Japan VC: Culture club

Few occasions offer a more transparent glimpse of a government’s soft power agenda than the Olympic Games. So when Japanese Prime Minister Shinzo Abe arrived at the closing ceremony in Rio de Janeiro last year disguised as video game hero Super Mario, the frivolity betrayed a certain macroeconomic sobriety.

As Japan grappled with stagnant growth, alarming demographic declines and more assertive regional competition, Abe was able to play a rare card in national self-identification by simultaneously referencing a homegrown cultural icon and a technology marketing masterstroke. The crossover of these themes is reverberating in the local venture capital industry with increasing urgency.

Recent evidence of this excitement includes a $10 million LP commitment last month by Cool Japan Fund (CJF), the country’s flagship cultural investment program, to a vehicle managed by US technology investor 500 Startups. Said to be the first time a Japanese government agency had backed any foreign VC, it hinted at a new sophistication in strategic thinking about exports.  

If Japan fails in this transition toward a more software mindset, it’s hard to envision any new brands replacing Toyota or Sony 20 years from now - Gen Isayama

“Japan’s creative industries such as washoku, fashion and animation have been gaining popularity worldwide,” says Kenichi Yuge, CJF’s general manager of PR, noting the advantage of tapping 500 Startups’ global network. “We think there are enormous opportunities for Cool Japan companies to export Japan attractiveness to growth markets.”

Most critically, the investment acknowledges that the massive manufacturing brands that emerged from the country in the wake of the Second World War are not transitioning smoothly into the internet age. In order to foster the next wave of universally recognizable trademarks, Japanese business will have to leverage venture capital’s international savvy through a renewed approach to style and craftsmanship.

Institutional innovation?

The Cool Japan publicity office was established in 2010 by the Ministry of Economy, Trade & Industry to coordinate a number of parallel initiatives, including the Japan Brand Working Group which is tasked with monitoring cultural promotions ahead of the Tokyo Olympics in 2020. CJF, however, appears to be the policy’s centerpiece, with some JPY69.3 billion ($630 million) raised since its launch in 2013, 85% of which has been provided by the government. 

The fund aims to dislodge a number of bottlenecks preventing the country from fully capitalizing on its cultural appeal overseas. These include poor communication, a lack international business experience among small to medium-sized enterprises (SME), and low availability of risk capital for SMEs.

Investment to date has focused largely on the diffusion of local media content, with CJF backing Indonesian translations of a Japanese television broadcaster as well as a subtitling business that specializes in localizing foreign programming for US audiences. Meanwhile, Future Venture Capital has agreed to acquire globally ambitious local media company All Nippon Entertainment Works from its government-owned creator, Innovation Network Corporation of Japan (INCJ).

On the heels of this kind of activity, 500 Startups’ formal introduction to the Cool Japan drive can be seen as something of a turning point. The firm attracted the government’s attention by nurturing Japanese pop culture start-up Tokyo Otaku Mode from a Facebook fan page to a JPY1.5 billion Series B round in 2014, which included participation from CJF. But future partnerships between the two investors are set to exploit more sophisticated business models.  

“Virtual reality and augmented reality show the most potential in terms of being exported as a Japan-oriented content play,” says James Riney, head of 500 Startups Japan. “There is a lot of content like anime that, if it’s exported in a VR or AR format, could do well outside of Japan.”

Like 500, World Innovation Lab (WiL) focuses on technologically innovative businesses models but finds plenty of room for dabbling in Japan-flavored cultural plays. Notably, the VC firm led a $50 million round alongside Sega Networks for Gumi, a video game company touted as a possible heir to Nintendo’s market leadership.

Gen Isayama, co-founder and CEO at WiL, sees an important role for VC in the interplay of culture and technology as part of the effort to find Japan’s next household brand names. He stresses the need to help young founders travel outside of the country and even subsidizes trips for entrepreneurs under his guidance. From a long-term perspective, the hope is that the internationalization process will eventually help transmute Japan’s cultural success stories into a new breed of blue-chip technology companies.

