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Startups

Japan's biggest firms recycle cash piles into tech start-ups

Corporate-backed VCs deploy record investment into Japanese startups, hope to spawn Unicorns

Tokyo-based aggregation app SmartNews raised $28 million in August, an effort led by the investment arm of Japan Post.

TOKYO -- Record levels of venture capital investment in Japan suggest that some of the nation's biggest companies are increasingly deploying some of their massive cash reserves into the country's fledgling tech start-up sector in a quest to create billion dollar tech "Unicorns".

Japanese companies are sitting on a cash pile of 273 trillion yen ($2.5 trillion) as of March, a record high, according to data from the Bank of Japan, and their cash-heavy balance sheets, coupled with extremely low interest rates, have helped venture capital funds secure capital amid growing interest for risky but high-growth companies. Japanese businesses can invest directly in startups or through their own venture capital funds.

"In the U.S., China and Europe, partnerships between corporates and startups have progressed at a pace many times faster than Japan," said Phillip Vincent, managing partner of Plug and Play Japan, which runs "acceleration programs" offering office space, mentorship and corporate partnerships to help startups grow and potentially reach Unicorn status, private businesses that are worth $1 billion or more.

In Japan, "that wave has finally arrived," Vincent added. Japan, despite its technological prowess, only has three unicorns.

Japanese venture capital investment hit 52.9 billion yen ($489 million) in the April-June quarter, the Tokyo-based Venture Enterprise Center said, a 65% increase from a year earlier and the highest since the group began tracking the data in 2013.

The figure totals just a fraction of that seen in the U.S. and China, but it bucks a broad slowdown in support for startups amid concerns about overheated valuations. Global venture capital investment fell to $52.7 billion in the second quarter of 2019 from a record $69.8 billion a year earlier, according to KPMG.

Tokyo-based news aggregation app SmartNews said in August that it raised $28 million at a $1.1 billion valuation, becoming only the third unicorn in Japan, according to CB Insights. The deal was led by the investment arm of national postal service Japan Post, which launched in late 2017.

Japanese corporates are also increasingly tapping independent venture capital funds to make up for a lack of investment skills, driving growth in the overall market. J-Power, an electric utility company, and Shinsei Bank were among new investors in Coral Capital's 6 billion yen fund, which launched in March. Japanese venture capital funds raised a record 94.8 billion yen in the first quarter, the enterprise center said.

As part of the growing interest in VCs and tech-start-ups in Japan, Plug and Play, a U.S. service provider that opened a Tokyo office in 2017, organized a technology conference here Thursday. Instead of a typical pitch contest in which startups make presentations to potential clients and investors, the event featured a "reverse pitch" where officials from Nissan Motor, Denso and other Japanese car industry giants talked up their desire to partner with startups.

During the conference, Plug and Play announced its first investment in a Japanese startup: Frich, a peer-to-peer insurance provider. Plug and Play aims to announce several more deals this year and 10 to 20 next year. It invests an average of around $150,000 per deal for a small equity stake.

Among Japanese corporates, one increasingly popular scheme is a so-called "two-person fund" in which a single company outsources its startup investment activities to an independent venture capital fund. SBI Investments, the investment arm of an online securities company, has launched such funds for Subaru and Nikon, among others.

While appetite is growing, venture capitalists may find difficulties in finding prospective startups in a country where lifetime employment is a norm for employees in major companies. Vincent of Plug and Play Japan said one major roadblock for startups participating in its acceleration programs is securing talent.

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