07 6 / 2012
While I couldn’t speak for others, the packed schedule in our MBA module contributed to a significant disruption to my routine. Mainly because of the distractions that followed toward the end of the day. Not that I didn’t welcome the fun but after two weeks of burning the midnight oil and rolling until the wee hours, it started to take a toll on me. I missed getting up early (usually up around 5.30 to 6.00am everyday), went to the gym for a swim, brew my espresso for breakfast then ready to tackle the day feeling energized. In other word I conceded defeat. Apparently there is such a thing as too much fun.
Okay, where am I going with this? Well, because I felt constantly exhausted, waking up in the morning and dragging myself to class was quite an ordeal. Which then led to my missing the morning session on Japan as Venturesome Economy by Michael Korver. Get the picture here? However, not all was lost. As it happened my lunch appointment with an entrepreneur friend who’s been in Japan for two decades sort of substitute for missing the session.
Does Japan has what it takes to foster entrepreneurship spirit? My initial gut reaction to the question was to say,“I don’t think so”. This reaction stem from the fact that Japanese has a very risk averse culture. And thanks to my years of living in Japan I had firsthand experience on how such culture contributed to my rather negative view of Japan, but that’s another story for another day.
So what kind of challenges do entrepreneurs face when launching startups in Japan? For one, working for big and notable firms in Japan still hold prestigious social value. With it comes the support of the big network of business colleagues and being in the circle. Once you’re out of ‘the circle’, you’re out. Severing social ties can’t be more obvious than quitting your job and be instantly alienated. It is through the company that most Japanese identify themselves with.
Secondly, there’s almost virtually no VC or angel investors who would back a startup at early stage. Most of them would demand at least two years of successful track record in the market before dipping into their pocket to invest. This mean a startup should be able to show a strong growth in users base and revenues with a likely path to profit in the following 1-2 years. So forget about ever getting seed money from investors who’d dig your ideas over your elevator pitch.
But is this risk aversion culture still relevant today? Apparently so, at least according to few entrepreneurs friends that I had a chance to chat with. Giving up your (presumably high profile) job to start your own still not widely accepted, at least not socially. Never mind the risk-averse mentality of most lending financial institutions — most banks in Japan will not lend money to startups unless they already have substantial capital to begin with— the social stigma that comes with starting your own thing is high enough barrier to halt any entrepreneurship spirit to ever flourish.
On top of that, there are few other factors that also make it challenging to launch a startup in Japan:
- First and foremost is the lack of exit strategy — M&A and IPO activity for internet startups are very low, which bring down valuations for companies.
- The sluggish domestic market especially in the past three decades, is not big and attractive enough for startup to be able to capitalize in a big way.
- Unique culture — Japanese business culture really emphasizes ‘process’ rather than ‘time’ or ‘efficiency’. This can cause some frustrations when looking for partnership or investments. The anonymous and mobile-driven internet culture also contributed to unexpected user behavior.
- Tolerance to risk - Japan has an extremely risk-averse culture. Not only the incorporator of the company is liable for damage and loss, but thanks to the risk-averse mentality it makes it even harder to recruit talents.
However the good news is there’s been some improvement in Japan startup landscape recently, albeit very slowly, especially in the past 2-3 years. Yes, there are still not many local VC or angel investors who would eagerly jump to finance your startup based on your alpha build, but at least the Japanese government has relaxed the regulation to start a company. The 2006 reform making it much cheaper to incorporate a startup (about ¥240,000), and some even aim to give grant to entrepreneurs.
Until then bootstrapping is still the best option for entrepreneurs in Japan to finance their startup at early stage. And it usually done by holding down a second job, like what my friend did in his first 13 years of his Gaijin life in Tokyo. This is one of the reasons why most founders on average seem to be about 20 years older than their Silicon Valley counterparts. Other than that, money borrowed from friends or relatives would also do the trick. But if you’re really lucky, you might meet someone like him to jumpstart your thing.
Note: Information was drawn over coffee and grappa with entrepreneurs friends in Japan. Many thanks to Nicolas Modrzyk, Chris Demetrakos and Timo Meyer.