By Katherine Hyunjung Lee
Entrepreneurship is becoming a more accepted career path in Japan, but certain persistent traits of Japan’s economy and culture are adding a color of their own and altering the trajectory of growth.
In the U.S., the term “serial entrepreneur” is used to describe those who start multiple new businesses, grow them quickly, make them valuable acquisition targets for bigger companies and become rich in the process.
Between being acquired and going public with an initial public offering, 77 percent of startups said they would likely be acquired, according to Silicon Valley Bank’s 2017 U.S. Startup Outlook Survey. 50 percent of entrepreneurs also said they expected stronger mergers and acquisitions activity in 2017.
In contrast, approximately 80 percent of startup exits in Japan are IPOs, according to James Riney, a partner at the Tokyo office of global early-stage venture fund 500 Startups. Only 20 percent exit through mergers and acquisitions.
Many characteristics of Japanese society contribute to this difference, said Masako Ueda, a professor of economics at Northwestern University.
Japanese people believe in dedicating their entire careers to one workplace, according to Ueda. The belief influences all aspects of work culture in Japan, from people’s preference for large, stable companies as workplaces to relatively low executive compensation.
If starting your own company instead of joining a stable organization was once unimaginable, having your leaders ousted by the management of another company is still abhorrent to many. The risk of cultural clashes keeps many startups from choosing the same path.
Even at startup incubators, where promising startups are introduced to opportunities to work with big investors and corporate venture capital, most entrepreneurs are not looking to attract an acquirer.
“They don’t believe in handing over the businesses they founded to others,” said Eunkyung Heo, a corporate planning unit manager at Tokyo-based startup incubator and venture capital firm Samurai Incubate Inc. “They start out with the intent of going public.”
Photo Gallery: A Day in the Life of a Startup Incubator
Samurai Startup Island was founded as a hub for Japanese startups in 2011 at Tennozu Isle, a small island in Shinagawa, Tokyo. (Photo by Katherine Lee/MEDILL)
Samurai Startup Island leases co-working space for entrepreneurs who have yet to open their own offices. (Photo by Katherine Lee/MEDILL)
In the morning, the Samurai Startup Island is quiet. Most entrepreneurs who have office space in the startup incubator spend their mornings in on-site meetings with investors and clients. (Photo by Katherine Lee/MEDILL)
Samurai Incubate Inc., the company that owns and runs Samurai Startup Island, also serves as a consultant to big corporations that are looking for investment opportunities in early stage startups. (Photo by Katherine Lee/MEDILL)
Samurai Incubate Inc. is a venture capital fund and network, helping early stage startups obtain funding and build a network amongst themselves. The company recently started an office in Tel-Aviv after seeing a demand for Japanese technology companies in Israel. (Photo by Katherine Lee/MEDILL)
Samurai Startup Island, a startup incubator and co-working space in Tokyo, offers various networking and funding opportunities for entrepreneurs in Japan.
Heo said entrepreneurs treat their startups with the traditional Japanese small business mentality: they would found their own businesses, and they would stick with them and take care of them.
The lack of M&A activity is representative of the whole Japanese business environment and is not exclusive to the startup community, according to Ueda.
“For mergers and acquisitions to become common, they must reach a critical mass,” Ueda said. The current Japanese business environment does not have a diversity of merger models and professionals to take on the different transactions that various companies would need.
James Schrager, an economics professor at the University of Chicago, said Japanese businesses have a negative perception of M&A.
“Companies, once they are established, are fiercely independent,” Schrager said. “Those that are already large companies, like Sony, have had very bad luck during acquisitions. The longer term view is taken that this is not a good way to build a business.”
Still, corporations show keen interest in investing in startups through corporate venture capital funds.
“They might just be trying to keep an eye on new ideas,” Ueda said. “As investors, they can watch what happens in those startups. If they wanted to develop similar functions, they may want to grow internally within their own companies.”
The younger generation in Japan is increasingly open to the idea of startups as a potential career. Prestigious academic institutions like the University of Tokyo have entrepreneurship classes and incubators on their campuses that allow students to seek mentorship and advice from business school professors and experienced entrepreneurs.
Riney writes on the “500 Startups” blog that because the Tokyo Stock Exchange has a lower market capitalization requirement for IPOs, Japan might provide a better environment for people who want to build startups.
But reaching a threshold market capitalization is just one hurdle.
“IPOs in Japan generally require the company to be much further along than the U.S.,” Schrager said. “You must be profitable, you must be growing, you must be able to make a projection one year ahead that you can make a net profit.”
With M&A an unattractive option for many Japanese, and IPOs requiring greater proof of success, startups are in a Catch 22.
“The youngest generation is more open to founding startups,” Schrager acknowledged. “But it’s much harder to do it. They don’t have an M&A as a way out, and an IPO can only happen much later.”
Photo at top: Samurai Startup Island, located on a small island in Tokyo Bay, Japan, is run by early stage venture capital and seed accelerator Samurai Incubate Inc. (Photo by Katherine Lee/MEDILL)