Japan’s venture capital (VC) industry is experiencing robust growth, driven by several important structural transformations. Independent VCs have taken center stage, the mark of a maturing startup ecosystem. Positive feedback loops necessary for VC growth and maturation have been firmly established: more VC investments fueling greater startup successes, leading to greater VC returns, which attracts more capital and talent to VCs, thereby enabling even more investment and more successful startups. Japan’s Government Pension Investment Fund (GPIF) has begun investing into venture capital as an asset class, which further accelerates the maturation and legitimacy of Japan’s VC industry.
But ultimately, getting VC right is just one of multiple components Japan will need to assure a robust and mature startup ecosystem. These other ecosystem components—such as human capital fluidity, large firm-startup symbiosis, robust government-industry-university ties, and ecosystem support businesses—will need to develop as well. The good news for Japan is that these components are all developing, although the process has taken a long time because of how different Japan’s predominant economic model is from a startup ecosystem. For the government of Prime Minister Kishida Fumio, which has made fostering startup a major priority of its economic philosophy, policies designed to accelerate Japan’s startup ecosystem must therefore aim not only to further develop the VC industry but also to target these other components. That is the challenge and opportunity Japan now faces.
Growth of Japan’s VC Investing
The growth of VC investing in Japan over the past decade has been dramatic. It grew fifteenfold in less than a decade, from a low point in 2012 at 21.9 billion yen to 329 billion yen in 2021 (see figure 1). While there was a drop in the initial pandemic year of 2020, and there is likely to be another in 2022 following a decrease in global VC investing, Japan’s VC industry will not likely revert back to its 2012 levels because important structural transformations have occurred as Japan’s VC industry matured.
In terms of international comparison, as noted in a previous piece, the total amount of VC invested in Japan is small compared to that of Silicon Valley or the United States, but it is quite typical of other G7 countries.
The Rise of Independent VCs and Why They are Critical for Startup Ecosystems
A critical structural transformation of Japan’s VC industry has been the rise of independent VCs. Table 1 below shows the rise of independent VCs as leaders by the amounts invested into startups. Until 2009, finance-related VCs had led in investment amounts, but independent VC investments grew rapidly thereafter.
|Table 1: Total Amounts Invested According to VC Types|
|(Billions of yen)||2008||2009||2010||2011||2012||2013||2014||2015||2016||2017||2018||2019||2020|
|Source: “Japan Startup Funding 2020,” Initial Enterprise, February 25, 2021, https://initial.inc/articles/japan-startup-funding-2020-en.|
While table 1 above shows which VCs were doing the investing into startups, table 2 below shows the type of VCs that received investments to create new funds. In almost every year since 2013, investors placed their money into independent VC funds.
|Table 2: Proportion of Investments into New VC Funds According to Receiving VC Type (% of total)|
|Source: “Japan Startup Funding 2020,” Initial Enterprise, February 25, 2021, https://initial.inc/articles/japan-startup-funding-2020-en|
Independent VC funds are now clearly leading Japan’s VC industry, a critical and important milestone of development for its startup ecosystem. So why are independent VC funds so important for a maturing startup ecosystem? Independent funds are the dominant form of VC in Silicon Valley, and their financial incentives are better aligned than those of other forms, such as those owned and operated by financial institutions and corporations. The next piece in this series will provide a deeper explanation of VC, but several critical differences between independent VCs and traditional financial institutions should be highlighted.
Independent VCs, unlike employees of major corporations’ investment arms or subsidiaries, usually have direct financial stakes in the performance of their portfolios. If the VC firm produces extremely high returns on its investments into startups, not only does the firm enjoy vast potential upsides (unlike bank loans, in which the maximum return is the principal and interest), but individual partners in VC firms also generally enjoy certain percentages of those returns. Highly successful VC firms produce high returns for the investors, and successful individual VCs can become billionaires. For example, John Doerr, chairman of one of the top Silicon Valley VC firms, Kleiner Perkins, donated $1.1 billion to Stanford University in May 2022 to create a new climate and sustainability school.
