Guide to Startup Companies in Japan

Introduction

Startup companies in Japan, a nation well-known for its technological prowess and economic stability, have evolved into a dynamic hub for businesses in recent years. This change can be attributed to various factors, including shifts in work culture, government initiatives, increasing access to venture capital, and a surge in digital transformation. By investigating the landscape, we can gain insights into the unique challenges and opportunities that startups in Japan face. This can provide valuable context for understanding how these entities are driving societal and technological advancement.

Top 20 Startups in Japan

The Japanese startup ecosystem has been on a 10-year bull run, showcasing a robust and growing environment for investment and innovation. Startup investments have grown 10x over the last decade, indicating a Compound Annual Growth Rate (CAGR) of 25%. In 2023 alone, Japanese startups raised an estimated JPY 850 billion (approx. USD 6 billion), surpassing South Korea and approaching Germany in terms of total investment

To grasp the scope of the startup landscape in Japan, let’s take a look at some of the notable rising stars. These startups span a wide range of industries, including aerospace, hospitality, renewable energy, fintech, medical devices, communication services, SaaS, healthcare, prop-tech, artificial intelligence, and Web 3.

In addition to the listed startups, it’s noteworthy that Japan’s ecosystem has produced several unicorns and potential unicorns. As of 2023, Japan had seven unicorns, including notable companies such as SmartNews (news app developer), SmartHR (HR SaaS provider), Spiber (materials science), TBM (materials science), Astroscale (space industry), and Mujin (industrial robot controllers). Furthermore, next unicorns like ANDPAD and Gojo & Company are emerging, reflecting the diverse and thriving startup environment in Japan.

Disrupting Industries: Spotlight on PayPay

One startup that has made significant waves in its industry is PayPay, a mobile payment service. PayPay, as reported by the Financial Times, has been instrumental in disrupting the traditional finance sector. The company has been successful in promoting digital payments in a country that has long been cash-dependent, demonstrating that startups can indeed challenge and change longstanding customs and practices. PayPay’s success can be attributed to a combination of strategic marketing, efficient logistical planning, and the application of technology to enhance efficiency. The company has shown how startups can leverage these elements to make a significant impact in their respective industries.

How PayPay Disrupted Traditional Customs in Japan

PayPay’s disruption of Japan’s traditional cash-based economy provides a fascinating case study on how startups can drive societal changes. According to a Reuters report, PayPay’s user-friendly platform and aggressive marketing campaigns, often offering substantial discounts and rewards, have encouraged Japanese consumers to adopt digital payments. This shift towards digital finance is a significant change in a country where cash has long been king.

International Collaboration and Influence

Japan’s startup ecosystem is increasingly gaining international attention and collaboration, which is enhancing its global influence. The country’s startups are forming partnerships with international corporations, securing funding from foreign investors, and expanding their operations overseas. For instance, PayPay, the fintech startup mentioned earlier, was formed as a joint venture between SoftBank and Yahoo Japan in collaboration with India’s Paytm. This partnership highlights how startups in Japan are leveraging international expertise to disrupt traditional industries.

Progress in Deep Tech Startups

There’s also significant growth in deep tech startups. For instance, Kyoto Fusioneering, a leader in fusion power plant engineering, and Astroscale, focusing on orbital debris removal, have raised substantial funding rounds in recent years. These companies highlight Japan’s competitive edge in advanced technology sectors and their contributions to global technological advancements​

Startups and Society: Impact Beyond Business:

The impact of startups in Japan extends beyond the business realm, influencing various aspects of society. From driving shifts in work culture to solving social issues, startups are playing a crucial role in shaping Japan’s future. The Japanese government has played a crucial role in fostering this ecosystem. The ‘Five-Year Plan‘ announced by the government aims to accelerate startup activities, with goals such as increasing startup investments 10x and creating 100 unicorns by 2028. This plan includes provisions for risk capital, renewing the SBIR (Small Business Innovation Research) program, connecting with global startup ecosystems, providing tax incentives for M&A, and upgrading stock option regulations​.

1. Changing Work Culture

The startup culture challenges the traditional Japanese work ethic, which often involves long working hours and lifetime employment. Startups often promote a more flexible and diverse work culture, emphasizing work-life balance, creativity, and individual initiative. This shift is not only attracting more young people to join or start their ventures but also influencing established corporations to rethink their work practices.

2. Addressing Social Issues

Many Japanese startups are also committed to addressing social issues. For example, startups in the healthcare sector are developing innovative solutions to improve medical services and elderly care, which are pressing concerns given Japan’s aging population. Also, environmental startups are creating technologies to combat climate change and promote sustainable living.

