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Cutting Edge of Clean Tech in Silicon Valley

February 10 2022

*This article was originally published in Japanese. All information in this article is as of December 10, 2021.

Hiroaki Izuma has been working to cultivate business with startups in Silicon Valley based on his long career in the energy industry. We asked him about the current status of clean tech startups that will help bring about carbon neutrality, a topic garnering attention around the world (interview date: November 25, 2021).

Mr. Hiroaki Izuma (photo by JETRO)

Energy companies acquiring a string of startups

Q: You were living in Silicon Valley in the US until this past spring, so what can you tell us about the current environment surrounding climate change-related startups?
Mr. Izuma : When I arrived in the United States in April 2016, I was surprised to learn that oil majors and major power companies were investing in and acquiring startups. No such moves were apparent in Japan five years ago. My initial posting in the US in 2016 came about when I was dispatched from OGIS-RI, a subsidiary of Osaka Gas, to search IT startups and create new business opportunities through them. After witnessing European and American energy companies investing in one startup after another, I persuaded the head office that Osaka Gas should set up its own business location in Silicon Valley rather than a subsidiary. We then set up an Osaka Gas open innovation activity hub in the head office of the US accelerator Plug and Play to seek out promising startups.
We now live in a time when startups are credited with bringing about all kinds of innovation. That perception is particularly strong in Silicon Valley, and it is no exaggeration to say that the days when innovations emerged from government institutions or large corporations are over. Startups today are even making forays into the space industry. Innovation across the full spectrum is coming from startups, and this holds true for the energy sector as well. Numerous startups with clean tech or climate tech – technologies that combat climate change – have opened for business in Silicon Valley. Five major energy companies from Japan, too, have set up offices in Silicon Valley to find leading startups.
Q: There seems to be growing interest in carbon neutrality around the world. Do you feel there are any regional differences in the level of interest?
Mr. Izuma : The US research firm Clean tech Group each year releases a list of the top 100 global clean tech companies, and the 2021 list had 60 companies from North America and 35 from Europe and Israel. Half of the 60 North American countries are located on the West Coast, centered on Silicon Valley.
The US is even seeing competition arising between cities. Silicon Valley hosts clusters of startups from all fields, but startups are emerging in other regions by taking advantage of their industrial features. Boston, for example, has a strong manufacturing industry, so many of the startups there are involved in hardware. Houston is host to a concentration of oil and gas energy companies, so startups aiding in the transition to green electricity have proven successful in that city.
Europe is actively working to achieve carbon neutrality by 2050. The EU has mapped out a hydrogen strategy, and many countries are adopting measures oriented around the production, transportation and utilization of green hydrogen. Just as Europe once created Airbus to compete with the American firm Boeing, it is now trying to create a "hydrogen version of Airbus", a hydrogen company able to compete on the world stage. This will require a variety of new technologies, so Europe is focusing on fostering startups, with both national governments and major electric power companies investing funds. This field is seeing an increasing number of startups, particularly in Germany, France and the United Kingdom.

Japan lags far behind in clean tech

Q: To what extent do Japanese companies have a presence in Silicon Valley?
Mr. Izuma : Major Japanese corporations have set up offices in Silicon Valley to find startups, but I’ve heard of some of these companies being kept at a distance not only because of the language barrier but also because of slow internal decision-making. Just carrying out demonstration tests takes time because of the need for internal approval via circular memos, so these companies simply cannot keep pace with startups’ growth. Demonstration tests often end in failure because the products and services being tested are still at the prototype stage. If you have something good (a technology, an idea, etc.), then demonstration testing will let you overcome any issues standing in the way of practical application and move on to commercialization. However, Japanese companies do not allow failure, meaning there are hurdles to get past and various preparations to be made even before something can be tried out. I’ve heard some US venture capital firms (VCs) advise startups to avoid partnering with large companies, especially Japanese corporations, telling them it’s better to scale up (grow with the aim of global expansion) in-house than to have to adjust their pace to a partner’s if they want to be able to realize their idea quickly.
Even among large companies, though, there are some like Shell, a major oil company in the United Kingdom and the Netherlands, that carry out 40 to 50 demonstration tests a year. If the tests do not work out, the company simply pulls back but, if the startup is a promising one, the company will move ahead to the next step and eventually acquire the startup.
Acquisition is the basic exit (investment recovery) strategy in Silicon Valley, but there are very few examples of Japanese companies acquiring overseas startups. I’ve exchanged views with a variety of Japanese companies on startup collaboration through CVCs (Note), and the most successful of these is probably Asahi Kasei. Asahi Kasei Ventures set up operations in Silicon Valley more than a decade ago, and Asahi Kasei’s head office delegated decision-making authority on new businesses to this CVC (Asahi Kasei Ventures). Decisions are thus made in Silicon Valley following the same pattern as European and American companies, and this CVC has invested in about 20 companies, augmenting its investment in, or even acquiring, startups likely to lead to new businesses. Similar approaches have recently been taken by Toyota AI Ventures and Omron Ventures as well.
Q: How can Japanese CVCs play an active role in Silicon Valley?
Mr. Izuma : Generally speaking, the Japanese market has a low priority. If you’re successful in North America, you target Europe next and then expand your business to Singapore and Australia. Japanese companies that are not well-known among startups must steadily build up their name recognition. Even Tokyo Gas is relatively unknown in Silicon Valley, and it has endeavored to change this by sponsoring and giving speeches at conferences in the clean tech field. It will likely also need to highlight its efforts at decarbonization among industry groups and at the national level.
Let me give you one interesting example. Donald Trump took office as US president in 2017 and withdrew from the Paris Agreement. At the time, investment soliciting entities from Canada, France and elsewhere were approaching startups in Silicon Valley, looking to attract entrepreneurs by inviting them to start businesses in Canada or France if no good opportunities presented themselves in the US. After all, no startup ecosystem can thrive without talent. The US’ withdrawal from the Paris Agreement left some US energy companies far behind in making the shift to renewable energy. Japan will undoubtedly need to undertake greater efforts to attract entrepreneurs in decarbonization from around the world.