Successful individuals within highly successful VC firms develop close-knit interpersonal networks, forming an “inner circle” of investors who have access to information and promising startups known to one another. They are often credited with having developed specialized skills to identify and cultivate successful high-growth startups as they build their careers on a series of “home run” investments. Independent VCs usually structure themselves as limited partnerships rather than corporations or corporate subsidies. They dominated the U.S. VC industry from the 1980s onward; by 1984, independent VCs accounted for over 70 percent of the funds allocated to the VC industry, totaling over $16 billion.
In contrast to independent VCs are subsidiaries or investment arms of traditional financial institutions or large corporations, also known as corporate venture capital (CVC). CVCs are very difficult to set up and incentivize in ways that maximize their performance as VCs. CVC investors are often salaried employees of the firm, rotating through from other assignments. While these employees do not risk their individual wealth in investments into startups, they also do not get to enjoy dramatic gains from successful startups. If they are long-term employees of the firm, like the typical large Japanese corporate employee, then they rotate through a VC investing assignment from somewhere else, and move on to another assignment after a comparatively short period—typically three years. This does not allow them to accumulate interpersonal networks or gain experience and know-how in investing into unproven startups. Moreover, since the duration of typical VC fund investments is around ten years, employees on three-year rotations cannot see, and do not have stakes in, the eventual success of investments they seeded. Their successors may not share the same beliefs on what would be a successful investment, leading to the withdrawal of some investments partway through the fund as employees rotate. If the corporation brings in a person who has previous VC investing experience, it can become difficult to retain them if their investment performance is good, since they could set up their own independent VC fund once they establish a strong track record and interpersonal networks. These are some of the reasons independent VCs are generally considered a better fit for VC investing.
It took time for independent VCs to develop in Japan because of its postwar economic model centered around large industrial groups anchored in “main bank” financial institutions. A subsequent piece will provide more detail, but for the past half century, Japan’s top talent in the financial industries was locked into big, prestigious banks and their subsidiaries. Given that most of Japan’s postwar financial system was bank-centered, the rise of independent VCs was an evolution forward in its VC industry, and therefore its startup ecosystem as a whole.
Meet Some Independent VCs
What do some of Japan’s current major independent VCs look like up close? Brief descriptions of some of the most prominent VC firms and the career paths of their founders provide a valuable vantage into how Japan’s startup ecosystem is rapidly maturing.
Some of Japan’s largest and most notable VC funds are listed below. Japan’s oldest VC, JAFCO, differs from other VCs in that it is organized as a listed corporation, but JAFCO has been a source of talent for Japan’s VC industry and startup ecosystem.
World Innovation Lab (WiL) was cofounded by Isayama Gen, born in the early 1970s, who started his career following a classic elite Japanese career path. He graduated from the University of Tokyo’s faculty of law in the late 1990s and joined the Industrial Bank of Japan (now part of Mizuho Financial Group) straight out of college, as is typical of lifetime employment arrangements. The bank sent him to the United States to obtain an MBA at Stanford University, graduating in 2003. Isayama’s father was a prominent career official at the Ministry of International Trade and Industry. Having experienced Silicon Valley firsthand, Isayama left the bank to become a partner at the Silicon Valley venture capital firm DCM Ventures.
In 2013, Isayama partnered with Matsumoto Masataka and Saijo Shinichi to found WiL with offices in both Palo Alto, California (at the heart of Silicon Valley and right across from Stanford University), and Tokyo. Their initial fund was $300 million, drawing from large Japanese companies including Nissan, Sony, ANA, Mizuho Financial Group, Daiwa Securities Group, Seven Bank, Hakuhodo, JVC Kenwood, and others. While WiL invests in both Silicon Valley and Japanese startups, its name indicates its focus beyond investment activities. It aims to actively facilitate innovation within its large-company investors through innovation boot camps, business carve-outs, and hosting employees in its Silicon Valley office to pursue collaborations with Silicon Valley startups, gather information about the latest developments, and cultivate interpersonal networks. In 2018, WiL raised a second fund of just over $400 million, and in mid-2022, it raised a third fund of $1 billion to bring its total assets under management to approximately $1.9 billion.
