The Sun Rises Again: The New Opportunities for Founders and Investors Entering JapanWritten by
To startup founders and investors everywhere, we at Geodesic believe that Japan is now emerging after a long hibernation and is poised to become a bright spot, both as a market for digital transformation and as its own dynamic venture capital and entrepreneurial ecosystem. A number of developments over the last few years have pushed Japan forcefully in the direction of true digital transformation, a movement that we believe will unfold over the next decade.
Why is this time different and why should you care?
- Covid revealed serious weaknesses in Japan, particularly around digitization (examples include an inability to disburse cash payments, difficulties in enabling remote work, etc.)
- A positive view of startup jobs is developing and taking hold: by the end of 2021, more than a fifth of job transitions from large companies in Japan were people leaving to join startups, according to the Japan Venture Capital Association, compared with 8 percent in 2018. That proportion has continued to push towards 25 percent in the years since, according to JVCA members.
- The Japanese government has focused on full digitization efforts. While investment in startups in Japan has grown 10x in the last 10 years, this investment has produced very few unicorns (per CB Insights data, with a total number of 7 unicorn startups in October 2023, Japan had just 0.6% of the world’s 1220 unicorn startups, an extremely low number for the 3rd largest economy in the world and one of the largest enterprise software markets). The government’s efforts include the following:
- First, the Japanese government established a new “Digital Agency” in September 2021, with a staff of 600 officials, including 200 ICT engineers.
- In November of 2022 the government announced a “Five-Year Plan” to accelerate startup activities, in which the public and private sectors will work together to achieve the major target of increasing the scale of investment by more than a factor of 10x (to 10 trillion yen) and create 100 unicorns by FY2027.
- There has been a huge psychological impact from the launch of ChatGPT and Generative AI developments broadly, especially given what it can enable in a society facing Japan’s demographics and insufficient number of homegrown data practitioners. The Ministry of Economy, Trade and Industry (METI) warns that Japan faces a “digital cliff” by 2025 due to a growing shortfall in professionals in Information and Communications Technology (ICT). Currently, the shortfall amounts to 300,000 but will grow to somewhere between 450,000 and 800,000 by 2030. Japan is also expected to have 270,000 artificial intelligence and Internet of Things (IoT) job vacancies in 2030 with no one to fill them, Nikkei Asia reported. Japan’s shortage of specialty IT workers is predicted to be 13 times more acute by then than it was in 2018, according to the newspaper.
- While overall investment in Japanese startups fell in 2023 (like in other markets), it still appears to be on trend to match or exceed the 2020 levels, and there have been few signs of a slowdown in the formation of startup funds in the country. In fact, 61 new startup funds were formed in the first half of 2023, with the total combined value of all verifiable capital raised amounting to JPY 216.8 billion (~$1.61 billion). Based on this rate, the full-year figure will likely end up in the upper JPY 500 billion (~$3.7 billion) range, putting it on par with ordinary years.
In short, Japan is now painfully aware of how much farther it has to go, the government is providing a large and broad push, and psychologically, the need for Digital Transformation (“DX”), especially AI and the data building blocks needed to implement it, has penetrated the broad consciousness.
- Of course, Japan isn’t likely going to catch up to Silicon Valley, but that’s unnecessary for Japan to be successful.
- Japan is awake and determined at all levels to transform itself (and those are the times historically never to bet against Japan).
- What we believe is coming:
- a) a stronger domestic economy driven by digital transformation, as there is a LOT of low-hanging fruit
- b) a much more robust domestic venture capital and entrepreneurial ecosystem, with Japan again taking its rightful place in the entrepreneurial and innovation worlds
Now is the time to consider Japan. The opportunity is immense for those parties who seize it. For startups, Japan is a large, sophisticated, wealthy market representing significant revenues for those companies intrepid and patient enough to enter. And Japan is a dynamic source of innovation that is capable of producing highly competitive, global champions (and returns) for those investors willing and able to add value.
To founders, especially those at enterprise software companies, but also in deep tech, robotics, climate tech, and other sectors, our message is: go to Japan. The market there needs and wants your solutions (and Geodesic can help).
To investors, our message is: it’s time to pay attention to Japan again as a source of innovation and startups. Japan is awake.
We built Geodesic Capital as a bridge between Silicon Valley and Japan. We are here to help, whether you’re a startup looking to expand into Japan or a Japanese startup that wants someone to truly help it go global and win in overseas markets.