Newsletter #2 - It's Snowing in Tokyo

This week in Japan!

First week in February and we have up to 30cm of snow forecast for parts of the Kanto plain, but the engine of startup activity is still running hot! _{Too much?}

Fun Fact: 3 of the top 10 snowiest cities in the world are in Japan.

1. Aomori, Japan (Annual snowfall: 792 cm)

2. Sapporo, Japan (Annual snowfall: 485 cm)

3. Toyama, Japan (Annual snowfall: 363cm)

And if you’re new here - here’s a quick recap on what the newsletter is on!

• Curated headlines relevant to startups and investors

• Startup fundraising announcements from the past week, with a focus on post-Series A rounds

• A detailed breakdown of news headlines

• Highlight social media posts by the chattering classes

• Links to thoughtful longer-form articles relating to tech in Japan (and more!)

• A bit of commentary from yours truly, hopefully with a dash of insight

- Jeremy and Kenneth

The Headlines

The year is kicking off with some activity in the broader ecosystem! Here are some of the highlights:

1. Growing number of Japan firms adopt stock-based worker compensation
   

2. Silicon Valley’s Japan Innovation Campus Launches To Help Japanese Startups Scale Globally
   

3. Japan VC funds ranked by 2023 IPO returns

4. Startup DB 2023 Year in Review Report

Deep Dives

Growing number of Japan firms adopt stock-based worker compensation

A growing number of Japanese companies are adopting stock-based compensation to enhance employee engagement and align interests, reflecting changing views and a strategic shift towards valuing human capital as a key asset.

• This system ties employee pay to the company's stock price, acting both as compensation and an employee benefit.

• As of August 2023, 767 listed Japanese companies had implemented stock-based compensation, a significant increase from 110 in 2015.

• Mitsui & Co. and ANA Holdings are examples of companies that have introduced stock-based compensation to foster a sense of ownership and unity among employees.

• Stock-based compensation allows companies to use repurchased shares efficiently and encourages employees to contribute to the company's success.

• However, challenges such as procedural and taxation issues need to be addressed to facilitate wider adoption and effectiveness of these systems.

Japan Innovation Campus (JIC) Launched in Palo Alto

The Japan Innovation Campus (JIC) in Silicon Valley, launched in January 2024, represents a strategic initiative to bolster Japanese startups through providing them with resources, mentoring, and exposure to a more international innovation ecosystem.

• The JIC, supported by the Japanese government, serves as a bridge for Japanese startups to connect with the global market, focusing on collaboration and innovation.

• Located in a renovated Palo Alto building, the JIC offers coworking spaces, offices, and event spaces to foster a collaborative environment for startups.

• Startups at JIC range from biotech to AI and robotics, benefiting from comprehensive support services including business and living support, digital community fostering, and event hosting.

• The campus aims to create a supportive community where startups can share knowledge, experiences, and networks, emphasizing the importance of learning from both successes and failures.

Japan VC ranked by IPO returns - Nikkei

Nikkei ranks Japanese venture capital (VC) firms based on their estimated profits from IPOs in 2023, highlighting the success of investments in innovative fields like virtual YouTubers and space exploration.

• STRIVE leads with significant returns from Cover, a VTuber (virtual YouTuber) production business, indicating high investor interest in unique content creation and digital entertainment.

• The second place went to Incubate Fund for its investment in ispace, a lunar exploration startup, marking the first space-related startup IPO in Japan.

• The IPO market saw 66 listings on the Tokyo Stock Exchange Growth segment, with 27 companies valued over 10 billion yen, showcasing the appeal of startups in cutting-edge technologies and global markets.

• The article emphasizes the strategic role of VCs in guiding startups through growth challenges, focusing on deep tech and international expansion as key areas for future investment success.

Startup DB Publishes Their 2023 Annual Japanese Startup Investment Trend Report

A few interesting graphs from this report to highlight:

Much like other ecosystems, the vast majority of investments made between 2019-2023 were (unsurprisingly) done within the Series A to Series D range.

Could potentially use a few more seed investments, but pretty healthy distribution, right? Growth rounds abound, even as the rest of the world goes through a fundraising winter!

Looking a bit closer at the amounts raised, rather than the labeled round, however, and the data on publicly announced rounds shows that only 21% of startups raise more than ￥500M JPY ($3.36M USD) in a single round, with only 4.9% raising rounds larger than ￥20B ($13.46M USD).

