Path to Innovation: Japan’s Startup Development Five-year Plan

Some statistics before jumping into the pillars

Here are a few numbers that stood out that provide additional context to the plan.

Corporate Entry/Exit Rate: The corporate entry rate is the rate at which new corporations are formed. In Japan, this number sits at 5.1% compared to 9.2% and 11.9% in the UK. This indicates that not enough new companies are entering the market to drive innovation. The corporate exit rate, the rate at which corporations shut down, is 3.3% in Japan, compared to 8.5% in the US and 10.5% in the UK. This indicates that there isn’t as much competition in Japan, given that they are able to stay in business longer. Both metrics combined indicate that the creative destruction cycle in Japan is not as robust as other global economic powers.

Investments in Startups: Based on figures from 2020, the US, China, and Europe invested $40.2 billion, $11.5 billion, and $9 billion, respectively. This number for Japan is $1.5b, about 3.7% compared to the US.

M&A in Japan: Exits in Japan are primarily driven by IPOs compared to the US. In Japan, when startups exit, the ratio is 80% IPOs. On the other hand, in the US the ratio is 90% M&A. Looking purely at the number of M&A exits for startups in 2020, there were 1,473 in the US, 244 in the UK, 60 in France, and 49 in Germany. The number of M&A exits for startups was 15.

Entrepreneurship as a career choice: 75% of people in China and 68% of the people in the US consider starting a business to be a desirable occupational choice. This number is at 25% in Japan. Three out of four people don’t consider starting a good career choice.

First Pillar: Educating, nurturing, and attracting entrepreneurs

The first pillar is all about people. The Plan includes multiple initiatives to educate the next generation of entrepreneurs, nurture existing entrepreneurs, and attract foreign entrepreneurs to Japan.

Starting with the education aspect, the Plan recognizes that there needs to be significant action to change the current mindset of entrepreneurship (only 25% of people in Japan consider starting a business a desirable career choice). To change the mindset and increase awareness, the Plan will support startup education for elementary, junior high, and high school students in collaboration with universities. Nurturing entrepreneurs was a big topic of the first pillar, as well.

Nurturing entrepreneurs through mentorship compromised a large chunk of the initiatives in the first pillar. For example, the “MITOU Program” (by the Information-technology Promotion Agency, Japan) has been active in finding mentors. They have been able to provide mentorship to about 70 entrepreneurs a year. 300 companies have started or commercialized based on this initiative. The Plan wants to take this model to other sectors, including energy and industrial sciences. The goal is to get to 500 mentees from the current 70.

The Plan also considers other educational and mentorship angles. Japan is considering a “Dejima” program that aims to dispatch “young people” to Silicon Valley to learn from more robust startup hubs. The Plan will start with 20 people but aims to dispatch about 1,000 over the next five years and will dispatch them to more hubs, including Boston, New York, San Diego, and Austin. The Plan is also considering establishing an MBA program focused on entrepreneurship at American universities, so people can earn a degree while working in Japan. The Plan also calls for more mentorship from incubators and accelerators.

Additionally, the Plan also proposes a closer relationship with domestic universities. There are multiple angles in working with universities. The most notable one is the “One University, One Exit” initiative. The Plan will support the creation of startups at universities with the goal to “start 50 companies per university, with one company aiming to exit.” The Plan will also push for the commercialization of university research with the intent of yielding 5,000 projects over the next five years. To support this from a financial perspective, the Japan Science and Technology Agency will create a new fund of 100 billion JPY, which is 10 times larger than the current fund. The Plan also includes creating a platform (“Licensable Patent Information Database”) for searching licensable university research.

The Plan also aims to actualize a “global start campus” concept. The goal is to “revitalize research and development at domestic universities and encourage reforms.” The concept brings academia and startups closer. The Plan will bring global VCs and academia closer through joint research and entrepreneur development programs. Other programs in the Plan also push for deeper research and innovation, which is supported by a 10 trillion JPY University Endowment Fund through the Universities for International Research Excellence Act.

