Japan is an extremely entrepreneurial society, with a long history of individuals creating businesses and striking out on their own.

Despite this history, the phenomenon of ‘Startup entrepreneurship’ is not yet the engine of economic growth and innovation that Japan needs; With global change and pace of innovation ever accelerating, Japan must evolve its to meet the challenges of the new global technology marketplace. While Startups are becoming more common, entrepreneurship in Japan is most commonly found in the form of local storefront business or ‘hako mono’ (lit. ‘box goods’) companies, selling physical products via traditional distribution networks. While these businesses are an important part of the business landscape, they are but a part of the picture for entrepreneurship. By many measures, startups are the next big thing for business in Japan. At the center of this change is an energetic and growing population of technology executives, students, and entrepreneurs that are helping Japan to catch up with the likes of Silicon Valley and Tel Aviv in the creation of innovative new technology and service-based companies.

When we talk about ‘Startup’ entrepreneurship, we are describing the Silicon Valley phenomenon of a new kind of business offering – developing as-yet-unknown products and services. When creating business models with so many unknowns contained within, we begin to define the process as true ‘Innovation.’ As desirable as innovation is, it is extremely hard for it to occur at scale in any economy. Innovation is an emergent property that arises only out of the wider social and economic environment — and only when the right combination of resources and behaviors are present.

Researchers and economists have spent a great deal of time figuring out what lies beneath the world’s truly prosperous innovation ecosystems (with startups being one of the most obvious fruits on the tree when innovation works.) Looking at Japan at present what seems to be happening? A look at the details shows us how the ingredients of Innovation are coming together in Japan today: chief among these are availability of talent and capital, and the prevailing social norms.

Japan’s Challenges and Opportunities:

Capital: Is the money to start a company available? Money for startups comes in three primary flavors:
Family/Personal Money – Where many startups get going is with savings on hand. Personal financing is just as easy or hard in Japan as in other first-world economies with one exception: Japanese families are still generally dubious skepticism for startup risk-taking.

Seed Funding–Seed funding is more widely available in 2015 than it has ever been, but it is still a challenge. Such funding is concentrated in Tokyo, so startups attempting to get something going in other parts of Japan will likely need to relocate themselves to the capital to get noticed. Even in Tokyo, there are relatively few activist investors or angels to work with, so bandwidth and availability are constrained. This does match, however to a relatively small number of startups competing for each available angel-funded dollar. Across a series of interviews over the last month, the answer to the question “Can a qualified group of individuals with a good idea get seed capital in Japan?” the answer varies from ‘absolutely’ to a qualified yes.

Venture Capital – There is also a limited though growing number of sophisticated investors in the venture space. Such firms do exist and are looking for opportunities to invest in formal funding rounds for startups that have emerged from concept to delivery with scalable business models. While the number of VCs and dollars are increasing, there are still relatively few funds at work.
Talent  – This is an area where Japan excels – as there is a lot of talent available in the functional areas of engineering, design, marketing, etc. That being said, at present there are relatively few individuals with extensive startup entrepreneur experience (the chicken and egg dilemma) so startups are highly dependent upon mentors and partners for guidance.

Social:  This is the most important and challenging of the ingredients for startup entrepreneurship, and where most would-be startup ecosystems fail to reach the tipping point and become true generators of large-scale innovative change. The social aspect of innovation ecosystems deals with people’s assumptions about how to interact with each other and with new ideas – critical to startup success.  The social aspects of Startups are the most critical remaining element in the Startup picture for Japan, a subject which we will discuss this in more detail in the near future.

The Startup Phenomenon in Japan has come a long way, and still has a long way to go to begin to provide the economic engine that innovation brings to other more startup-tolerant societies. Most of that journey will come in the form of greater tolerance and understanding of the social norms that allow individuals to take the risks required to truly innovate new products and services. I am looking forward to exploring that area in more detail in my next article on Japan.

Until next time, remember –the Next Step is Always the Most Important One!

by Kevin Ready

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