A Possible Reason for Fewer Startups in Japan: Lacking Entrepreneurs
Introduction
There are many possible reasons that people may or may not pursue to be an entrepreneur. In this post, we’ll be exploring possible reasons that Japan has fewer startups than countries that have a robust startup ecosystem.
From a global economic perspective, Japan is positioned to be a global innovator. Japan is the third largest global economy and historically has been an innovator in electronic goods and automobiles. When it comes to more recent technologies, Japan has lagged behind other global economies.
Venture Capital Investment in Japan
There is a clear desire to invest more into Japanese startups by VC firms, but there is a lack of entrepreneurs and companies to invest in. Investments in startups in Japan are growing but are nowhere near the US. You can read more about the “State of Venture Capital in Japan”.
Lack of ecosystem
The startup ecosystem in Japan is not as robust as some of the more mature startup ecosystems. A robust startup ecosystem will have a proper business environment, opportunities, funding environment, and entrepreneurs. Japan is said to only have a good business environment, as the government is prioritizing startups as a point of focus. In 2018, the Japanese government launched the J-Startup program to provide both support and funding to Japanese startups. In 2022, The Japanese government also launched a five-year plan to catalyze the inception of more startups.
It’s hard to say whether there’s a lack of entrepreneurs due to lack or a weak ecosystem but it definitely is a possibility.
Large Corporations: A Japanese Preference
There are a few other potential explanations and, realistically, the lack of entrepreneurs is a combination of all the cited reasons (and probably a lot more). Another potential explanation for the lack of entrepreneurs is a preference to work at a large corporation.
Large Japanese corporations provide multiple benefits, the main ones being brand and stability. The brand power of working at a large corporation comes in handy besides the bragging rights. It helps with applications for any form of credit, including mortgages and credit cards. For example, an applicant may get a favorable interest rate because of the company’s brand. Large companies in general also provide more stability: one is less likely to lose their job at a large Japanese corporation. The concept of lifetime employment (終身雇用) is most prevalent at large corporations. It is not uncommon to see an individual start and finish their career with one company (which is also reflected in Japanese workers not switching jobs or careers). Japan is definitely going through a cultural shift with more people switching companies, but there’s definitely a large group of people looking to take advantage of working at a large Japanese corporation.
Lacking Entrepreneurial Education Programs
Another potential reason for the lack of entrepreneurs may be the limited exposure that individuals receive. There is limited entrepreneurial material in Japan, especially in the formal education system. According to research conducted by the World Bank on the Japanese startup ecosystem, three universities produce a good chunk of the startups.
Table: Distribution of Entrepreneurs by University
Source: World Bank: Tokyo Start-Up Ecosystem
This concentration can be interpreted in different ways. On the positive side, the initiatives and education programs around entrepreneurship are paying off for these three. On the negative side, there’s too much concentration from these three universities which brings up the question of the effectiveness of entrepreneurship education at other universities.
International Talent
More developed startup ecosystems have a significant influx of foreigners. This adds usually depth to the pool of entrepreneurs and software developers. This can be seen in Berlin, London, and Singapore where more than half of their technical labor forces are foreigners. There’s also a high number of foreign talent in San Francisco, Boston, Beijing, and Shanghai. Compared to these startup ecosystems, Japan has struggled to attract foreign talent even with government support (relaxing visa requirements).
One reason for being unable to bring in foreign talent is the ease (or unease) of doing business in Japan. Japan ranks lower than countries that have a robust startup ecosystem on the World Bank’s Ease of Doing Business report. A few anecdotes from the interview cite the regulations being outdated, including the required use of an inkan or hanko to open a bank account (physical personal seal or stamp, typically used for formal documents such as contracts). The language barrier and the conservative corporate culture were a few other reasons that were cited. The founder or representative is also personally on the hook for many things when starting a company in Japan, so there may be a lot more personal risk compared to other countries.
That being said, there have been a few success stories in Japan. Paidy may be the poster child for foreign entrepreneurs in Japan. Paidy was founded in 2008 by Russell Cummer. The BNPL company eventually sold to PayPal for $2.7 billion. With more stories like Paidy, there may be an interest in starting a company in Japan.
Business Opportunity for Global Companies
There is an abundance of room for global technology companies in Japan. There is a lack of new startups in Japan, which is actively being addressed, but there will unlikely be any instantaneous change. Since there is a lack of startups in Japan, global technology companies have the opportunity to provide a solution before a domestic alternative is created. With the right approach to localization and go-to-market, the Japanese market may be a great destination for global companies.
Conclusion
Japan is already facing a shortage of IT workers and demand is likely going to increase. The need for both global and domestic software companies will continue to rise until there are real prductivity gains. There is an opportunity for global SaaS companies to offer unique and innovative solutions to Japanese end users that truly need (and are mandated to adopt) innovative technologies. If you are interested in exploring the potential that Japan has to offer, book a free consultation here.
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