These major Japanese banks want to give $30M to startups. But their plan could be misguided.

Tech startups in Tokyo know that the vast majority of funding comes from the many angel investors and venture capital firms in the city. Government funding, while it has helped notable firms such as Preferred, Inc. and Sansan, is rarely publicized and often overlooked.

Yesterday, Nikkei reported that the Development Bank of Japan and the Tokyo Citizens Bank teamed up, along with the investment bank Risa Partners, to create a new JPY 3 billion (US$27.8 million) fund to support small to mid-size companies in Tokyo.

The investment is described as stemming from Prime Minister Abe’s plan to revitalize Japan’s economy, in part via supporting startups. Even so, companies will have to meet some strict requirements to be eligible for funds. According to Nikkei, risk-averse methods like asset-based loans (where the lender has the right to claim an asset from the lendee in case of a default) will be used at first and companies will only earn the right to move up to things like subordinated loans (in case of a bankruptcy other debts will take precedence).

This approach makes the fund less than ideal for startups. Considering the long odds of startup success, it is unlikely that young entrepreneurs are going to wager their assets against a government loan. Betters offers will be waiting, and those offers will make it possible for the entrepreneur to fail once and still live to fight another day.

Under the current set-up, the banks seem to want to have their cake and eat it too. They want to invest in entrepreneurs but only the ones who have succeeded enough that they can reasonably agree to something like an asset-based loan. The reality is that more established companies attract a better class of venture capitalist who can offer much better terms than the government’s offer. Even an unestablished company, assuming it has a smart CEO, would be reluctant to take this deal.

The result is that the government could be left looking for something that likely does not exist. A young startup with a surefire idea but a CEO risky, desperate, or foolish enough to tie himself or herself down to such a heavy loan.

At any rate, this sort of a loan will not be limited to Tokyo for long. The Nikkei report noted that similar funds are expected to crop up across the country in other cities. Considering the president of the Development Bank of Japan is Toru Hashimoto, the mayor of Osaka, a major city in western Japan, the next location might be easy to deduce.

See: Telco giant KDDI launches new $50M fund

The post These major Japanese banks want to give $30M to startups. But their plan could be misguided. appeared first on Tech in Asia.

These major Japanese banks want to give $30M to startups. But their plan could be misguided.