Is Japan on the cusp of a startup bubble? An expert panel that took the stage last week at Startup Asia Tokyo, including two successful young entrepreneurs and two established venture capitalists, seemed to unanimously agree that the answer is yes. However, with funding for startups amounting to only a fraction of what’s seen in the US, contradictions abound.
Two domestic startups recently raised rounds which, while big, caused concern among other investors that a bubble might be forming. Between March and June of this year, Gunosy raised US$24 million in dual funding rounds led by Japanese telco KDDI. A month ago today, competing app SmartNews announced a series B round – rumored to be as high as US$36 million – from mobile gaming (and other things) giant Gree.
While those are huge numbers for Japan, Palo Alto-based Flipboard – the app that Gunosy and SmartNews are trying to beat – raised a US$50 million series A and closed a US$100 million series C last December.
Can we really call it a bubble when there are comparatively so few startups raising equally big rounds, the panelists pondered? Maybe it isn’t fair to compare Japan to bigger, better-funded foreign markets in the first place.
“I have no objections that there’s a bubble forming,” said Daisuke Sasaki, CEO and co-founder at accounting SaaS startup freee (and an ex-Googler). “In overseas markets, startups are a huge investment category, but we don’t see so much in that category here in Japan.”
Sasaki, whose company landed US$8 million in April, speculated that Japanese VCs may not be as invested in the ecosystem due to their purely financial backgrounds. “In the US, startup founders become VCs – but Japanese founders stay with their company until retirement.”
Government support
Akio Tanaka, co-founder and managing partner at Infinity Venture Partners – and a freee investor – said that domestic VCs focus on series A in the 100 million to 1 billion yen (US$950,000 to US$9.5 million) range and not much else.
“We don’t see 10 billion yen (US$95 million) valuations in the Japanese market,” he said. “Still, I’m amazed at the amount of the [private VC] funding for startups that I would never invest in are getting huge valuations.”
Tanaka supports the current implementation of prime minister Shinzo Abe’s “third arrow” of deregulation.
“I think government policy should be supporting startups – national policies are becoming more friendly for startup investments,” he added. “If it’s a private VC, I’d question them – but if its a national policy I think that’s good.”
He cautioned that domestic VCs ought not rely too much on the government, as the current wave of deregulation could disappear if Abe is removed from office in the near future. Anyone who follows Japanese politics understands that prime ministers have short shelf lives – Abe, on his second stint after resigning in 2007, became the seventh PM in six years when he re-entered office in 2012.
Conflicting advice
Kensuke Furukawa, founder and CEO at nanapi, saw his lifehacking startup net US$3.3 million back in 2010 – hardly Valley-level money, but big news for the fledgling domestic ecosystem after an especially rough 2009:
“Back then, we were told that we didn’t have common sense and that our valuation was crazy. But nowadays, people tell me we didn’t raise enough. If you’re planning an exit, maybe it’s better to wait if there is indeed a bubble – but some people are still telling us to get more and more funding.”
Shinichi Takamiya, chief strategy officer at Globis Capital Partners – around since 1997 and considered a representative VC in Japan – led the nanapi funding. While many outside observers point to the lack of startups in Japan, he sees the opposite.
“From a macro point of view, there’s too much supply driving valuations up,” Takamiya said. “From that POV, it is a bubble – but what we have now is different than the post-Dot Com web 2.0 bubble. We’re seeing huge seed valuations with no real product.”
He said that startups can raise larger funds by exiting early – a notion that might sound completely insane overseas:
“It’s easy to get on the [Tokyo Stock Exchange’s] Mothers index, much easier than getting on the Nasdaq, and [in Japan] it’s easier to increase your value once you’re listed.”
Bubble or not, one thing is for sure – Japanese startups are attracting more attention on a global scale. Perhaps the traditionally conservative domestic VCs should switch their concern from speculating on a startup bubble to pumping more money into the ecosystem – before bolder and ever-expanding foreign investment firms take their places.
See: Startups in Asia: change has come, and it’s never going to be the same
Despite relatively small funding amounts, experts agree that Japan is on the cusp of a startup bubble
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