WiL has invested into both Japanese and Silicon Valley startups. Some of its major Japanese exits (“exits” for VCs are typically IPOs or acquisitions in which returns on their investments are realized) were pathbreaking for Japan’s startup ecosystem. The 2018 IPO of Japan’s e-commerce startup Mercari was the largest Japanese startup IPO on the Tokyo Stock Exchange (TSE) Mothers market, Japan’s primary small market capitalization market. The acquisition of Soracom, an Internet of Things company whose intellectual property was spun out of Japan’s incumbent telecommunications carrier, NTT Docomo, was one of Japan’s largest acquisitions of a startup. An example of WiL’s successful Silicon Valley startup investment exits is the 2020 IPO of Silicon Valley company investment Asana, a business process software service provider, on the New York Stock Exchange.
Another independent VC, Globis Capital Partners (GCP), was founded by Hori Yoshito, a University of Kyoto graduate born in the early 1960s, who joined Sumitomo Trading Company out of college. Sumitomo supported Hori’s MBA at Harvard Business School when he was twenty-seven. In 1992, shortly after returning to Japan at age thirty, Hori left Sumitomo to establish Globis University, a graduate school providing MBA-like training. Globis received certification by the education ministry in 2006. In 1996, Hori founded GCP as a hands-on VC firm to support various portfolio companies. GCP raised eight funds by mid-2022. Its most recent fund had over $370 million committed, and GCP was set to receive investments from GPIF as the latter began VC investing for the first time. Some of the notable Globis portfolio companies include Mercari (introduced above), mobile SNS and gaming platform Gree, news app SmartNews, online asset management service Money Design, and drone-as-a-service company Sensyn Robotics.
Beyond investments, Hori became active in fostering Japan’s startup community. A series of events and gatherings under the umbrella G1 Institute, a nonprofit aimed at providing a platform for government, business, academia, and notable leaders with societal impact to exchange ideas for the betterment of Japan. G1 aimed to become Japan’s Davos summit, with annual conferences that invited prominent political, government, business, and societal leaders. The G1 Next Generation summit, limited to participants under forty years old, entailed annual weekend retreats for groups of entrepreneurs, budding political leaders, promising government officials, and other social movers and shakers. Many of the entrepreneurs in the G1 community had received investments from GCP. The G1 Ventures summit is focused on entrepreneurs with participation from government, large firms, academia, and other notable people with social impact. Annual Globis Assembly for Synergy, Knowledge and Ambition summits invite Globis MBA students and alumni from all over Japan to engage in panels and small sessions led by entrepreneurs, including awards to early-stage entrepreneurs and large-firm employees who had an impact.
Among Japan’s best-known seed-stage VC firms is Incubate Fund, established in 2010 by Yusuke Murata, who was featured in the “Midas List” of successful venture capitalists in Forbes Japan in 2017. Murata, a graduate of the Rikkyo University department of economics, began his career at an enterprise software vendor developing online service software for financial institutions. In 2003, he joined NIF Ventures (now Daiwa Corporate Investment) to manage funds for internet and mobile-related companies, eventually managing a 7-billion-yen portfolio.
Incubate Fund raised a total of approximately $470 million by mid-2022, with eleven funds, over 270 investments, and thirty-eight exits. Its investors include companies such as Tencent, Yahoo Japan, Sega Sammy, Tokyo Broadcasting System, INCJ, Sumitomo Mitsui Banking, Mistletoe, Mixi, and the Development Bank of Japan. Incubate Fund focuses primarily on seed investments and has backed IPOs by companies including mobile app production and publishing startup Gumi, online game publishing site Aeria, community website for smartphone game strategy GameWith Inc., and wedding hall selection review site Minnano Wedding Co. Its portfolio companies also include fast-growing startups such as bitFlyer (cryptocurrency exchange) and Drivemode (automobile app), which was purchased by Honda.
An increasing number of independent Japanese VCs are partnering with universities, with a focus on commercializing promising technologies. In May 2022, Incubate Fund partnered with the Okinawa Institute of Science and Technology (OIST), a new university established in 2011 that ranked first among Japanese universities and in the global top ten universities in the Nature Index measuring the highest-quality scientific output, to create a $40 million fund focused on commercializing leading-edge technology startups from OIST. Incubate Fund also runs a seed acceleration program called the “Incubate Camp.”
