Why Does Japan Have So Few Startups?
7 reasons why it’s difficult to build a startup in Japan
Every day brings news of another Silicon Valley startup acquired for a billion dollars, making their founders unimaginably wealthy while expanding the economy and improving the lives of users.
Much of our daily activities revolves around current or former tech startups — Google, Amazon, Twitter, and let’s not forget Medium itself. Our Covid vaccines come from Moderna, and our cars from Tesla.
While Silicon Valley in California is the epicenter of the startup revolution, the rest of the world is catching up. The startup buzz is growing louder everywhere in the world. Everywhere except Japan.
Of the 1170 unicorns (successful startups valued at over $1 billion) listed by CB Insights, 644 of them — a little more than half — are based in the US. China comes in second with 302 and India third with 108.
Japan? A total of 6!
That’s less than 1% of the startup successes in the US. The world’s third largest economy is tied with tiny Switzerland in 19th place for successful startup creation.
Japan has fewer successful startups than Mexico (8), Indonesia (12) and Brazil (16). South Korea, with less than half the population of Japan, has 16. Yikes! What’s wrong here?
Why Aren’t There More Startups in Japan?
It’s not a question of money. Japanese corporations are active venture investors. But big Japanese companies open offices in Silicon Valley instead of Tokyo to invest in startups.
And it’s not a matter of not wanting startups, either. Local governments are falling over each other to become the Shirikon Tani of Japan, offering startups funding, office space, and special visas for founders.
There’s no shortage of accelerators to help budding startups either, with Plug and Play in Tokyo, Osaka, and Kyoto, the Startup Hub in Kobe, and Google for Startups, among others.
But most of the startups I’ve seen in Japan are either local offices of startups based elsewhere looking to expand into the Japanese market, or small business offering local services instead of disrupting a staid industry with fresh, innovative ideas.
There has to be a reason Japan excels at building world-beating large enterprises like Toyota, Nintendo, Shiseido, and Suntory, yet is unable to foster the growth of innovative startups.
The answer, of course, is culture. Where Japanese culture excels at collaboration, craftsmanship, and unrivaled quality, the flipside is a deep-seated aversion to moving fast, making mistakes and breaking things.
In Silicon Valley, if you have a great idea, you quit your job, gather money from friends and family, and create a prototype. Then you go to angel investors and venture capitalists to get funding to build the business.
What most people outside the startup world don’t realize is that venture investors aren’t looking for good, profitable businesses. If you’re building a solid small business to do consulting or open a shop or two, or even building a product for a niche audience, that’s great. But you’ll have to fund it yourself or get a bank loan. Venture investors are looking to invest in rocket ships that are shooting for the moon. It’s go big or go home in Silicon Valley. More than 90% will explode on launch and crash back to earth. But the few successes are so spectacular to make up for all the failures.
Japan’s staid incrementalism is the opposite of the high risk, high reward culture of Silicon Valley. Japan builds the highest quality cars and runs the cleanest cleanrooms, but struggles to create innovative new products that expand the economy.
Can this change? Absolutely. But the underlying causes of the dearth of startups are both intricately intertwined with what makes large manufacturing businesses so successful and deeply seated in aspects of culture that make Japan a safe and comfortable place to live.
Impediments to Building Startups in Japan
These are the 7 key roadblocks I’ve identified to building successful startups in Japan.
- Inflexible Job Market
While the lifetime employment system in Japan is changing, the average employee still stays at their company for 12 years (15 years for men at large companies) compared to 4.3 years in the US. Career paths are generally based on seniority in the company rather than experience or skill, making it difficult to quit a job to join a startup, and if it doesn’t work out, restart a career in the corporate workforce.
2. Conservative Buyers
In the US, if you have a better product that saves money, customers will quickly switch, even if the product still has a few bugs and lacks documentation. Japanese companies prefer to stick forever with the same suppliers they know and trust, and won’t accept anything but perfection. Evaluation of new products goes on forever, problematic for startups that need revenue quickly.
