Over 20 Chinese companies have already raised $5.23 billion in U.S. IPOs this year Despite China and the U.S. being embroiled in a trade war for more than 2 years, and the tightening of IPO filing restrictions and guidelines, a slew of Chinese companies are racing to go public in the U.S., with 6 [...]
By Masaru Ikeda
The Bridge Co-founder Masaru Ikeda discusses Japan’s startup opportunities and its growing unicorn population
I primarily write about startups in Japan and the rest of the world for my Japanese audience, but I occasionally do so in English to encourage interest and share what’s going on in the Japanese startup landscape.
Based in Tokyo, I spend almost one-third of the year somewhere outside Japan to meet up with great entrepreneurs and speak onstage at major global startup conferences. When participating in such opportunities, I’m often asked about the latest startup trends on my home turf.
For those people, the articles I write on a daily basis are too detailed to gain a broad understanding. Leveraging this year-beginning opportunity, I decided to summarize the status quo of the Japanese startup scene with the global audience, with a focus on what happened in 2019 and what we can expect in 2020.
87 startup IPOs and SaaS successes
In 2019, software-as-a-service (SaaS) startups accounted for 20% of the 87 IPOs. The strength of SaaS startups in Japan is a result of unique characteristics that make them easy for companies to adopt. Japanese companies can subscribe to these services without any top-down decision-making, unlike when introducing package software or on-premise systems.
When we look at who joined the unicorn club this year in Japan, TBM (developing new limestone-based material as an alternative to paper and plastic) and Clean Planet (introducing practical applications of new hydrogen energy using condensed-matter nuclear reactions) are especially notable, among other deep tech-focused startups.
The sustainability sector has seen considerable growth–unsurprising, as plastic pollution in our oceans and global warming are issues that are being treated with increasing urgency. The market is offering a significant amount of funds to this vertical, despite the fact that the payback period for investors is relatively longer.
The next unicorns and IPOs: Subscription-based and PaaS startups
Many developed countries are facing the impending crisis of an aging society and a declining working-age population. Nowhere is this more evident than in Japan; one-third of Japan’s total population is expected to be 65 or older by 2030. Our economy needs to improve work efficiency immediately, and robotics and AI startups are likely to respond to this change in full force, helping businesses automate their work by leveraging digital technologies.
Partially owing to this demographic shift, a Japanese startup called AnyFlow won pitch awards at many startup conferences this year. The platform-as-a-service (PaaS) company helps businesses integrate and connect different SaaS platforms. For instance, when new employees join a company, the service would allow the HR team to create their email address and a Dropbox or a Slack account with just a few clicks. While there are several competing services, AnyFlow is on track to gain market share in Japan.
Another interesting trend is the hype around customized and subscription-based ecommerce. The adoption of a subscription model enables startups to secure their sales base and predict future growth. Also, recent technological advances and automation have enabled small-lot and niche-item production systems, so influencers and key opinion leaders (KOLs) can now produce and sell their own branded products.
Popular items that benefit from the concept include cosmetics, supplements, shampoos and soaps, and clothes and underwear. Thanks to factories with such production lines, influencers and KOLs don’t need to invest as much or take on as much inventory risk before starting their business.
VC funds get bigger, helping local startups grow in private
When a Japanese startup is in its mid- to later-stage and needs to raise more than eight-digit figures (in U.S. Dollars), it’s a common practice for them to list on the ‘Mothers’ section of the Tokyo Stock Exchange, which is reserved for high-growth and emerging stocks.
For U.S.-based startups, it’s possible to raise massive amounts of VC funding as a later-stage company. Japanese startups struggle to raise as much venture capital because local funds are relatively small. Due to this characteristic, more than a few growth-stage startups have been forced to devote their resources to investor relations, and pursue an IPO long before they become a unicorn in terms of valuation. However, many firms have announced the launch of more considerable funds since early last year, and the challenges faced by growth-stage startups are slowly being alleviated.
DNX Ventures is expected to close its third fund with an oversubscription of its initial target of about US$275 million. Globis Capital Ventures and Global Brain recently combined their funds, which are worth $345 million and $183 million, respectively. ANRI, an emerging VC firm that has recently facilitated several exits for their portfolio companies, is reportedly raising a new $183 million fund.
One of the critical reasons why Japanese VC funds are scaling up is because institutional investors–represented by pension funds from overseas–are happy with what they’re seeing in the Japanese startup scene and willing to pour more money into it. In the past, Japanese VCs mainly raised money from national conglomerates. These companies are now setting up corporate venture arms to accelerate collaboration with startups in exchange for investment opportunities.
Such changes signal the growing maturity of our startup ecosystem, and many more changes to the landscape to come.
About the Author
Masaru is the Co-founder of Bridge, one of Japan’s leading media outlets covering the country’s startup scene and that of the rest of the world. In 2018, the company was acquired by TSE-listed press release distribution company, PR Times. He started his career as a programmer and engineer, and previously co-founded several system integration companies and consulting firms. He’s been traveling around the world to explore prominent startups as well as helping them connect with the global business ecosystem.