Japanese start-ups generate innovation

Growing trend with entrepreneurial ventures boosting the economy

Once uninterested in start-ups, Tokyo is now keen on encouraging Japanese entrepreneurs to begin new businesses. Kazuhio Nogi / AFP

Belying Japan's reputation as a country of big, conservative conglomerates where fear of failure stifles entrepreneurship, many small, innovative companies are springing up.

Actually, the Japanese economic system is not averse to start-ups that are unrelated to established domestic corporations, says the Ireland-based journalist Eamonn Fingleton, who has written three books on the economies of East Asian countries. "But from the point of view of most start-up companies, it makes sense to reach out to an established company for help as expansion begins," he adds.

In past decades, few start-ups made it big or became successful in the country's business environment. Most successful ones started soon after the Second World War, such as Honda and the electronics shop that became Sony. Established in 1981, the multinational telecommunications and internet corporation Softbank stands as a more recent example.

But times are changing. Japan-based start-ups raised ¥92.8 billion (Dh3.06bn) in the first half of last year, more than half of 2015's total ¥165.8bn and the previous high of about ¥170bn set in 2000, figures from the think tank Japan Venture Research (JVR) show. The funding is mostly home-grown; foreign investors made up just 10 per cent, according to Reuters.

The JVR data shows corporations and their affiliated venture capital firms accounted for more than a third of investment, while independent venture capital firms made up 19 per cent.

Many venture capital funds are also getting their financial resources from banks, says Takao Fujiwara, a professor of business administration at Toyohashi University of Technology. In addition, "the Japanese government is eager to support start-ups," Mr Fujiwara says.

In a speech two years ago at Stanford University, the Japaneser prime minister Shinzo Abe said his country must transform its economy in a way that mirrors the innovation ethos in places like Silicon Valley and Stanford University.

Today, the ministry of economy, trade and industry's "Industrial Policy for Innovation in Japan" calls for conducting new programmes to take advantage of Silicon Valley resources, including seminars, workshops and Silicon Valley visits for selected entrepreneurs, intrapreneurs (employees within a company who are assigned to work on a special idea or project) and engineers in start-ups and large companies.

Established in February 2015, the Japan Open Innovation Council (JOIC) consists, as of March 1 this year, of 772 private companies and entities. JOIC shares case studies and presents policy recommendations for open innovation.

Among success stories so far is the start-up Life Robotics, which developed a robotic arm called Coro that is designed for use by cosmetics companies, car factories and logistic warehouses. The chief executive Woo-Keun Yoon raised ¥1.5bn last year for his company. Investors included Global Brain Corporation, Nippon Technology Venture Partners, Koden Holdings, Lead Capital Management, Mitsubishi UFJ Capital, Omron Ventures, Mizuho Capital, Golden Asia Fund Ventures (a joint fund established by Mitsubishi UFJ Capital and Industrial Technology Investment) and several corporate investors, Mr Yoon says.

Although Mr Yoon says the start-up business environment in Japan is good, last December he was reported as saying that for years he got the cold shoulder from local investors and was thinking of decamping to the United States. "People talk about a robot boom and start-up boom in Japan, but personally I don't feel we have reached such a stage at all in terms of money," Reuters reported him as saying at the time.

Yet things have changed since then. Coro is now being used by the car maker Toyota and the Yoshinoya rice fast-food chain. Through its investment, the electronics maker Omron is also exploring its possible use of the robot, according to Omron's chief executive Naoshi Ozawa. "We believe it is difficult to tackle diversifying and changing social issues with our own technology and human resources alone,"  he says.

Yoshinoya is trialling Coro at some of its restaurants to stack dishes after washing. The company does not yet know if it will expand the use of the machine, says the firm's corporate communications and investor relations department official Minoru Maehara.

"We want to use the technology to save time and be a leg up on the competition," Mr Maehara says.

To launch his start-up, the Abeja chief executive and chief technical officer Yousuke Okada says he raised money from backers including Inspire Investment, the PNB-INSPiRE Ethical Fund, NTT Investment Partners Fund, Mizuho Growth Support Investment, Archetype Venture Fund, Mitsubishi UFJ Capital 4, salesforce.com, Sakura Internet, Itochu Corporation and Toshiba Tec Corporation.

Abeja uses "deep learning", a form of artificial intelligence that processes vast amounts of data, to analyse shoppers' behaviour. Since launching its services in October 2015, the company's business has been steadily increasing, Mr Okada says. But, he admits, there are challenges.

"A platform business utilising AI such as deep learning is an unprecedented business model anywhere in the world, and it feels difficult because you have to build the business up from zero and make it known," Mr Okada says.

Venture financing in Japan has been steadily improving since 2013, and government ministries and agencies are also making moves to actively support ventures. So the current business environment is favourable to new business, Mr Okada says. "That is why I launched my company in this country instead of overseas."

"Of course, I do not intend to remain a domestic business only, I aim to become a global company,"  he adds.

Reflecting the trend of start-up growth, classes on entrepreneurship at top universities are packed, as many students turn their back on both the seniority-based lifetime employment model that served their parents and the cheap, insecure contract work that is slowly replacing it.

While a number of universities run such courses, the Japan Association of National Universities does not have exact data on numbers, says the public relations official Takana Hori, who works in the general affairs department of the association, which covers 86 national universities.

Political and business communities recognise that it is necessary to create venture companies to boost the Japanese economy. However, according to a survey by The Global Entrepreneurship Monitor (a world entrepreneurship study by the London Business School), Japan is not highly ranked among countries for encouraging entrepreneurship, so the Japanese government is working to improve the situation, Ms Hori says.

"We suppose that is the reason why a growing number of universities are creating entrepreneurship courses," she says.

In light of the growing needs for teaching entrepreneurship, Japanese universities are increasingly focusing not only on existing university education for undergraduates aged 18 to 22 years of age, but also on education for working people, says Masazumi Ikemoto, a professor emeritus at the School of Business Administration of Sensu University, one of 123 universities grouped under the Japan Association of Universities and Colleges.

"That seems to be the main factor" for the increase in such courses, Mr Ikemoto says.

Many in Japan hope such developments will put the country back at the vanguard of business innovation.