More big companies gobbling startups for tech, talent
Venture-focused M&A deals surge more than sixfold in four years
TOKYO -- Large corporations are increasingly acquiring or investing in Japan's startups to get their hands on fresh technology and talent, speeding expansion into new fields and helping drive the country's cycle of innovation and entrepreneurship.
Mergers and acquisitions involving unlisted Japanese startups numbered 347 in 2016, up from just 52 in 2012, the first year in which M&A consultancy Recof kept count. The value of these transactions, which include deals for minority stakes, grew by a factor of 3.6 to 102.5 billion yen ($922 million).
Most have been acquisitions by major companies inside and outside Japan. More businesses are moving away from proprietary development to a so-called open innovation model, snapping up outside technology for use in new offerings.
Investing in or purchasing startups is costly but provides greater access to their innovations and staff. Companies can also quickly acquire cutting-edge tech in such areas as artificial intelligence or rapidly expand into new fields.
Pharmaceutical group Otsuka Holdings has acquired through a subsidiary Biomedical Solutions, a Tokyo-based startup developing a device to remove blood clots from the brain. It would "be difficult to develop everything on our own," a source at Otsuka said. Onward Holdings has acquired cosmetics makers Kokobuy and Innovate Organics to expand beyond its underperforming clothing business.
Access to larger companies' sales networks and brand power can also help startups grow faster. Hunza, an online ticket seller acquired by internet services group Mixi in 2015, saw its monthly gross merchandise value rise from 3.6 billion yen to 5.8 billion yen in the year to December.
Japan's venture capital industry remains relatively underdeveloped. Such investment totaled just 130.2 billion yen in fiscal 2015, or less than 2% of that in the U.S. The entry rate of new businesses in Japan comes to 5% or so -- around half those in the U.S. and Europe.
For 90% of American startups, the exit strategy for recouping venture capital investments leads to being bought out by another company. Only 10% go public. Entrepreneurs typically apply the proceeds from cashing out toward creating new businesses or become "angel investors" in fledgling startups, driving the replacement of old companies with new ones.
In Japan, these rates are reversed. While efforts to promote a similar cycle are spreading, many large companies here have considerably less experience investing in startups than their international counterparts. They will need to gain a better eye for novel technologies and business models if they hope to keep up with cannier peers.