VCs with Dual Presences in Silicon Valley and Japan
Some independent VCs are specialized in connecting Silicon Valley and Japan. The largest is WiL, introduced above, but another prominent one is DNX Ventures, founded in 2011, which operates in both Silicon Valley and Japan focusing on early-stage B2B startups. It began as Draper Nexus, part of a network of smaller VC firms around Draper Associates, one of Silicon Valley’s established VC firms. Managing partner Mitch Kitamura had been a Japanese government employee (at the Japan External Trade Organization) and worked for investment company Japan Asia Investment Company. Another managing partner, Rio Maeda, was assigned to Sumitomo Corporation’s VC fund in Silicon Valley, Presidio Ventures, before joining Silicon Valley VC firm Globespan. DNX’s initial fund was approximately $41 million, followed by $128 million and $152 million funds in 2015 and 2019 on the U.S. side and approximately $84 million and $173 million funds in Japan in 2015 and 2018. In 2020, DNX closed a $315 million fund, bringing its assets under management to over $560 million. Its limited partners (LPs) across various funds include major Japanese firms such as Canon, Hitachi Solutions, IHI Corporation, Komatsu, Tokio Marine Holdings, and others. The investment areas of DNX Ventures include cybersecurity (Cylance, a DNX portfolio cybersecurity company in Silicon Valley, was acquired by Blackberry in 2019), software as a service, fintech, retail tech, and other areas.
Geodesic Capital was cofounded by former U.S. ambassador to Japan John Roos, who had previously been CEO of Wilson Sonsini Goodrich & Rosati, a prominent Silicon Valley law firm, and Ashvin Bachireddy, previously at Silicon Valley VC firm Andreessen Horowitz. Geodesic raised two funds, the first in 2016 with $335 million and a supplemental one in 2018. Its LPs include several Mitsubishi Group companies, including Mitsubishi Corporation, Mitsubishi Heavy Industries, and Bank of Tokyo-Mitsubishi UFJ, as well as other major companies such as Sumitomo Mitsui Banking Corporation, Sompo Japan, and Development Bank of Japan. Geodesic invests into Silicon Valley startups, with investments that have led to successful exits including AirBnB, automated driving startup Aurora, Duo, Instart Logic (now Instart), Snapchat, Uber, and others. Geodesic’s Japan presence focuses on assisting Silicon Valley companies entering the Japanese market.
Alumni Creating their Own Funds
Japan’s oldest VC fund is JAFCO, launched in 1982, although it takes the form of a listed corporation—atypical of VC funds, which are usually limited liability partnerships. As a listed corporation, JAFCO investors are not personally incentivized like independent VCs, whose personal fortunes rest upon their portfolio performance. However, JAFCO has contributed to the maturation of Japan’s VC industry not only through its long history of investing into startups, but also by producing numerous independent VCs who left JAFCO to start their own funds.
JAFCO’s first partnership fund was launched in 1982, began operations in Silicon Valley in 1984, and listed itself on the TSE First Section—Japan’s primary global stock exchange—in 2001. It established over one hundred investment funds with investors comprising financial institutions, pension funds, and large corporations, managing over $9 billion over its lifespan. By mid-2022, the fund had invested in over 4,125 companies total, two-thirds of which were based in Japan, with over 1,020 IPOs of its portfolio companies. Some of JAFCO’s notable Japanese investments include Money Forward (fintech) and Cyberdyne (robotics); JAFCO also had small stakes in Silicon Valley companies such as Twitter and Nvidia.
Numerous JAFCO alumni left to begin their own independent VC funds that became prominent players in Japan’s VC industry. For example, GMO Venture Partners was founded in 2005 by Muramatsu Ryu, who had been at JAFCO in charge of business development and Japanese connections for its U.S.-based portfolio companies. He oversaw JAFCO’s successful investment in an early Japanese internet service provider (ISP), GMO Internet, which became the first Japanese ISP to go public when it was listed on the TSE in 1999. Muramatsu went on to found his own startup focused on payment transactions; this eventually became GMO Payment Gateway Inc., which was listed on the TSE in 2005. In the same year, Muramatsu founded GMO Venture Partners.
