Entrepreneurship growing in Japan, but challenges remain

By Qiqi(Vivian) Zhang

When Yorick Traunecker, a 31-year-old Swiss expatriate, wanted to rent a workspace to develop his startup idea in Tokyo, finding TechShop, an open-access DIY workshop in Minato-ku District, was a surprise to him.

“There is no way you can find a space that is as big as this with so much industrial-level equipment,” Traunecker said. “They are good at helping you build prototypes at a really early stage, and they are I think the best at that. Nobody else really helps doing that.”

TechShop opened a year ago as the first membership-based DIY studio in Japan. Its mission is to help entrepreneurs bring their innovations to life, with industrial-level machinery and tools, open co-working space, engineering trainings and networking events.

Entrepreneurship is growing in Japan, as the country has clawed its way back from the 2008 financial crisis and a longer-running stagnation. The Mothers Index of Tokyo Stock Exchange, an index used to measure investors’ enthusiasm for high-growth startup companies listed on the Mothers section of the stock market, has seen steady growth since 2012. But observers and experts say cultural risk aversion, funding and an inflexible labor market remain as challenges.

Weekly chart of Tokyo Stock Exchange Mothers Index. Source: Tokyo Stock Exchange website.

TechShop was first built in 2006 in Menlo Park, California, at the center of Silicon Valley. The Tokyo studio is under contract with TechShop U.S. and is fully funded by Fujitsu Ltd., a Japanese multinational IT equipment and services company. Currently there are 10 startup projects and about 500 members registered in the studio.

The studio is breaking the ice by helping entrepreneurs start from the ground up. It provides large open workspace for members to exchange ideas and co-create with others. Members can design and build prototypes, using devices and tools like a 3D printer, laser cutters and metal engraving machines. Beginners will have the supports from the on-site “dream consultants” if they are not familiar with the new gadgets.

A 3D-printing model made by TechShop members. The studio provides a variety of devices and tools for entrepreneurs to build prototypes and test out their ideas. Photo: Qiqi (Vivian) Zhang/MEDILL

Tokai said TechShop plans to open more studios in Japan over the next few years. He said many prefectures in Japan have expressed interest in building similar DIY workshops.

There are other startup efforts under way. The Japan External Trade Organization, or JETRO, began offering boot camp trainings and consultations for Japan’s tech companies in 2015, said Futoshi Okazaki, a staff member at administrative
affairs department, in an email.

“We offer a matching event in Silicon Valley named ‘TechMatch’ to excellent companies in the JETRO Innovation Program,” Okazaki responded. Some 40 Japanese companies have participated and met with such tech giants as Google, Samsung, PayPal and AT&T, Okazaki said.

However, there are still many obstacles. “The startup culture was just born in Japan. Nobody knows how to make a startup in the current situation,” said Masamitsu Tokai, General Manager in TechShop Tokyo. “Many startups have emerged but support situation is not enough for them, like money and making the network,” said Tokai.

Masamitsu Tokai, General Manager in TechShop Tokyo, said the Aichi Prefecture had expressed interest to build a TechShop studio in the region. Photo: Qiqi (Vivian) Zhang/MEDILL

“In the Japanese culture, risk is not very embraced,” Traunecker said. “This means that there are some policies that do not ease the process of finding private capital or even providing an easy exit strategy for companies to invest in startups.”

But experts say it’s more complicated. Regulatory conditions have been improving in Japan. Last May, the National Diet passed an amendment bill that allowed banks to acquire more than 5 percent of financial technology companies. Bank holding companies can acquire more than 15 percent of such companies.

It is easier for companies in software development, electronic commerce and biotech to get funding, but investors are still conservative for other sectors, said Robert Eberhart, an assistant professor of management at Santa Clara University, in an interview. He was also a visiting scholar at Stanford University leading research for Japanese entrepreneurship for the past five years.

Experts say software development is not Japan’s strong suit. “Japan is historically relatively strong in hardware…But unfortunately hardware doesn’t scale well as software does,” said David Brunner, CEO and Founder of ModuleQ and coauthor of the book “The Japanese Entrepreneur: Making the Desert Bloom.” “Another problem is scaling a software company is still really expensive,” Brunner said.

TechShop Tokyo hosted a competition event from Feb. 10 to Feb. 11 for members to design virtual reality content for LandSkip, a startup that produces movies about sceneries around the world in virtual reality. Photo: Qiqi (Vivian) Zhang/MEDILL

Experts also say the problem is less about the availability of funding but more about the capability of the entrepreneurs and the human resources they have.

“In Japan, they usually teach entrepreneurship as coming up with a technology, getting venture capital and trying to sell it,” Eberhart said. “That’s the wrong way to build a company. Good entrepreneurs look to find a market first, and figure out a smart way to get into that market.”

Japan’s lifetime employment system also discourages risk-taking, said Brunner.

“The entrepreneurs themselves, overall in Japan, the best and the brightest, don’t work for startups. They still go to the government, or large companies,” said Brunner. “If you are one of the well-educated top young people, you have one chance to get an elite job, and that’s when you graduate from college. If you leave, you will never get it back.”

TechShop Tokyo provides open workspace for entrepreneurs to exchange ideas and co-create products. Photo: Qiqi (Vivian) Zhang/MEDILL)

But Eberhart said the labor market is changing. Companies now hire more temporary employees, and those people are more likely to start companies to gain a better sense of security than being a temporary employee.

“That’s changing the condition for entrepreneurship in creating a larger community,” Eberhart said.

“On the whole though, it’s still an economy that is very much dominated by big, established companies,” said Jonathan Soble, New York Times correspondent in Tokyo who has covered business for the past fifteen years.

“Some of them are trying to nurture more innovation and more of a startup culture in-house,” Soble said, adding, “It’s kind of hard.”

In TechShop, Tokai is still working on how to attract more entrepreneurs who would pay membership fees. As it is, the studio would be losing money without Fujitsu’s sponsorship.

For Traunecker, he just finished the financial model for “FrenchLab,” and plans to pitch the project to 10 companies in the next two or three months.

“TechShop inspired me to work there since it has a similar business model as I imagine will be profitable for FrenchLab,” Traunecker said.

Photo at top: Swiss expatriate and entrepreneur Yorick Traunecker is working on his project “FrenchLab” at Techshop Tokyo. He wants to build a platform to provide job training and networks for French-speaking expats and their spouses in Tokyo. (Qiqi(Vivian) Zhang/MEDILL)