January 11, 2018 10:00 am JST

Gen Isayama: It's time for Japan to nurture its own 'unicorn' startups

More risk taking could be good for cash-rich corporations

Mercari, an e-commerce marketplace for secondhand goods, is the only known Japanese entity that qualifies as a unicorn.

The hottest topic in Silicon Valley is the rise of the so-called unicorns -- privately-held tech companies valued at $1 billion or more.

Unicorns are coming to life in many of the globe's leading economies, but not in Japan. The U.S. has 112 of the 222 such businesses, Japan has just one, according to the research group CB Insights. China has 59, and India has three. Why such a yawning gap between Japan and other big economies?

The rise of unicorns seems unstoppable as the speed of business grows with technological advances. This rise is also being helped by low interest rates that encourage venture capital companies to back risky early-stage projects, aggressive investment by large corporations, and the development of new financing methods such as initial coin offerings.

According to CB the top unicorns by market value are Uber Technologies, the ride-hailing group, at $68 billion, and Didi Chuxing, its Chinese rival at $50 billion.

Japan's only entrant -- Mercari, an e-commerce marketplace for secondhand goods -- is valued at just $1 billion.

There are three key reasons why Japan is lagging so far behind.

First, a lack of investment companies focused on providing growth capital in Japan is encouraging many tech startups to go public with valuations of under $100 million -- never reaching unicorn status.

Second, startups funded in Japan tend to be focused on the domestic market, so the business opportunities are inherently limited, or even declining, given Japan's shrinking population.

Third, a lack of entrepreneurs and management talent in tech makes it difficult to build organizations of real scale.

Most talented graduates still want to work at big corporations with famous names, such as Mitsubishi, Toyota, Mizuho and Sony, even though technology is changing and such companies can no longer guarantee prestigious futures. As long as family and friends continue to value a big name and the certainty such employment brings, a majority of young people will hesitate about startups.

Such conservative views are common in many cultures, but in Japan this is amplified by rewarding those who make the fewest mistakes. This inertia makes it hard to venture any risks.

RISKING CREATIVITY I believe there are some creative ways Japan can overcome these obstacles. One is to encourage big corporations to play a role as providers of growth capital instead of waiting for the domestic venture capital industry to mature. Chief executives of big groups are aware of the risks of not doing things differently and are willing to invest in change. Many have huge cash piles sitting in their accounts. Executives need to see that their current high profits rely on the low-interest rate environment and not on the fundamental strength of their businesses. They need to look to the future and invest in tech.

Japan has a good example of a world leader in such initiatives in the $100 billion SoftBank Vision Fund, the investment vehicle established by SoftBank founder Masayoshi Son. But SoftBank Vision Fund invests almost entirely in other countries because Japan lacks companies of sufficient size. We need other groups to launch smaller funds.

Another way forward for Japan is to establish consolidated business development hubs in major cities to help Japanese startups make the jump into overseas markets. The government must play a leading role in providing money and in encouraging big companies to cooperate to promote innovation. These conservative companies will not do it on their own.

And most importantly, more opportunities must be created for Japanese business people in tech to meet executives at successful unicorns in Silicon Valley and elsewhere to ignite the spirit of entrepreneurship. They need to learn how to view failures positively, as long as they learn from such experiences. They need the ambition to try something difficult -- beyond what they think is possible. Our society must recognize those who try as heroes, not losers. All Japanese must learn these invaluable principles to build a country filled with hope and excitement.

Far from being impossible, these solutions are rather easy to implement today. Those who do not adapt to change will not thrive in the future. It is time for all Japanese interested in tech to wake up. Become doers, not just thinkers.

Gen Isayama is a co-founder and CEO of World Innovation Lab of Palo Alto, California. He co-founded a web design company while a student at the University of Tokyo and later worked at the Industrial Bank of Japan.

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