Capital, talent flock to Japanese start-ups - AVCJ Forum

"I have been involved in venture capital investment in Japan for about 20 years, and I see a big difference when looking back at the past," Kazushige Kobayashi, a managing director at MCP Asset Management, said in his opening to the VC session. "The Japanese market has developed in a very good manner. Today we’d like to discuss how we can make this growth sustainable."

In an earlier address, Shinichiro Shiraki, CEO of Aizawa Asset Management and LP relationship director at the Japan Venture Capital Association (JVCA), noted that start-up funding in Japan surged from $641 million in 2012 to $5.2 billion in 2020. In the first half of 2021 alone, it surpassed $3 billion, according to the data from INITIAL 2021 Japan Startup Finance.

The country’s VC industry is in "a very bright mood," said Shiraki, while noting that the market is still tiny compared to the US. According to New York-based data provider CB Insights, VC-backed companies in the US raised a record $130 billion in 2020, COVID-19 notwithstanding.

Masashi Kataoka, head of the venture investment arm of Dai-Ichi Life Insurance, echoed Shiraki, describing Japan’s VC market as “niche” in terms of size compared to the US, Europe, and China. However, many Japanese start-ups have delivered successful exits through listings on the Tokyo Stock Exchange, ably supported by local securities companies and banks.

"The market capitalizations might be rather small, but investors can achieve returns for sure because you can certainly reach an exit," Kataoka told the panel. Dai-Ichi Life has invested in some Japanese start-ups as part of its domestic equities exposure. In that context, VC is very attractive, Kataoka added.

With two months left in 2021, venture capital investment in Japan is already $2.87 billion, matching the record-high set across the full 12 months of 2019, AVCJ Research’s records show. Growth-stage investment in the technology sector specifically is also on an upward track. More than $900 million has been deployed so far this year – another record – up from $527 million in 2020.

Meanwhile, there have been 21 PE or VC-backed IPOs in the technology sector in 2021, with aggregate proceeds of $1.9 billion. The number of offerings is consistent with recent years, but the proceeds represent an all-time high. Trade sales have received a boost as well, notably with PayPal’s recently announced acquisition of Paidy, which has numerous VC shareholders.

This increased activity has encouraged more talented to join the start-up ecosystem. "The quality of entrepreneurs and the depth of the talent pool have drastically changed over the past five years," said Satoshi Fukushima, a director at Globis Capital Partners. Many of these entrepreneurs can communicate in English with overseas investors and are well-versed in financial terminology.

Yuka Hata, head of fund investments of Japan Investment Corporation (JIC), observed that more professionals are leaving consulting firms and investment banks for start-ups, although the talent pool shallows beyond Tokyo.

Commenting on the rise in growth capital, Hata noted that overseas investors have become willing participants. For example, US-based Princeville Capital and Woodline Partners recently joined a $230 million Series F round for news app SmartNews at a valuation of $2 billion. They were joined by several local players.

However, overseas capital remains concentrated on a handful of leading start-ups and investors could easily withdraw if the market crashes. Stability in the investor base is paramount. "The Japan market needs a more diversified ecosystem. That’s an issue it is facing now," Hata said.

Kiichiro DeLuca, head of research at Weru Investment, added that this diversification should extend to exit options as well. A robust IPO market should be complemented by an equally robust M&A environment. "The big difference between the US and Japan is the diversity in terms of players that are active in the market," DeLuca said.

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• Topics
• North Asia
• Technology
• Venture
• Fundraising
• Early-stage
• Japan
• AVCJ Events
• TMT
• MCP Asset Management
• Globis Capital Partners
• Japan Investment Corporation (JIC)