Japan s business system has changed significantly since 2000, shifting toward

Similar documents
Angel Investor Networks The Power of Groups

Marketcraft Japanese Style: What Japan Tells Us About the Art of Making Markets Work

Overview of Venture Equity

FINLAND. The use of different types of policy instruments; and/or Attention or support given to particular S&T policy areas.

National Innovation System of Mongolia

EQUITY STRUCTURES FOR HIGH GROWTH ENTREPRENEURIAL VENTURES

ESban Financing Innovation in SMEs: the role of Business Angels 11 th December 2009, Madrid

2013 venture capital trends summary

Getting Started. This Lecture

$ 100M INVESTMENT IN AVIATION INDUSTRY PANOS XENOKOSTAS PRESIDENT & CEO ONEX TECHNOLOGIES INC ONEX SA

15.431: Entrepreneurial Finance

Raising capital Healthy fundraising tension shows the market s underlying strength

Slide 1. Slide 2. Slide 3. Entrepreneurship New Ventures & Business Ownership. BA-101 Introduction to Business. What Is a Small Business?

2014 Asia Entrepreneurship Update

Session 14 Venture Finance

Entrepreneurship WILEY. Third Edition. William D. Bygrave. Andrew Zacharakis. Babson College. Babson College

OECD s Innovation Strategy: Key Findings and Policy Messages

Financing Emerging Growth Companies

Four Surprising Facts

An Introduction to China s Science and Technology Policy

ACCESS TO FINANCING FOR SMEs Problems and Challenges. Prof. dr Dejan Erić Belgrade Banking Academy Member of the ERENET Network 2005.

Historical Development of Management in Japan

Dynamic Cities and Creative Clusters

Michigan venture capital pros: Region attracting attention

Winter 2004/05. Shaping Oklahoma s Future Economy. Success Stories: SemGroup, SolArc Technology Yearbook

ARTICLE VENTURE CAPITAL

3Q13. Trends in Terms of Venture Financings in Silicon Valley. Third Quarter Fenwick. fenwick & west llp

IP and Technology Management for Universities

GOVERNMENT PROMOTION OF HIGH- POTENTIAL ENTREPRENEURSHIP AND VENTURE CAPITAL

Chapter 5. Forms of Business Ownership and Organization

Creating a University Angel Group

Technology and Industry Outlook Country Studies and Outlook Division (DSTI/CSO)

BASED ECONOMIES. Nicholas S. Vonortas

Teresa V. Pahl Partner

Mergers and Acquisitions/ Private Equity. Providing In-Depth Deal Coverage for Buyers, Sellers, and Investors. Attorney Advertising

WIPO REGIONAL SEMINAR ON SUPPORT SERVICES FOR INVENTORS, VALUATION AND COMMERCIALIZATION OF INVENTIONS AND RESEARCH RESULTS

Venture capital - An introduction into the nature of venture capital

Florida Venture Factbook

Financing Entrepreneurship: Is Gender an Issue?

The Sun Rises Again? Regaining Industrial Competitiveness of Japan in Science Based Economy Era

The View from Silicon Valley

Financing Options and Exit Strategies

SESSION 4: Mr. Hanson Cheah, Managing Partner, AsiaTech Ventures Limited, Hong Kong

Silicon Valley Venture Capital Survey Third Quarter 2017

Private Equity Classification Changes. November 2008

Under the Patronage of His Highness Sayyid Faisal bin Ali Al Said Minister for National Heritage and Culture

Inbound Flip Transactions

The Great Convertible Note Debate What New Angels Need to Know

E Profesor Tom Byers

Resilient Innovation for Economic Transformation

Silicon Valley Venture Capital Survey Second Quarter 2018

Science & Technology Basic Plan (FY )

Industrial Technologies. Amsterdam, June 2016 Nitan Pathak European Investment Fund

Promoting Foreign Direct Investment in The United States. Christopher Clement International Investment Specialist Invest in America

SESSION 9A: SOURCES OF CAPITAL, VC FUND ECONOMICS

Science, technology and engineering for innovation and capacity-building in education and research UNCTAD Wednesday, 28 November 2007

PwC Deals $42B. Global Pharma & Life Sciences Deals Insights Q Update

Indigenous Innovation and Economic Development

François G. Laugier's Representative Experience

Canada s Support for Research & Development. Suggestions to Improve the Return on Investment (ROI)

The business of Intellectual Property

The Internationalization of R&D in India: Opportunities and Challenges. Rajeev Anantaram National Interest Project March 2009

Give Me 5: GENDER LENS INVESTING: THE RISING TIDE OF WOMEN ANGELS

Research on Venture Capital Exit for Science and Technology Innovation Enterprise Ding Wenhui Guangdong University of Science and Technology

executives are often viewed to better understand the merits of scientific over commercial solutions.