“For the short term, some of the global brands that may emerge will be in fashion, food and lifestyle, and we’re already seeing that with Muji and Uniqlo,” says Isayama. “With the right entrepreneurial spirit, I can see that happening more often in the next 10 years.”

Anecdotal feedback from VCs in the country illustrates a society that is making valiant but inadequate efforts to revamp its educational system and adjust to the digital global economy. The current stagnation is sometimes referred to as an extension of the country’s so-called “lost decade” when, after generations of explosive growth, a sense of complacency seemed to smother entrepreneurial instincts, and foreign rivals took the lead in internet-related industries.

The argument that the cross-border influence of the VC industry can reverse this damage is supported by the fact that Japan’s current smattering of internet heavyweights invariably launched their careers overseas. For example, Hiroshi Mikitani and Tomoko Namba, founders of Rakuten and DeNA, respectively, both got their start at Harvard. Meanwhile, Masayoshi Son, the founder of SoftBank, studied computer science in the San Francisco area in the 1980s and 1990s.

Travel is therefore near the top of the catch-up agenda, although interestingly, most of the momentum has been in inbound tourism. On the back of relaxed entry visa regulations for key markets including China and a depreciating yen, the Japanese government has doubled its foreign visitors target to 40 million people by 2020.

“We had been told by someone when we were trying to reach Cool Japan that the government-aided fund only invested in Japanese exports. But when we first contacted them in 2014, we realized they actually care a lot about inbound traffic because, either way, they are able to promote Japanese content,” explains Yoshi Hashino, CFO for WiL-backed homestay start-up Hyakusen Renma.

“Japanese companies are good at making products and exporting them, but many global competitors like Apple are also selling experiences across the whole value chain. In a similar way, bringing visitors here for both content and unique experiences is a holistic way of selling Japan to the global market.”

Hyakusen received a $13 million round from CJF, lifestyle-focused investor AID Partners and railway operator Keio Corporation in May last year. AVCJ understands that AID plans to prioritize international promotions in Asia in part since the company faces stiffer competition from Airbnb among Western consumers.

The marketing plan involves a number of new media cross-currents, including tours that cater to people visiting the filming locales of shows with a cult following – and expectations that the ensuing social messaging chatter will go viral. Although such strategies imply targeting a young clientele in the midst of a much-ballyhooed aging crisis, Japan VCs remain unfazed.

“When people talk about changing demographics, the number that comes up frequently is ‘by 2050’,” says 500 Startups’ Riney. “I personally think Japan will figure something out to counteract it way before that. You will still be able to build sizeable businesses in games and other younger consumer areas with the population in 10 years, so it’s completely irrelevant for investors like us.”

Demographic driver

Demographic changes, nevertheless, remain a pervasive part of the cultural investment thesis for government VCs with longer horizons. INCJ, for example, has even addressed the issue in areas such as Japanese cuisine by investing ramen noodles maker Chaucer Food alongside domestic strategic Nagatanien Holdings.

“In the Japanese market, competition among companies is intensifying due to changes in the external environment, such as the slowdown of consumer spending, dwindling birth rate and aging population, and the growing tendency for people to have meals alone,” says Tomohumi Watanabe, deputy general manager for Nagatanien’s strategy department. “On the other hand, the population is likely to increase in overseas markets, and diversification of food is rapidly progressing.”

Korea’s success in maximizing its cultural trade through this kind of cross-border demographic maneuvering has been a guiding example for Cool Japan, but CJF’s latest pivot toward early-stage technology has helped clarify the program’s subtler long-term goals. The question now is whether VC bets on innovative lifestyle business models can finally bridge the economy into the 21st century.

“Brands like Pokemon and Nintendo were a mix of content, culture, software, and hardware, and I can see that happening going forward, but it’s hard to see a Google, Facebook or Amazon type of company coming from Japan because there’s still a very strong bias – almost religious belief – that you’ve got to create something tangible,” says WiL’s Isayama. “If Japan fails in this transition toward a more software mindset, it’s hard to envision any new brands replacing Toyota or Sony 20 years from now.”

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• Topics
• North Asia
• Technology
• Media
• Early-stage
• Japan
• TMT
• Outbound investment
• World Innovation Lab (WiL)
• 500 Startups