In quarterly earnings calls, he points to the unavoidable disruption that technological advances, such as artificial intelligence, will have on industries. But, it is not only industries that are being transformed by technology; the socio-economic foundations of societies, such as Son’s Japan, are being uprooted.
The dawn of venture capital activities
To understand just how transformative technology and venture capital activities are on Japanese society, we invoke September 19, 2014. On this day four years ago, Alibaba completed its IPO on the New York Stock Exchange. It was an instant classic, as the IPO produced three records. First, it was the largest IPO of all time, with Alibaba (under the ticker: BABA) raising $21.8 billion (on a total valuation of $168 billion).
Just as remarkably, the Alibaba IPO is said to have created the richest men in two countries that day: Jack Ma, the founder of Alibaba, the wealthiest man in China, and Masayoshi Son, the founder of SoftBank and an early investor in Alibaba, the richest man in Japan.
The tale of Alibaba’s record-breaking IPO is notable not only for these headline accomplishments. It is emblematic of the rise of technology entrepreneurship and venture capital in East Asia, even in so-called coordinated market economies typified by Japan.
Disruption of venture capital investment rules
In 2017, Masayoshi Son announced the launch of the SoftBank Vision Fund. The Vision Fund would raise a previously unheard of amount for the purposes of venture capital investing: $100 billion. Son quickly assembled giant tickets from global investors: $45 billion from Saudi’s Public Investment Fund, $9.3 billion from Abu Dhabi’s Mubadala, and $5 billion from Apple, FoxConn and Sharp. In May 2018, news came that the remaining $7 billion of the Vision Fund would come from a combination of investors, including German car markers (Daimler and Mercedes Benz) and three Japanese banks (MUFG, Mizhou and Sumitomo Mitsui Banking Corp).
It is not only the size of SoftBank’s fundraising that grabs headlines. Son is shaking up the Silicon Valley investment arena with his brashness, omnipresence and large checks. The Vision Fund was reportedly involved in more than half of the top 10 biggest investments in VC-backed startups. Its largest single investment was in Uber, at the tune of a whopping $9.3 billion in the ride-sharing company. Beyond SoftBank, Japan’s local venture capital investing and entrepreneurial activities are on the rise.
Venture capital fund fuelled J-Startup initiative
In the first days of July, the World Economic Forum (WEF) announced, in partnership with the Japanese Ministry of Economy, Trade and Industry (METI) and the Asia Pacific Initiative announced the launching of a Fourth Industrial Revolution Centre in Tokyo; the only other one in the world was established in San Francisco in 2017. Japan, according to the WEF, is poised to be at the fore for the 4th Industrial Revolution. This announcement came just two weeks after the METI – responsible for propelling the global rise of Japan’s keiretsu, such as Sony and Toyota – launched the J-Startup initiative with the aim of producing 20 unicorns by 2023. Besides, there were regional efforts to bring globally-renown accelerators – such as 500 KOBE, the Kobe City instalment of 500 Startups – that offered tax subsidies for commercialisation and entrepreneurship.
These government efforts come on the heels of Japan’s growing technopreneurship activity. In May, Mercari achieved the status of “Japan’s first unicorn” – a privately-held company with a valuation in excess of $1 billion – as it filed for a Tokyo IPO worth $1.1 billion. This came two months after The Guardian asked if Osaka was becoming “Japan’s Silicon Valley” given the efforts to turn the Grand Front – a stunning complex with a large mall at the bottom – into a tech entrepreneurship cluster through efforts such as “Knowledge Capital” and “The Lab”.
In fact, seed funding has been on the rise in Japan since the Global Financial Crisis. Japanese venture capital wasn’t just growing; a high-risk venture capital in its earliest stage was also taking off. In fact, venture capital funding from the keiretsu reached record levels, with Japanese start-ups raising ¥271.7bn ($2.5bn) in 2017, compared with ¥63.6bn in 2012.
Drivers of success
While the pace and extent of Japan’s startup boom is unprecedented, it is not completely new. The popular “Dragon’s Den” and “Shark Tank” format did not originate in Silicon Valley, Route 128, or Silicon Roundabout. The global phenomenon was first created in Japan, as "マネーの虎" ("Money Tigers"), and ran from 2001 to 2004.
Earlier this summer I visited Kyoto, Osaka and Kobe to better understand: Why the push – or embrace – of global, high-tech entrepreneurship? There are three main drivers:
- Learning from the “Galapagos syndrome”: In an earlier period of the tech boom, in the 1990s and early 2000s, Japan’s cell phone industry is said to be world-leading. But, the great advances did not diffuse, and since the rest of the world did not take up the technologies, Japan’s cell phone innovations became an island rather than a leader. It was like the Galapagos: remarkable, but distinct. In explaining the global orientation of Japanese technology today, policymakers speak of wanting to make a concerted effort to be globally relevant – and leading. For this, getting users in China and the US is just as important as the technology itself. So Japan’s current startup boom has a distinctly international character.
- Flailing giants embrace startup-led open innovation: Much of Japan’s phenomenal economic success stemmed from the tremendous growth of its conglomerates, either the horizontally integrated keiretsu or its vertically-linked zaibatsu (think Mitsubishi and Sumitomo). But in recent years, holes have been spotted in these giants’ armour. In July 2017 creditors pled with Toshiba to file bankruptcy following a massive accounting scandal in 2015. In August 2016, Taiwanese firm Foxconn acquired Sharp at a discount. Back in 2012, Sony had reported its largest losses ever, while Nintendo, Toyota and Kobe Steel all flirted with disaster. The takeaway – for many – is that large firms can’t do it on their own. They need the ideas, the innovativeness, and the nimbleness of startups. So they have embraced the idea and practice of open innovation.
- Less Permanent Employment: Along with the challenges faced by leading firms, the notion of “permanent employment” has taken a lashing. The corporate environment in which employees stay as “company men” for life, as the company takes care of the individual just as the worker gives their loyalty, has changed. The troubled performance of previously considered steady leaders has shaken the psyche associated with permanent employment. As a result, there is now more mid-career movement. It is no longer considered uncouth to leave a job mid-career or to either try to build a startup, or to be recruited elsewhere. There are now markets (and even recruiting apps, such as Wantedly, which went public on the TSE Mothers Market) for job searches throughout the career.
The Japan Times said in a May 2018 headline, “Japan shouldn’t try and replicate Silicon Valley to spur innovation”. I agree. There are certainly Japanese characteristics that are – and should be – distinct, just as elsewhere. What is undeniable is the fervour supporting technology entrepreneurship. Rather than the Japanese government promoting its large firms’ prowess, this incarnation of industrial strategy points to startups and venture capital. Prolific investors such as Masayoshi Son epitomise the transition, and the METI hope they will lead the revolution as well.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.