Quite a few of these later-stage rounds would be roughly equivalent to Seed or Series A rounds in Silicon Valley in terms of the amount of capital involved.

Here’s another graph that’s potentially surprising/unusual (or not, if you’re already familiar with Japan) - the top 4 most active venture investors in Japan are all CVCs associated with major banks, followed by 6 independent VCs.

When we talk about the dominance of CVCs in venture investing, it might be a bit too much of a blanket statement - we’re probably just talking about the megabanks here!

Another possibility here though: other strategic investors might not be as active in publicizing their investments, or might invest in startups through something other than a fund structure. Something to dig into.

In any case, the top 10 are, in order:

• Mitsubishi UFJ Capital

• SMBC Venture Capital

• SBI Investment

• Mizuho Capital

• Global Brain

• ANRI

• Future Venture Capital

• East Ventures

• JAFCO

• Incubate Fund

This graph shows the number of IPOs and startup M&A transactions between 2019-2023. Though still a far cry from the U.S, the positive trend in M&A activity (~61% increase in 5 years) is encouraging. This is something that’s likely to continue to accelerate, especially given the tax incentives the Japanese government put in place in 2020 allowing companies to deduct from their taxable income 25% of their share purchase amounts in startups

Word on the Street

Interest continues to pour into AI - clearly perceived as at least somewhat of a national priority. We’ve included the English translation of these Tweets (X-eets?) underneath them.

Also, the government and other interest bodies are pouring money into foreign service providers to bring entrepreneurship and investor training into Japan - a topic I’m sure we’ll dig into in future editions.

GENIAC, a project led by the Japanese government to accelerate the development of domestically produced AI, is scheduled to start. The selected companies are startup companies ABEJA, Preferred Elements, Stockmark, Sakana AI, Turing, Research Organization of Information and Systems, and the University of Tokyo. However, Google provides the supercomputer necessary for development.”

“I had a meeting yesterday with a former colleague in charge of startup investment at Google, and he said that he continues to be interested in generative AI applications that are unique to Japan, Japanese payments, entertainment (which uses a lot of cloud), and healthcare. The two, who were originally investors in China, are now based in Singapore and are interested in Japanese startups.”

Fundraising Highlights

• Medical Note, a comprehensive medical service that connects doctors and patients, raised ¥1B JPY(~$6M USD) in a Series E round by Mealthy 

• Eucalia, a startup that provides a bedside information terminal for medical workers, raised ¥1.1B JPY (~$7M USD) in a Series D round, led by Sumitomo Mitsui Trust Bank, and SBI Shinsei Bank, Atlae Sigmaxis Investment, and Kyoto Capital Partners participating

• Original Life, a wedding preparation app raised ¥577M JPY (~$3.8M USD) in a Series B round from Hakuhodo, H.I.S. Nissay Capital, and Japan Venture Capital

• ABABA, an Okayama University based startup that provides a a direct recruiting service for new graduates raised a ¥250M JPY (~$1.6M USD) Series A round led by NES Venture Capital with Delight Ventures participating

• SENTAN Pharma, a Kyushu University based startup that provides technology for converting all compounds into nanoparticles or microparticles, raised ¥574M JPY(~$3.7M USD) in a Series B round by Nippon Soda and Shinmei

• Fermenstation, a R&D based startup that provides an original fermentation technology, raised ¥230M JPY(~$1.5M USD) in a Series C round by SXC Investment, TBS Innovation Partners, and Stage Up Fund

More Food for Thought

Some additional reads for the week - the Foreign Affairs article by Richard Katz is a pretty succinct (and in our view, accurate) summary of the current choices facing Japan.

• What Holds Japan Back - And How Economic Reforms Could Overcome a Hidebound Old Guard (Foreign Affairs)

• Pay hikes at small firms in focus at Japan’s spring wage negotiations (Japan Times)

• Japan to spur clean hydrogen production with $20bn in subsidies (Nikkei)

• Canon Marketing Japan Launches ¥10B JPY(~$67M) Mirai Fund (Canon)

• US Property Losses Trigger 20% Drop in Japanese Bank Aozora (Yahoo)

Notes from the Team

Thanks for reading and hope to see you around around the sidewalks of Tokyo!

Have a question or any feedback? Let us know!

Jeremy (Investor @ GHOVC) / Kenneth (Product @ Moon Creative Lab)