Early stage Japan: Accelerating Tokyo

Starring a Yakuza vying for control of Japan's underworld or of a high-school teacher trying to impose order on a unruly class of teenage girls, the quirky range of addictive mobile role-playing games developed by Japan's Gumi have built up a huge following. Seven years since it was set up, Gumi controls a large chunk of the fast-growing mobile games market. In 2012, it ranked at the top of a Deloitte list of Japan's fastest-growing tech start-ups, with revenues expanding 3,950%. The company's beginnings are much more humble. 

"When we invested in Gumi it was still just three people developing games in a café," recalls Masahiko Honma, co-founder of Incubate Fund, "Now they have grown to around 650 people and they are expecting an IPO this year."

Honma singles out Gumi as one of the more successful investments made by Tokyo-based Incubate Fund which itself was set up 2010. However, this success is part of broader growth story involving Japanese early-stage VC.

Incubate Fund is one of a number of accelerators to emerge in recent years. Their presence, and the number of entrepreneurs receiving support, suggests that seed investing is taking off once again in Tokyo - but backing Japanese start-ups still brings with it some unique challenges.

Positive signs

AVCJ Research seems to support to the idea of a resurgent start-up scene with early-stage investments -classified as deals below $5 million - totaling $49 million across 38 transactions so far this year. This follows $76 million and 74 transactions in 2013, the most since 2007. Many of these companies are graduates of Tokyo accelerators and incubators.

"There are now around six incubators in Tokyo, and while the quality and quantity of start-ups is not the same as in Silicon Valley, they are much better than five years ago," says Shohei Ando, an associate at Samurai Incubate Fund.

Comparisons with Silicon Valley in California are inevitable, even if they might be somewhat premature. Tokyo, like other Asian cities, has sought to model its venture capital industry on the US model. Incubate fund is one of several early-stage investors that are loosely following the approach made famous by US accelerator Y-Combinator. Like Y-Combinator, Incubate Fund selects a batch of start-ups and then provides then with seed money and mentoring over a three-month period at the end of which there is a demo day where business pitch to investors.

A similar set up is seen at Open Network Labs, a unit of internet firm Digital Garage, and at Movida Japan, both established within the last four years. Invariably, the success of these accelerators relies on the strength of the community of investors, entrepreneurs and mentors that have grown up in Tokyo in recent years, particularly around the districts of Roppongi and Shibuya.

"There have some been some good exits these past 10 years, and from that we have been seeing the next generation of serial entrepreneurs and angel investors," says Takeshi Ebihara, founding general manager of seed-stage investor Redbright Partners. "There is also a ton of talent being produced by the likes of CyberAgent, Gree and DeNA."

These three internet companies have also been providers of early-stage capital. CyberAgent and Gree have formed their own VC arms while DeNA recently made its first foray into venture capital by backing Korean social network app Between. The start-up ecosystem is still very small compared to Silicon Valley, and inevitably it is dominated by corporate programs such KDDI's Mugen Labo and Docomo's Innovation Village. This has turned out to be something of a double-edged sword.

"The difference between independents and corporates is that the corporate accelerators are good at promoting their start-ups to the media and they provide huge access to tech infrastructure," says Honma "Independents are passionate about creating a business with the entrepreneur. The person inside the corporate VC is more of an employee; their commitment is different and they are less passionate about creating a business."

Local nuances

Due to the lack of an organic community, the accelerator model in Japan differs in some key respects. Unlike YCombinator, which prefers to spread small amounts of money among a large number of start-ups, Incubate has a smaller intake of start-ups. It then commits capital during the incubation stage and leads follow-on seed rounds for the best teams, taking a 15-30% stake in each business.

This is because the angel community is still not big enough to raise that initial seed stage investment after demo day, Honma explains. Samurai has taken a similar approach buying as much as a 15% stake in follow-on investments.

The shallow investor base is perhaps a symptom of the fact that Japanese early-stage venture capital is still largely domestic facing. While many start-ups have the ambition to expand abroad, most prefer to stay focused on the Japanese market. This means they are less likely to seek capital from foreign investors with overseas strategies in mind.

"I would say in our community around 5-10% of start-ups are looking to expand abroad," says Samurai's Ando. "In South Korea and Southeast Asia start-ups are more willing to expand. Few entrepreneurs speak English here and they are under less pressure because they know they can survive in the Japanese market. As a result, the focus is very narrow."

However, Ando is optimistic this will not always be the case, arguing that although Japanese are generally perceived as risk averse, the situation is gradually changing. He feels Samurai's choice of location - removed from the hubs of Shibuya and Roppongi - says as much.

"We would like to create the next Facebook of Google, so we don't look at Shibuya," he says. "Instead we are based in Shinagawa. Why? Because it has a direct train link to the international airport."

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Venture
• Early-stage
• North Asia
• Samurai Incubate Fund
• Japan
• Venture
• CyberAgent Ventures
• Gree Ventures