Japan's World of Startups Gets International Interest

February 2024

Japan's startup scene is undergoing a dynamic transformation. With the help of a fresh surge in foreign capital, it is now emerging as an international startup hub. With government incentives and a five-year plan that includes visa reforms and tax benefits, the local ecosystem anticipates a surge in funding, international collaboration, and opportunities for entrepreneurs, signaling a promising era of growth.

“If you compare the Japan startup ecosystem to where it was 10 years ago, it is unbelievable the amount of progress that has been made,” said Tim Romero, a serial entrepreneur with more than 25 years of experience in Japan and host of the popular “Disrupting Japan” podcast.

To help make Japan a more attractive destination for global investment, the Japanese government has launched a wide range of incentive programs under the banner of the “New Form of Capitalism,” a comprehensive program that is attracting the attention of investors from around the world, including famous investors such as Warren Buffett.

Startup veterans such as Romero cite a number of factors in the seismic shift. For example, high-flying new graduates, who invariably went into government or life-time employment at a Japanese blue chip are today increasingly looking into the startup world: Mercari and CyberAgent are a few mega-startups topping the list. And while business planning moves more cautiously in Japan, interest by foreign investors is increasing, he says.

In just one example of this new support, the Tokyo Metropolitan Government this year pre-opened the Tokyo Innovation Base, a startup hub that is meant to help the metropolis to meet its ambitious goal of boosting the number of startups and of unicorns by 10-fold over the next five years. “We created the TIB as a place for startups and eco system builders, not just from Japan but across the globe,” Tokyo Governor Yuriko Koike said at the pre-opening event in central Tokyo in November.

The center is just one of many such support structures now sprouting up around Japan. Tokyo's popular Shibuya neighborhood features several new incubator sites, while the nearby Minato office district, already home to many foreign companies, is creating a startup hub to help bring entrepreneurs and investors together. Other regions, including Osaka, Kyoto and Hokkaido feature their own networking centers for startups.

Until recently, the Japanese startup market had been limited to small caps, few of which attracted the attention of global investors, but this is also changing as venture capital from Japan and overseas look for the best opportunities. The number of startups receiving funding has risen sharply over the past decade and was up 17% in the first half of 2023 from the same period in the previous year, according to industry data. At the same time the number of startups valued in the 5-10 billion yens range (approximately 35-70 million dollars) have been on the increase, an important sign of a maturing market.

On the funding side, there is increased money available as Japan's steadily growing economy and safe-haven status amid volatility elsewhere in Asia helps to bring in venture capital from abroad. In the first half of 2023 there were 61 new startup funds, according to an industry report, with capital totaling 217 billion yens (approximately 1.5 billion dollars). Within this, there were seven private startup funds each exceeding the 10 billion yens mark (approximately 70 million dollars).

The Japanese government is also providing support specifically for the startup community under a comprehensive five-year plan that will help with every aspect of starting a new business from getting into the country, finding a workspace, and opening a bank account.

As part of the new plan, restrictions on visas for foreign entrepreneurs will be eased, leading to a more supportive environment. The current confirmation procedures for the “Startup Visa” scheme will be extended beyond local governments that are authorized by the national Government, to private organizations such as venture capital firms and accelerators authorized by the government. Furthermore, the maximum period of stay will be extended. The tax code is also making it more attractive to invest, with funds put into startups under the “Angel Tax System” receiving special tax treatment. Angel investors can also get partial tax exemptions on profits and more easily offset losses.

Japan’s startup world remains small by global standards. Funding for startups in 2022 was $4.4 billion according to the CB Insights “State of Venture” report, just 2% of the level in the United States. For some of those arriving from overseas, that is exactly the point.