3. Intolerance of Failure
In Japan, if your business fails, your life is ruined. You’re labeled a failure forever. That makes it difficult to take risks. In Silicon Valley, failure is a start. If your first startup fails, you build the next one. If that fails, you build your third. Instead being penalizing failure, every failure is considered a learning experience to pave the way for success.
4. Lack of Corporate Acquisitions
In Silicon Valley, if your startup is growing quickly, an industry giant will acquire the business for a huge sum of money. In fact, many large corporations have given up developing their own new products and instead buy up startups once the product is proven.
Japanese corporations rarely acquire startups, preferring to develop new products in-house. With no acquisitions, there is no payout to investors, and no reason to invest in startups.
A public listing on the stock market is the other way to turn an investment in a startup into a financial return. However, with the Nikkei remaining moribund for 35 years during which time the S&P grew 14x, public stock listings are not an easy path to financial returns in Japan.
5. Community and Social Harmony Over Wealth
In Silicon Valley, it seems everyone’s life mission is to become incredibly wealthy. That’s obviously not all good, and leads to considerable fraud while exacerbating social ills, but it does create a dynamic atmosphere where everyone is striving for success.
In Japan, harmony and social cohesion are prioritized over individual success. Ostentatious displays of wealth are frowned upon and overly ambitious people are shunned. It’s always hard to be a renegade, but nearly impossible in Japan.
6. Rote Learning Education System
The average Japanese student graduates from high school with an education far better than most Americans. However, the Japanese education system is famously rigid, with an emphasis on rote memorization. The American system which fails far too many of its students, places emphasis on the type of creativity needed to become the out of the box thinkers who can invent new products.
7. Immigration
In Silicon Valley, 55% of successful startups are founded by immigrants. Some come for university, others to escape poverty and war, some are recruited to join a startup in Silicon Valley and stay to create their own.
With language issues, visa complications, and the insularity of Japanese society, Japan is not an easy place for immigrants to move and build a startup.
How to Foster Innovation in Japan
Patchwork solutions to deep-rooted cultural issues will not make much difference. Immigration visas won’t help build startups if customers won’t buy the products. Investors won’t fund startups unless the companies have a good chance of being acquired for an outrageous sum. Employees will be loath to join risky startups if they can’t get another job when it fails.
Does that mean it’s impossible to create a startup culture in Japan? That Japan can never change? Of course not.
Japan has a long history of fast and radical change once there’s a consensus that change is needed. With a falling population and a declining standard of living, that consensus may be coming soon.
Those big, world-class companies like Toyota and Sony were once startups themselves, with iconic founders who pushed the boundaries of technology to change the world. It can be done again.
The Silicon Valley model is hardly perfect, too. The huge disparities of wealth, the tumult of job churn and layoffs, the extreme ups and downs of the economy as people’s lives get upended by changes in the stock market make life difficult for many.
We laud the 10% of startups that succeed and call the founders heroes. We never hear about the 90% that fail and people return to regular jobs that pay a decent salary with benefits.
As with many things comparing American and Japan, Silicon Valley startup culture is on one extreme and Japanese corporate culture on the other. There is much to admire in both worlds, but downsides, too. Large Japanese companies make the most reliable, dependable, highest quality products but move far too slowly. That’s a good thing for building a car, not so much for a social media app.
Is there a middle ground that can foster innovation and reward success without destroying social cohesion? That can encourage software companies to move fast and break things while still celebrating the beauty and perfection of skilled craftsman? A hybrid culture where Japan can start making not only the best quality products in the world, but the most original ones, too. I hope so.
My mystery novel, To Kill a Unicorn, is about Japanese and Japanese-Americans in Silicon Valley. It highlights the social ills of trading morality for riches when the founders of a startup are willing to murder people in their quest for a trillion dollars. A crazy ride with teleporters, elephants, and a lot of sake.