Japanese startups need to commit to changing the world

Q: What does Japan need to do to play an active role in this field?
Mr. Izuma : In the first place, there are few energy-related startups in Japan trying to expand globally. Looking at the 100 global clean tech companies, I mentioned earlier, no Japanese companies are, or have ever been, on that list. Japanese startups tend to find niche markets with no major corporate participants to develop their businesses, but most of them only achieve some slight success in Japan. Nevertheless, a few startups have been launched with an eye on the global market. For example, WASSHA Inc.External site: a new window will open, which engages in installment sales of off-the-grid solar power generation systems, has begun offering power services to non-electrified areas in Africa. Africa has become a market for startups from around the world involved in businesses that leverage their strength. There is also Challenergy Inc.External site: a new window will open, which develops small wind power generators that convert typhoon winds into energy. It has begun wind power operations in the Philippines and has been committed since its founding to changing the world.
Japanese startups are under strong pressure from VCs to become listed. In fact, 90% of Japanese startups make IPOs (initial public offerings). VCs can recover their investments if companies get listed in Japan early on, but the startups themselves will only find success in Japan.
Q: Aren’t there also some Japanese startups capable of competing globally with their technologies?
Mr. Izuma : Japanese universities and corporate research institutes do have world-class basic technologies, but the problem is that they haven’t commercialized these technologies. There is room for Japanese technical capabilities to be applied in the fields of hydrogen and CCUS (carbon capture/usage/storage) technologies. I hope more people will be starting businesses based on the technologies available at universities and companies. A venture business was recently established by the University of Tokyo, and it is vital that we increase such businesses. Even world-class technology will go nowhere unless it’s commercialized. Tesla’s electric vehicles (EVs) were initially dismissed by automobile companies, but Tesla made repeated improvements and grew to become a leading company in the EV market. Since it’s not in the nature of large companies to tolerate failure, having a startup take the risks when creating a business using a new technology offers a higher chance of success. Research in Japan has produced some impressive hydrogen-related technologies, and I’m hopeful that we will see startups launched in this field.

Note: Corporate venture capital funds (CVCs) are funds created by business companies with their own resources to invest in and support startup companies. CVCs are designed to invest in companies relevant to the business companies’ own core operations in order to generate synergistic effects with these operations.

Profile of Hiroaki Izuma
Mr. Izuma is an advisor to the Business Creation Department at Tohoku Electric Power Co., Inc., and a representative of IZM. Initially employed at Osaka Gas, he was engaged primarily in launching new businesses and projects at that company’s in-house research and development (R&D) and IT organizations. In 2016, he became the first industry member to be stationed in Silicon Valley, where he pioneered business development with clean tech enterprises in Europe and the US. He joined Tokyo Gas in 2018 and participated in a CVC launch in Silicon Valley. After returning to Japan in 2021, he joined Tohoku Electric Power Co., Inc., where he is an advisor to the Business Creation Department. As a representative of IZM, he also works as an outside advisor to major manufacturing and consulting firms and supports the expansion of overseas startups into Japan. He has previously served as a visiting researcher at the University of Southern California’s Robotics Research Laboratory, a part-time lecturer at Kyoto University, a part-time lecturer at Osaka City University, and vice president of the Operations Research Society of Japan.
Report by:
IOKI Tomoko, International Economy Division, Overseas Research Department, JETRO

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