Japan is finally opening up to the rest of the tech world

Vinnie Lauria is a managing partner at Golden Gate Ventures based in Singapore.

Visiting Japan’s top tier investors can feel like a scene out of the movie Lost in Translation. One minute you’re exchanging ever-deepening bows with suited senior VPs who address you formally as Lauria-san, and the next you’re loosening your tie, drinking neat whiskey, and watching bikini-clad women duke it out with giant robots.

Japan offers an intriguing mix of tradition and trendsetting culture that attracts record levels of tourism. Can their technology scene continue to do the same?  Will Japan be able to marry its strong history of hardware innovation and build mass appeal for the next generation of software-based technology firms?

Strengths

The market size of Japan is a beast with 127 million people and the third-highest GDP in the world.  Japan has a large, comfortable middle class, a well-educated society, and huge amounts of disposable income. Local technology companies have the distinct advantage of growing strong in a vibrant domestic market before expanding globally – as demonstrated by Sony, NEC, Panasonic, and so on.

The Japanese market is quite mature, with over two decades of software technology startups building IPO value – from price-comparison portals, to gaming, to ecommerce.  For comparison, Japan’s own homegrown social networking site, Mixi, was founded the same year as Facebook and quickly IPO’d two years later. Japan has a history of building companies that grow quickly and successfully go public, like Rakuten, the Amazon of Japan.  Yet, paradoxically, it’s a place where Tower Records and Blockbuster still thrive – both of which went belly up in the US as consumers turned to the internet.

Weaknesses

There are a few things that are inhibiting the startup ecosystem from growing faster.  First and foremost, the focus on the large domestic market makes it very difficult for an internet startup to expand globally.  Poor English language ability inhibits global partnerships. And the crappy User Interface (UI) of many Japanese websites could be considered another language compared to the sleek UI of a Silicon Valley-based site.

Vinnie Lauria (managing partner at Golden Gate Ventures) speaking at Echelon, one of Asia’s largest tech conferences

Japan has never competed with the US in mobile software because they were building mobile websites specifically for advanced feature phones that were unavailable in the US. These feature phones are still prominent in Japan, with smartphone adoption only picking up in 2012 after SoftBank began pushing the iPhone heavily. Other carriers tried to hold back releasing smartphones to keep all the revenue they were making from mobile web carrier billing.  While their proprietary platforms were advanced in the pre-smartphone days, Japan startups have only recently joined the game in app development for smartphones.

Traditionally, marketing and distribution came through corporate partnerships, such as installs on feature phones or a prominent link on a larger corporate’s highly-visited website. Japanese startups, accustomed to corporate investment with distribution, rely more on corporate partnerships for distribution.  These startups don’t focus on deep integration with social networks to grow their user base. By omitting the social aspect of growth, these companies also miss out on multiple layers of user engagement, retention, and alternate sources of revenue.

Many of the startups I met also have a different view on growth hacking the early user base. Where a startup in Silicon Valley would leverage Facebook wall posting, inviting friends, email notifications, and a bunch of  other tactics, many Japanese startups – accustomed to corporate investment with distribution – rely more on corporate partnerships for marketing. 

A great example of how many firms don’t think about social media for growth would be purikura – the photobooths spread across Japan’s arcades (and a few basements in San Francisco’s Japantown).  While a fun experience, companies like PICTLINK are completely missing out on viral growth and additional revenue streams.  Although your images are printed out and available via email, they have no tie-in with Facebook, Twitter, or any other global social media platform.  This sort of sharing would engage new users, as well as open up more revenue opportunities with additional prints.  And to further highlight an old school way of thinking, your photos are deleted after one week.  Cloud storage has lots of growth opportunities in Japan.

And what about that black-suited salaryman who likes neat whiskey and robot battles? After the third round of drinks we began to talk about his idea for an internet company – a company that would never get off the ground because he cannot leave his current employer.  While fear of failure is universal, a unique quality in Japan is the obligation to the firm that began your career. 

In the US, employees are quite fluid between firms, some believe making a jump every two years is quite positive for your career.  In Japan, many folks feel they would be doing a dishonor to the firm (or their manager) by leaving to do their own startup. One reason why LinkedIn has faced slow adoption in Japan is that many use it only when they want to switch jobs.

Changes

Asia is changing very quickly. In Japan, over the past three years, there has been a rapid adoption of global mobile platforms such as iOS and Android.  In 2010, iPhone and Android sales accounted for less than 10 percent of new phone sales, now they account for more than 60 percent of all sales. This provides a platform for easier app development, APIs for partnerships, and tools to effectively tie into new marketing channels. 

There’s also been a new diaspora of young Japanese founders moving to Silicon Valley and other parts of the globe.  Notably, the outward-facing accelerator 500 Startups has brought a handful of Japanese startups to their four-month intensive accelerator. AnyPerk got their start in Y Combinator and set-up their company in Silicon Valley.  A number of companies have made the move on their own, such as Peatix to the US and Voyagin to Singapore.

Opportunities

Local funding for startups in Japan is opening up across all stages.  A number of new accelerators have launched over the past few years, like Samurai Incubator, Open Network Labs, Movida, and East Ventures (Disclosure: East Ventures is an investor in Tech in Asia) to name a few. New, non-corporate VCs are popping on the scene and actively making investments, such as Incubate Fund, CyberAgent, B Dash, and Draper Nexus. There are many healthy channels for a startup to exit, from an active IPO market thanks to the early-stage Mothers exchange to a large pipeline of hungry technology corporates and conglomerates interested in M&A.

I spoke to Justin Waldron, co-founder of Zynga, who spent 18 months in Japan as part of the company’s expansion.  He sees Japan’s mobile startups about to make waves globally, because they are finally using the same smartphone platforms as the rest of the world. He also pointed out that Japan just passed the US as the mobile app spender:

Companies like GungHo, with their top grossing smartphone game, Puzzles and Dragons, have proven that the days of the ‘Galapagos Island’ style isolation are over. Japan has been focused on mobile for much longer than US developers, but the hardware and platforms (code, design, and interaction) have always been completely incompatible. Now that we are all on the same platform, it lowers the cost for Japanese startups to build software for the US market, and US companies to build software for the Japanese market. Considering they are the two of the largest software markets in the world, it’s a huge opportunity for both sides. Only basic localization is needed to address huge, equally sized, markets.  This is a very big opportunity that most companies in Silicon Valley are sleeping on, but the Japanese founders I know, are hungry to go global.

Japan is in a unique position to be a gateway between Silicon Valley and the rest of Asia, geographically and corporately.  Many larger tech giants have shown a hunger to enter Japan as their first Asian market, like Yahoo, Twitter, Zynga, Facebook, and Stripe. And in the valley, a number of new VCs are helping valley startups expand to Japan, such as Sun Bridge, Sozo, Global Brains and Scrum Ventures.  Japan’s global technology presence should not wither with the move into software and app development. Startups need to boost their English abilities and grow beyond the local market, employing the well-tested social marketing growth hacks seen in a Valley startup.

See more: How the crazy talented Saito brothers are giving back to Japan’s startup scene

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Japan is finally opening up to the rest of the tech world