Challenging Times: Sustaining Your Business While Waiting for Financing. January 14, 2009

Private Equity & Venture Capital

OECD/ADBI 7th Round Table on Capital Market Reform in Asia October 2005 ADB Institute, Tokyo, Japan

Angel Financing. UNCP Entrepreneurial Summit UNCP Regional Center at COMtech Pembroke, NC 12 March Presented by:

ENTREPRENEURS LEBANON

Access to Capital. Equity Investing. John Coutris B.Comm(Hons.) CEO, MEDF Inc.

Private Equity Market and Trends Brigitte Baumann CEO Go Beyond; President of EBAN

GOALS FOR PRESENTATION

Venture Capitalists in Malaysia: Challenges and Future Directions

Creating a Social Investment Fund in Israel: Policy and Financial Considerations

T T T T T T T T T T T T T T T T T T T T T T T T T T T T T T T T T AND PRIVATE EQUITY ENERGIZE GROWTH

Ministry of. Economic Development

EXAMINATION NUMBER ONLY.

The Danish-American Entrepreneurship Summit

Technology transfer and development: implications of four case studies Session 2

VENTURE CAPITAL. Financing startup and emerging growth companies Long term/patient capital Equity financing High Risk/High Return Exits: M &A or IPO

Why is US Productivity Growth So Slow? Possible Explanations Possible Policy Responses

Viking Advisory Group. Company Presentation September 2011

Canada s Intellectual Property (IP) Strategy submission from Polytechnics Canada

Recent Developments in Research and Innovation Policy in Japan

RESEARCH, INNOVATION AND ENTREPRENEURSHIP: ESSENTIALS FOR SOCIO-ECONOMIC TRANSFORMATION

THE INSTITUTIONALIZATION OF THE PRE-IPO EQUITY MARKET

BASICS OF RAISING CAPITAL OCTOBER 11, 2012

2017 1H. ARI HALO Report. For immediate release November 6, 2017

7 Signs It's Time to Hire a Virtual CFO

Co C m o pa p n a y n Pr P o r f o il i e l Nove v mb m e b r r

Testimony to European Parliament

ACF Equity Research. Key Messages for: Think Like a VC Meetup 20 March Accuracy Clarity Foresight

The Optimum Exits Workshop Section 3 Financing Your Company

Founder Follies. Presentation for Harvard Business School. February 9, Jeffrey L. Quillen Alexander J. Aber

OECD-INADEM Workshop on

The Fourth Industrial Revolution in Major Countries and Its Implications of Korea: U.S., Germany and Japan Cases

Why is US Productivity Growth So Slow? Possible Explanations Possible Policy Responses

PRIVATE EQUITY & VENTURE CAPITAL

Start, Tumble and Succeed

Transcription:

1 Continuity and Change in Japan s Ecosystem for Venture-Capital backed Start-up Companies: Encouraging the Creation of Firms to Stimulate Economic Growth and Jobs Japan s business system has changed significantly since 2000, shifting toward increased labor mobility, greater emphasis on shareholder returns, more outsiders on corporate boards, and closer ties between firms and academia. An important subset of these broader changes is that leaders have overhauled laws and policies to create a healthy start-up ecosystem, especially in the Tokyo area. A start-up ecosystem includes various laws, practices, actors (entrepreneurs, venture capitalists, bankers, lawyers), institutions (universities, firms, banks), and the relationships among them that impact the nation s capacity to create new firms as well as to shut down failing ones and reallocate their capital and human resources to new ventures. A healthy ecosystem has a virtuous cycle, in which entrepreneurs who create profitable businesses re-invest some of their profits and knowledge into new ventures, such that over time, successful start-ups sow the seeds of new successful ventures. The bigger the ecosystem, the better, but there at least needs to be a critical mass of experienced entrepreneurs, financiers, and support service providers. Starting in the late 1990s, state and business leaders have significantly changed key parts of Japan s start-up ecosystem, including financing, reducing disincentives to entrepreneurship, encouraging a greater role of large firms and universities in the ecosystem, and creating state programs to educate, train, and mentor entrepreneurs. As a result, new firms are helping stimulate economic growth and provide new jobs.

