February 19, 2014 7:05 am JST

Full speed ahead for Japan's startups

The popularity of smartphones is pushing profits at Internet companies to new heights.

TOKYO -- Japanese startups are rapidly picking up steam as a growing funding pipeline, a sharp rise in planned listings, and the highest quarterly earnings since the 2008 financial crisis all point to a strong trend.

     Combined October-December pretax profit at 713 listed up-and-coming companies -- excluding financial services providers -- rose 16% on the year to rack up a fifth consecutive gain for the quarter.

     Startups are outpacing the blue chips on the Tokyo Stock Exchange's first section, a group whose earnings have yet to return to their levels before the global financial crisis.

     Internet-related stocks are leading the pack. Smartphone game maker GungHo Online Entertainment earned the highest pretax profit at 21.4 billion yen ($207.4 million), an impressive 210% leap. Thanks in part to its free-to-play hit "Puzzle & Dragons," its profits rival those of major airline ANA Holdings.

     Colopl, which produces smartphone games and apps, saw pretax profit soar 460% to 4.8 billion yen.

     Internet stocks spent time in the spotlight around 2000 and in the 2005-06 period. But in many of those cases, the market expected too much from unprofitable companies.

     Now the spread of smartphones has made the Net a part of daily life, and businesses can quickly turn profits from hit software. Such firms as GungHo have jumped straight from the early stages of growth to expanding overseas.

     Even in more established industries, businesses are thriving by offering unique services or operating in niche fields. Nakanishi, which makes dental and industrial equipment, has enjoyed strong results. So have Message, which operates private nursing homes, and work clothing retailer Workman.

     Investors are taking note of venture companies that have built up their earning power. The startup-focused Nikkei Jasdaq Stock Average has climbed 46% since the end of 2012, and the TSE Mothers Index is up 110%.

     Rising stock prices are opening up a path for the next round of startups looking to debut on the market. Around 70 initial public offerings are expected this year, up 30%.

     Investment in fledgling firms is rising as their funding sources grow. The amount of money in private venture capital funds soared 550% last year to nearly 200 billion yen, according to Japan Venture Research. IPO hopefuls received an average of 50 million yen per company last year, the most in seven years.