Though the Plan includes other initiatives, the last one that will be covered in this post is the Plan’s push to attract foreign entrepreneurs. Currently, foreign entrepreneurs can come to Japan for a year on a Startup Visa via the Foreign Entrepreneurship Promotion Project. There is a bottleneck since the only people who can approve this visa are government officials. The Plan will grant approved venture capital firms and accelerators to grant the Startup Visa. The Plan also includes expanding on the existing J-Startup initiative, which includes building out a startup ecosystem. A stronger startup ecosystem should help increase the presence of both domestic and foreign entrepreneurs in Japan.

The Plan includes “efforts will be made to facilitate procedures for foreign individuals to open bank accounts.” This highlights the difficulty of performing basic business operations in Japan. Though the initiative isn’t as drastic as others, the implications are important: The Japanese government is acknowledging that performing basic business tasks can be difficult and is showing an attitude to change.

Second Pillar: Making life easier for startups, start to finish

The second pillar includes initiatives to reduce the barrier to entry of starting a company in Japan and to increase exit options for successful startups. The second pillar addresses issues like improving the infrastructure around venture investments, easing access to capital, revamping the current stock options structure, reducing the barrier to starting a business, and increasing exit opportunities for startups.

Starting with the infrastructure and access to capital, the Organization for Small & Medium Enterprises and Regional Innovation, JAPAN (SME Support JAPAN) will strengthen its current investment function by 20 billion JPY and has further plans to strengthen its limited liability investment functions. The investments will be made in domestic and foreign venture capital firms, which will ultimately increase the access to capital for startups. Japan Investment Corporation (JIC) will also strengthen its investment functions by submitting a bill in 2024 to extend its operation period from 2034 to 2050. The Government Pension Investment Fund (GPIF) in Japan will also be redirecting 2,000 trillion JPY of personal financial assets to startups and “pathways will be developed to redirect long-term investment funds such as GPIF to venture investment and infrastructure provision.” All of these government initiatives should ultimately improve the current infrastructure around investing in startups and increase access to capital for startups.

There are plans to encourage investments in startups, as well. A preferential tax system will be established for investments made by founders and other individuals in new startups after they sell shares in their own companies with the goal of having a healthy reinvestment cycle. This will hopefully yield mentorship from the exited founder. The angel investing taxation may also be simplified by moving the process online and reducing the number of required documents. As part of the push to increase angel investments, the Plan will promote platforms that provide information on angels and platforms that match startups and investors. There will also be a push to “promote investments in start-ups from individuals through venture capital firms” including reevaluating tax measures.

Lastly, from access to capital perspective, the Plan will promote financing from banks. The Plan will add more flexibility to the current approval process. The Plan also intends to increase the lending limit for startups. The Plan will monitor the changes made in 2021 on the Banking Act. Initially, the Banking Act prohibited banks from making investments of more than 5% in business companies. The changes allow banks “to make investments of more than 5% in startups that have been established for less than 10 years.” The impact of the changes will be actively monitored and any additional changes will be made to reduce the barrier to access loans. The Plan actively makes it easier for startups to access capital from loans from banks and capital from venture capital firms and individuals.

In addition to access to capital, the Plan intends to reevaluate the current stock option structure. For starters, the Plan will add flexibility to the timing of exercising stock options. The Plan also will reevaluate the usage of stock option pools. In Japan, the Companies Act requires stock options to be granted within one year of the stock options tranche being established. Companies don’t have any flexibility to issue stock options based on the current structure of the Companies Act. The Plan will also tackle developing the usage of Restricted Stock Units (RSUs). RSUs in Japan fall into a grey area and more visibility will be provided. An overall overhaul of stock options is in place as part of the Plan.

On the topic of stocks, the Plan also includes an initiative to create a secondary market. The current private trading systems (PTS) don’t permit unlisted stocks. Given that unlisted stocks aren’t permitted, there’s a lack of infrastructure to facilitate transactions. The Plan will address the infrastructure (standardized data of unlisted securities) and the transactions themselves. The implications of this would be massive as it’d give founders more ability to sell in secondary markets and provide additional opportunities to exit. As for other exit options, the Plan will reevaluate the IPO process and will consider Special Purpose Acquisition Companies (SPACs).