3. Encouraging Female Entrepreneurship

Japan has also seen a rise in female entrepreneurship. While women are still underrepresented in the startup scene, more and more women are launching their businesses and breaking into leadership roles. Organizations such as Women’s Startup Network Japan are providing support and resources to empower female entrepreneurs, contributing to diversity and inclusion in Japan’s startup ecosystem. For Empowering Women (FEW) in Japan is a nonprofit organization that champions the professional and personal growth of women. Through networking opportunities, seminars, meetings, and special events, FEW inspires, educates, and connects globally-minded women. Their significant contributions are aiding the growth of female entrepreneurship and enhancing diversity within Japan’s startup ecosystem.

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What does the future hold for startups in Japan?

The trajectory for the future of startups in Japan is looking increasingly optimistic. As the Japanese startup ecosystem matures, characterized by improved access to funding for Japanese startups, a swelling talent pool, and amplified government support for startups in Japan, it fuels a promising outlook. Moreover, the heightened internationalization of Japanese startups is bolstering their competitiveness on a global stage. Japan persistently fosters innovation, and this culture of innovation in Japan is causing startups to be poised to play a crucial role in propelling technological progress. This, in turn, stimulates Japanese economic growth and instigates societal transformation. With their innovative solutions and disruptive potential, Japanese startups are reshaping their industries and setting the stage for a more sustainable and innovative future. The impact of these startups is so profound that it’s fair to say Japanese startups are driving societal change.

New Exit Strategies in Startup Systems

The resilience of Japan’s IPO market further underscores the robustness of the ecosystem. In 2023, 49 startups went public, demonstrating a strong rebound from previous years. Notable IPOs include Cover, a next-generation media and metaverse company, which realized an initial market capitalization of over JPY 100 billion (approx. USD 711 million). The growing trend of significant IPOs and M&A deals, such as MUFG’s acquisition of Kanmu, highlights the evolving exit strategies available to Japanese startups.

Additional Case Studies: Astroscale, BitStar, and WealthPark

Further examples of startups disrupting their respective industries in Japan include Astroscale, BitStar, and WealthPark.

Astroscale, an aerospace startup, is addressing the growing issue of space debris. By pioneering solutions for orbital debris removal and on-orbit servicing, Astroscale is not only innovating within its industry but also contributing to the sustainability of space operations, a concern that impacts global security and communication systems.

BitStar, a platform for content creators, is capitalizing on the rise of the gig economy and the increasing value placed on digital content. By providing a platform where creators can monetize their work, BitStar contributes to the evolution of digital economies and labour models.

WealthPark is a real estate management platform that offers tools for property owners and managers to track their assets and operations. By digitizing and streamlining aspects of property management, WealthPark is leading the PropTech industry in Japan and transforming how real estate businesses operate.

In addition to these, the rise of deep tech in Japan is particularly noteworthy. University spin-out startups have increased from 131 in 2014 to 1,335 in 2022, nearly a tenfold increase. Government subsidies and deep tech-focused venture capital funds, such as those affiliated with leading universities, have been instrumental in supporting these startups. Examples include Ookuma Diamond Device, which manufactures diamond semiconductors, and Logomix, a synthetic biology platform leveraging advanced genome editing technology

What government benefits are startup companies in Japan receiving?

Japan’s government has taken proactive steps to foster startup growth through a range of incentives, including tax deductions, grants, and additional benefits intended to alleviate the financial burden on new businesses. Among these are several corporate tax incentives, specifically those aimed at small and medium-sized enterprises (SMEs). These incentives include a reduced corporate tax rate and tax credits for research and development endeavors.

Every prefecture in Japan may also provide various tax incentives to attract businesses. Comprehensive information about these benefits can be found on the JETRO website. For startups seeking more precise insights into these benefits and how to navigate them, The article Ultimate Guide to an Accountant in Japan can be a valuable resource for understanding the role of accountants in managing these benefits. The article on Tax Reduction: Bad Debts as Accounting Loss gives insights into how bad debts can be used as accounting losses, which can further reduce the tax burden. Additionally, the post on Short-term Prepaid Expenses in Japan provides valuable insights into managing short-term prepaid expenses, another important aspect of financial management for startups in Japan.

The Scaling Your Company website, coupled with the government’s supportive measures, provides a robust environment for startups to grow and thrive in Japan.

