this mentality will evolve in the coming years, and what initiatives does GLOBIS capital conduct to boost the desire of young people to follow entrepreneurship?

The mindset is particularly improving among graduates from top universities. These talented individuals now view joining large corporations as a risk. This trend is especially evident in the University of Tokyo’s Engineering Department, where we also deliver lectures. Many graduates are running their own startups or participating in them, and the numbers of graduates involved in startups has surpassed those joining large corporations.

Traditionally in the Japanese startup space, most exits are done through initial public offerings (IPO), which is in stark contrast to the US, where many exits are through M&As. These M&As have been growing in Japan, but they still represent a small fraction of all exits. There are a couple of reasons for that. Firstly, the growth section of the Tokyo Stock Exchange is very accommodating to IPOs. However, this focus on IPOs has two big downsides. On one hand, it limits the opportunities for global investors who love to invest in private raising funds for shareholding reasons. Additionally, the argument can be made that by having an early IPO, you sacrifice long-term prospects for short-term shareholder elections. How important do you believe it is for Japan to diversify its exit strategies? What role should foreign investors play in the diversification of exits?

The situation is already evolving.  For venture capital, aiming for a significant “home run” is preferable to targeting a small IPO. This trend is bringing both capital rising and exit strategies closer to the U.S. style. Discussions about whether an IPO is the best exit option are becoming more common during each funding round. At the same time, companies that do not fit this model are increasingly inclined to explore alternative options to IPOs as equally viable strategies.

One of the criticisms that not only exists but also fundraising that Japan has received is the lack of investment diversity. There are institutional types that matter, but there is also the location of those investments, and in comparison, to other startup nations, Japan has lower rates of foreign capital coming in both for fundraising and exit stages. How important do you think it is to attract foreign investors for the market’s development?

The most important goal is to create a globally recognized “signature” originating from Japan. One challenge for Japanese companies is the language barrier, which remains a significant issue. Looking ahead, adopting a global perspective will be essential. Therefore, Japanese companies need to broaden their horizons and attract growth capital.

How does Global Capital Partners help its partners find the best exit strategy possible?

At each milestone, we discuss whether an exit strategy is the optimal choice. As board members, we are always committed to considering the best interests of the company.

GCP was established in 1996 and pioneered in Japan’s venture capital market by investing in early-stage companies. Since then, your company has invested over USD 1 billion in 180 companies. You’ve also participated in many of Japan’s recent success stories. Can you run us through some of the recent milestones of GCP and the role that your company has played in shaping Japan’s venture capital (VC) and startup scene? What investment or success stories have had a particular significance on you personally and why?

Globis Capital Partners is a pioneer in Japan’s venture capital market and a leading company domestically. However, we aim to further strengthen our presence as a global VC firm. To achieve this, delivering substantial returns for investors is critical, requiring a net return of over three times. Our approach focuses on becoming a dominant leader in a specific field while also providing consulting services for global expansion.

As for specific examples, SmartNews comes to mind for global expansion, while ANDPAD stands out in the domestic market.

Can you tell us the comparative advantages and distinguishing features that GCP has nurtured since its foundation that will allow the firm to become a global dominant killer?

The larger the fund size, the greater the challenges we can take on, enabling us to attract bigger and high quality companies to the fund. Fund size is not something easily replicated. Our company was founded in 1996, and I joined the company in 2006. In 2013, I became a partner, and just two years ago, two members of the next generation also became partners. This means we now have three generations of partners in the company, a structure that is highly valued by our investors.

GLOBIS Fund VII is the largest fund in the company’s history, more than JPY 72 billion, which is in line with the overall market dynamic. Since 2020, the average venture capital fund size has increased. Taking into account the overall market trend, what do you believe will be the differentiating factors of the GLOBIS Fund VII? What key investment themes will it focus on?

Our added value lies in our comprehensive support system, which includes active participation as board members and offering a platform for HR recruitment. We also provide consultation and assistance for global expansion, leveraging our expertise and strength in these areas. Our proven track record is, quite frankly, our most effective tool for attracting investors. By consistently moving forward and delivering high returns, we believe this will enhance our appeal and strengthen our position in the field.

Investors have high expectations: three-X returns. Can you run us through the key metrics you will be looking to achieve with this fund?

While this may not be a quantitative approach, we prioritize follow-on investments in strong-performing companies, dedicating less focus to those with weaker performance.

Your initiatives have allowed you to open a new office in San Francisco in 2023 to support the expansion of your portfolio companies. What role and activities will this new office be expected to fulfill, and why did you select San Francisco as its location?

We chose San Francisco because one of our Japanese entrepreneurs aimed to expand into the US, and securing office space was a significant challenge. By providing a shared office space, we offer added value to support their expansion.  Moreover, entrepreneurs can use the GLOBIS office as their registered address when establishing their presence in the US.

Looking at the future, do you have any plans to strengthen your international presence further?

Our company’s role is to support businesses in expanding into new overseas markets. We primarily focus on startup companies, guiding them through the initial stages before transitioning them to the next venture capital partners. My primary mission is to assist during the early phases of entering a new market.

Another unique aspect of our approach is the leadership of our General Partner, Emre Hidekazu Yuasa, who is proactively building networks with European and US venture capital firms from the initial entry stage, ensuring companies receive comprehensive support.

With the big focus you have not only on network building but also on the GLOBIS Fund VII, are you currently looking for new partnerships or partners to come and strengthen your international outlook?

Yes, we aim to expand our membership beyond Japan to include the United States as well. Currently, we are seeking researchers specializing in the global economy to strengthen our capabilities.

Imagine that we come back in three years and have this interview all over again. What goals or dreams do you hope to achieve by the time we come back for that new interview?

As a company, our clear goal is to become a globally top-tier firm, ultimately contributing to Japan’s growth. This effort aims to pave the way for the younger generation, not just in business but also in boosting Japan’s overall gross domestic product (GDP).

Soccer is a personal passion of mine, and I have a strong connection with the Japanese national team.  As for the future, who knows? What I do know is that one day, I want to dedicate myself to something related to soccer or sports.

For more information, please visit their website at: https://www.globiscapital.co.jp/en