By late 2021, GMO Venture Partners had established six funds, with around $170 million under management. Its 180 portfolio companies included eighteen that had gone public, including Money Forward, Mercari, and Raksul. It also invested internationally, mostly in Asia, with noted investments including Qihoo 360 Technology, China’s fourth-largest internet company, which had a billion-dollar IPO on the NYSE in 2011. GMO has raised funds from a variety of large corporate LPs including Sumitomo Mitsui Financial Group as well as Japan’s Small and Medium Enterprise Agency and other GMO Group companies.
Another prominent JAFCO alumnus, Sugaya Tsunesaburo, is representative director and partner at Miyako Capital, affiliated with Kyoto University. He joined JAFCO in 1999, establishing JAFCO America in 2003 and serving as its president and CEO, establishing six funds. In 2013, he was named one of the “top 100 venture partners on the planet” by AlwaysOn, a business media and networking company in Silicon Valley. Sugaya was the first Japanese to appear on the list. In 2015, Sugaya left JAFCO to join Miyako Capital as a partner while continuing to reside in Silicon Valley. Prior to joining JAFCO, Sugaya spent twelve years at Motorola Japan, where he held various senior management roles. Somewhat unusually, Sugaya’s bachelor’s degree is from Japan’s National Defense Academy, where he studied computer science and electrical engineering. Miyako Capital raised two funds—over $50 million in 2015 and over $106 million in 2019; it has offices in Kyoto, Tokyo, and Silicon Valley.
Entrepreneurs Becoming VCs
Japan is now seeing some successful entrepreneurs joining or founding VCs after leaving their companies—a common pattern in Silicon Valley but difficult in Japan until the startup ecosystem began to mature to the point that company exits and independent VC funds became increasingly common.
For example, Daisuke Iwase, a successful entrepreneur, became a managing partner of Spiral Capital, an independent VC based in Tokyo, in 2020. In 2006, Iwase cofounded an internet-based life insurance firm, Lifenet: the first independent life insurance firm founded in Japan in the postwar period. It grew to 10,000 subscribers by 2009, 50,000 by 2010, 100,000 by 2011, and was listed on the Mothers market in 2012, boasting transparency and low fees with an exclusively online presence. Iwase graduated from Tokyo University, worked for a consulting firm, received a Harvard MBA, and worked for a VC firm before founding Lifenet in partnership with a senior manager from Nippon Life, Japan’s leading life insurer. Iwase left Lifenet a few years after its IPO, joining the international insurance firm AIA in Hong Kong before becoming a managing partner of Spiral Capital.
Another such example, Yusuke Asakura, was a University of Tokyo graduate who started his own company, then worked for McKinsey before moving back to the company he had started, Naked Technologies. The company provided middleware for Japanese internet-enabled mobile phones in the era predating Apple and Android smartphones. Naked Technologies was purchased by Japan’s social networking service provider Mixi, and Asakura became CEO of Mixi itself. After turning around the company, Asakura left, still in his early thirties, and spent two years in Silicon Valley before returning to Japan. The company he cofounded to assist startups after their IPOs, SignificantInc., raised a 20-billion-yen (approximately $150 million) VC fund in 2019. Significant is focused on later-stage investments to help grow companies that already have initial funding and seek to attain rapid growth.