Foreigners Owning Businesses in Japan

Japan is an open market that encourages foreign investment, permitting foreigners to own businesses within the country. The national government is actively enhancing the global competitiveness of Japanese startups by internationalizing the startup ecosystem. The procedure of initiating a business as a foreigner in Japan is detailed in the resource written by Tyson Batino. Mercari, for example, was co-founded by Tommy Tomishima, a Japanese entrepreneur who was born and raised in the United States. Mercari has become one of Japan’s unicorn startups with Tomishima relocating back to the United States to expand the operations of Mercari, exemplifying the international reach of Japanese startups. To attract foreign talent, the Japanese government has relaxed visa restrictions and introduced programs tailored for foreign entrepreneurs. In 2018, the “Startup Visa,” a subset of the Business Manager Visa category, was introduced. This visa allows foreign entrepreneurs to stay in Japan for a year to establish their business. This influx of foreign talent not only infuses the Japanese startup scene with new skills and perspectives but also aids in building a global network. For more content like this, check out the podcast hosted by Tyson on Scaling Your Company’s very own podcast hosted by Tyson Batino.

Prefecture Advantages for Startups in Japan

Japan’s diverse prefectures offer unique advantages for startups, influenced by factors like industry focus, local policies, grant availability, tax incentives, talent pool, and cost of living. Okinawa, for example, is establishing its reputation as an Okinawa IT startup hub. The local government offers support measures such as rental assistance for office space, employment subsidies, and capital investment subsidies. Fukuoka, nestled on the island of Kyushu, has been designated a Fukuoka special zone for global startups by the national government. The city offers startup support measures such as relaxed visa regulations for foreign entrepreneurs, tax incentives for newly established companies, and a startup support centre, aptly named Startup Cafe in Fukuoka, which provides consultation services and networking opportunities. Osaka has emerged as a hotspot for biotech and healthcare startups in Osaka, thanks to its strength in the medical field. The city’s lower cost of living compared to Tokyo makes it an attractive alternative for startups. The outlook of the startup industry in Kobe can be found in Startups in Kobe with Yoshi Nishikawa. 

Tokyo, Japan’s bustling capital and the largest city, fuels the Tokyo startup ecosystem with a vast pool of talent, a multitude of venture capital firms, and a dense concentration of corporations for potential partnerships. Japan’s startup ecosystem is rich and diverse, with each city, such as Shibuya offering its unique opportunities and challenges for startups. A deep understanding of these nuances is crucial for any entrepreneur planning to set up a business in Japan, and resources like our podcast series provide invaluable insights into these different startup scenes.

For instance, Sapporo offers a vibrant startup environment, with Miho Tanaka discussing the available benefits and support for new business owners in the podcast episode, Startups in Sapporo with Miho Tanaka. She shares insights into government grants and loans for entrepreneurs, making it a must-listen for those considering this city for their startup. In the south, Nagoya is also making its mark in the startup ecosystem. In the podcast Startups in Aichi and Nagoya with Satoru & Akihiro, the duo discusses the startup scene in Nagoya, making it a useful resource for entrepreneurs eyeing this industrious city.

Osaka has become a hotspot for biotech and healthcare startups, thanks to its strength in the medical field and lower cost of living compared to Tokyo. Tokyo itself fuels the startup ecosystem with a vast pool of talent, venture capital firms, and a dense concentration of corporations for potential partnerships. Adjacent to Tokyo, Kanagawa benefits from its prowess in the tech and manufacturing sectors, hosting comprehensive startup support programs.

These are just a handful of examples, with many other prefectures in Japan also offering a multitude of advantages for startups. The optimal location will depend on a startup’s unique needs, such as its business nature, target market, and necessary resources. As the startup scene in Japan continues to grow and evolve, resources like these are invaluable for anyone looking to understand the lay of the land and the key to succeeding in Japan’s dynamic startup ecosystem.

These are merely a handful of examples. Many other prefectures in Japan also offer a multitude of advantages for startups. The optimal location will depend on a startup’s unique needs, such as its business nature, target market, and necessary resources. For more tips and strategies on scaling a startup, interested readers can refer to resources like contacting Scaling Your Company.

Final Thoughts

Japan presents an increasingly vibrant landscape for startups, particularly in areas like technology, healthcare, renewable energy, and more. The government plays a crucial role in this ecosystem, actively nurturing it through funding for research and development, bridging academic research and commercial enterprise, and fostering entrepreneurship education. There are robust support structures in place, such as the New Energy and Industrial Technology Development Organization (NEDO), the Feed-in Tariff scheme (FiT), METI’s Startup Program, and the Japan Green Innovation Fund, providing a strong launchpad for startups, especially those in the renewable energy sector. Japan’s commitments to the United Nations Sustainable Development Goals and the Paris Agreement on climate change further promise growth in green and sustainable technologies.

Despite these challenges, Japanese startups are making strides across numerous industries, powered by cultural shifts, government initiatives, and a growing pool of venture capital. As Japan continues to cultivate a conducive environment for startups, the entrepreneurial scene is expected to become even more dynamic and vibrant in the coming years.

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