2 Finance New stock markets were created in the late 1990s that allow unprofitable firms to go public through an IPO. This increased options for entrepreneurs and investors to exit their investments. Various tax incentives for individual and corporate angels, created since the late 1990s, have become less cumbersome and are used more frequently. Twenty years ago, most VC funding was a loan. Now virtually no VC is provided as a loan. Twenty years ago most VC companies were affiliated with risk-averse financial institutions, but only 60% of them are today. The rest of VC now comes from independent VC firms and Corporate Venture capital (CVC) funds of mainstream firms, such as Toyota, Mitsubishi, and NTT. The total amount of VC in Japan has rebounded from lows during the global financial crisis, reaching Japan s VC 152.9 billion yen ($1.4 billion) in 2016, which is quite small compared to the $69 billion in VC investment in the U.S. that year. Japan s VC investment is also relatively low as a percentage of GDP, but is not very different from that of France and Germany. Japanese VC investors are taking greater risk than in the past when they primarily invested in later stage firms; today most investment is in seed and early stage firms. Reducing Barriers to Entrepreneurship More people are thinking about becoming entrepreneurs in Japan, but social norms still work against such risk-taking. Most educated Japanese still prefer secure employment at a large firm, and low birth rates and few immigrants mean there are few young people to become entrepreneurs. The stigma against failure is lower than in the

3 past, but is still comparatively strong. However, graduates of top universities can afford to fail because Rakuten and other young firms lacking rigid lifetime employment and seniority wage systems will hire them. Other changes have reduced disincentives to entrepreneurship. Limited liability partnerships and companies have been permitted since the mid-2000s, allowing managers and investors to reduce the risk of being involved in start-ups, of which only 10% survive. Legal changes in the mid-2000s made bankruptcy much easier, quicker, and cheaper, thereby reducing barriers to entrepreneurship. The practices of personal guarantees and stock buybacks, which have long discouraged entrepreneurship, have been dramatically improved. Until recently, most founders had to provide a personal guarantee for VC funding. But they are less common today because in 2014 Prime Minister Abe pressured banks to eliminate them. Banks opposed this change, so in the end guarantees became prohibited in principle, but with exceptions allowed. These exceptions are when the assets of founders and their firms are mixed, which is quite common in Japan. Still, due to Abe s efforts, many entrepreneurs had their guarantees nullified and received new loans, some from government-owned banks, without needing to provide a guarantee. Forced stock buybacks in which founders must buy back stock from a VC company at cost if an IPO doesn t occur within a specified time frame or has a low payoff have also discouraged entrepreneurs. Powerful entrepreneurs can delete these buyback clauses from their contracts but most cannot. Recently entrepreneurs have collectively pushed back against major VC firms, and in some cases VC firms have accepted less than a full buyback.

4 Role of Large Firms and Universities Large firms have traditionally practiced closed innovation within their keiretsu. But economic pressures have pushed them slowly toward open innovation, in which they collaborate with new firms and purchase their products. Large firms are also acquiring more ventures through M&A, rising from virtually no exits through acquisitions to 13% of venture exits in 2016. The possibility of exiting through acquisition opens up more opportunities for entrepreneurs and investors, and thus will likely increase entrepreneurs and VC investment. Large firms are also trying to speed up decisionmaking, and some are no longer regularly rotating managers involved in the VC world, allowing them to become VC specialists who can take on greater risks. Legal reforms between 1998 and 2004 transformed the role of universities in the start-up ecosystem. They were allowed to establish technology licensing offices, which help professors obtain patents and handle the marketing and licensing of technology. Professors and universities can now own the results of state-funded research, and professors can earn extra compensation through consulting or creating new firms. As a result, universities are much more involved in creating start-ups. The government is encouraging four national universities to play a greater role in the ecosystem by giving them about $1 billion dollars to invest in start-ups starting in 2015. There has been some criticism of the universities investments because most goes to people they know, and much of the money has yet to be invested. But it is too early to make any definitive conclusions.

5 Other Government Programs There are hundreds of other new government programs to train and support entrepreneurs. Unfortunately, most have small budgets and are housed in various ministries in a scattershot approach. It is too early to assess results, but in general experts praise the government for making key changes that have resulted in an ecosystem that is getting stronger and bigger day by day. Conclusion Japan s start-up ecosystem has helped many new firms emerge from Rakuten, DeNA, and Gree, to Line and Mercari. And these new firms and their leaders have become angel investors, advisors, and mentors, who are now sowing the seeds of more successful ventures, triggering a virtuous cycle. The government, entrepreneurs, and the VC industry have been the primary promoters of dramatic reforms, and big business and social norms have resisted change somewhat, making it relatively slow and incremental. It took Silicon Valley several decades to create a strong ecosystem and they received significant support from the defense industry. Only time will tell how successful Japan s ecosystem will be, but it has the fundamental ingredients to succeed and is comparable to other countries that started building ecosystems two decades ago, such as South Korea, Germany, and France. The efforts to create a healthy ecosystem signal Japan s successful attempt to shake off some of the shackles of its coordinated market economy and move more toward the institutions and policies of a liberal market economy, at least in the area of venture-capital backed high-tech start-ups.