|Table 3: Select Major Japanese VCs, 2018|
|VC||Year Established||Total Fund Size, Billions of Yen (USD)||Select LPs||Select Investments|
|NVCC||1996||697.2 ($5B)||Kyoto Bank, Shinsei Bank||J-Pharma Co., Yadokari, Orizuru Therapeutics|
|World Innovation Lab||2013||260.4 ($1.9B)||Nissan, Mizuho Financial Group, Daigas, Sony, ANA Holdings, Suzuki, Mori Building Co., INCJ, Japan Investment Corporation||Adara, Asana, Gumi, Inagora, Mercari, Soracom, WISE|
|Global Brain Corporation||1998||205.6 ($1.5B)||KDDI Open Innovation Fund, SONY Financial Ventures, Mitsui Fudosan, Yamato Holdings, Epson, Mitsubishi Electric||Mercari, 5Rocks, Raksul, nanapi, Origami, giftee|
|Globis Capital Partners||1996||109.8 ($801M)||Sumitomo Mitsui Trust Bank, Development Bank of Japan, Daido Life Insurance Company, Nippon Wealth Life Insurance Company||Mercari, VASILY, Uzabase, Kiramex, Minnano Wedding Co., Yappli|
|Incubate Fund||2010||98 ($818.8M)||SME Support Japan (SMRJ), Tokyo Metropolitan Government, Mitsui Sumitomo Banking Corporation, Tencent Holdings, Mistletoe, Mixi||GameWith, Minnano Wedding Co., Medley|
|JAFCO||1973||80 ($548M)||(Listed on TSE First Section)||LOCONDO, Money Forward, Cookbiz, TKP Corporation, Twitter, Avalon Pharmaceuticals, NVIDIA, Chatwork|
|DNX Ventures||2011||73 ($606M)||Komatsu, Mizuho Financial Group, IHI, Canon, Hitachi Solutions, Tokio Marine, Toshiba TEC, JR East||Alp, Hubble, Connected Robotics, Kakehashi, MedUP|
|Mobile Internet Capital||1999||35.2 ($257M)||SMRJ, NTT Docomo, Mizuho Securities||Navitime, Rakumo, Commerce Robotics, MedUP|
|Headline Asia (Formally Infinity Venture Partners)||2008||39 ($285M)||KDDI Corporation, DeNA Co., Mixi, P&A Corporation||Freee, WealthNavi, Groupon Japan, Dolphin, Farfetch, Jimoty|
|B Dash Ventures||2011||11.6 ($85.2M)||NTT Investment Partners, Mitsubishi UFJ Capital, Gree||bitFlyer, Gumi, Gunosy, Iemo, 3 Minute Inc., Connehito|
|Note: For sources, see Crunchbase entries for each company and company websites as of April 2022. Conversions between JPY and USD are calculated in 2022 exchange rates at 1 U.S. dollar = 137 Japanese yen.|
Positive Feedback Loop Established
A positive feedback loop has developed in Japan’s VC industry. As more independent VCs realize substantial returns from their startup portfolios’ IPOs and acquisitions, more large companies become interested in investing into VC funds. As greater capital is committed to VC funds, more experienced entrepreneurs and high-caliber talent join the industry to set up their own VC firms or join existing independent VCs. The growth of VCs allows more startups to be funded, providing more opportunities for entrepreneurs and raising the probability of startups succeeding. The higher probability of startups succeeding leads to higher performance of VCs’ investment portfolios, thereby attracting more investments into VC, and more human capital to VC. This is the positive feedback loop driving the growth of Japan’s VC industry over the past decade.
As shown in the next piece, it took time for this positive feedback loop to become established, especially given the strength and size of Japan’s prevailing financial system, which is centered on large mega-banks and traditional financial markets. However, now that the positive feedback loop is established, with much of Japan’s top talent thriving in the industry, it is no longer a small, peripheral part of Japan’s financial system. While VC is inherently smaller than other financial sectors, Japan’s VC industry now enjoys a position of unprecedented prominence and social legitimacy. The commitment by GPIF to include VC in its portfolio strengthens this legitimacy; VC is now widely recognized as an engine of innovation and growth desperately needed by the Japan of today and tomorrow.
However, as shown earlier in this series, VC is only one of multiple components in a startup ecosystem, each of which depends on the others. Increasing levels of available VC funding or experiencing a maturing VC industry will not dramatically accelerate a startup ecosystem alone. Other ecosystem components to be introduced in later pieces, such as human capital fluidity, large firm–startup symbiosis, robust government-industry-university ties, and ecosystem support businesses need to develop as well. The good news for Japan is that these components are all developing, but the process has necessarily taken a long time. Policies designed to accelerate Japan’s startup ecosystem must therefore aim not only to further develop the VC industry, but to target these other components as well.