Limited-Time Promo: $588 $470 for Crunchbase Pro | Use code CLOSEOUTQ2

Dawn of the Startup Era: An In-Depth Look into the Japanese Ecosystem

With the world’s third-largest gross domestic product for a small island—1/61 the size of the U.S. and 1/25 of Europe—Japan has been prospering in an original way. The country is focusing more on the digitalization of enterprises and the expansion of the startup ecosystem. 

This article focuses on the current market and distinct features of the Japanese ecosystem to further unveil what is happening in the Far East. 

Note: The startups in this article were selected by the local consortium and the accelerators in charge of support programs. Please note they are not the only ones that represent each region.

 

Innovation opportunities

Japanese Prime Minister Fumio Kishida said last year that, “digitalization and focusing on startups to accelerate innovation,” are key pillars of the Japanese economic growth strategy. This was directly influenced by the pandemic. Although Japan was a developed country with 92.73 percent of internet penetration as of 2019 (ITU, 2019), the digitalization of the systems inside enterprises were slow. The pandemic forced companies to make digitalization a priority and helped the government see that startups are essential for innovation. We saw this in the significant increase in 2021 financing of Japanese startups:

chart with total number of funds raised and number of companies that have raised funds in Japan
 

In 2021, investors put $10.3 billion into startups, a 53 percent year-over-year increase according to STARTUP DB and Crunchbase data. Not only was there a rapid increase in the number of funded startups, investor segments also changed, welcoming global investors. Bain Capital launched a $950 million fund focused on Japanese companies. The fund, which targets all small and medium-sized businesses, invested in Japanese startup hey in August 2020 and in Linc’well in December 2021. And Silicon Valley VC firm Light Street Capital was a lead investor in SmartHR’s Series D funding, making it a part of the Japanese unicorn community.

M&A also continues to grow, with a change in scenery brought on by global companies. Pring, which specialized in money transfer, was acquired by Google for $93.4 million in July, followed by PayPal acquiring credit card-free buy now, pay later startup Paidy for approximately $2.6 billion in September. It was considered by some to be crushing for Japan to have two fintech companies be acquired by U.S. companies, but there are many more hidden startups in line to grow and exit.

 

Japanese R&D and university spinoffs

Japan is known for its active research and development sector. The country’s patent application per population and R&D is considered the best in the world (The Global Competitiveness Report 2019). R&D expenditures by gross domestic product  percentage is first amongst G7 countries, and second for the total number of researchers (UNESCO Institute for Statistics). Grants—such as the “Research-based start-up support project” by Japan’s New Energy and Industrial Technology Development Organization—are offered to technology-based startups that spin off from R&D at various universities.

From 2016 onward, more than 200 startups were spun out from universities, totaling 244 in 2019 (Ministry of Economy; University-spinoff ventures 2019). Robot suit-maker Cyberdyne, established in 2004 by Yoshiyuki Sankai Ph.D., from University of Tsukuba was considered one of the first successful university spinoff startups. His successor Yuichi Ochiai established Pixie Dust Technologies, which develops and applies computational technologies to human life. University of Tsukuba is a part of the “Startup Ecosystem Tokyo Consortium,” being one of eight regions focused on accelerating their local ecosystems. Other notable university-generated startups include:

  • CellFiber, a spinoff from The University of Tokyo that develops fiber cells ”Cellfiber™” for clinical studies and research purposes, from small to manufacturing scale.
  • Also a University of Tokyo spinoff, Pale Blue seeks to disrupt the space propulsion industry by providing a variety of water propulsion systems with high-performance, an affordable price, short lead time and reliability.
  • Kyoto Fusioneering develops advanced technologies for commercial fusion reactors including gyrotron systems, tritium fuel cycle technologies, and breeding blankets for tritium production and power generation. The company is a spinoff from Kyoto University, utilizing the technologies researched and developed by the university for over 40 years. Kyoto is also one of the eight local-focused ecosystem-developing regions through the Osaka, Kyoto, Hyogo, Kobe Consortium.
  • With many university spinoff startups utilizing a variation of papers for research, Onikle was founded to offer a pre-print search platform using recommendation artificial intelligence.
 
Strategy to making Japan a startup ecosystem - chart with locations and a 7 step plan
 

The challenge of an aging society

By the year 2036, one-third of the population will be over 65 (Annual Report on the Ageing Society [Summary] FY2020, Japan Cabinet Office), which will impact the workforce.

Japan census chart with average citizen ages
 

Japan expects to see more startups making headway in addressing the challenges of a diminishing workforce. This has presented an opportunity for innovation to happen, with opportunities for startups to monetize. A few of those startups include:

  • RUTILEA, which provides easy to deploy, plug-and-play, no-code based software solutions to improve labor productivity of companies and solve the problem of global labor shortage.
  • XELA Robotics, which develops “uSkin” that provides the human sense of touch to robots. This enables robots to perform tasks with their hands that only humans could do, such as gently grasping objects. The company also is a university spinoff from Waseda University in Tokyo, with a laboratory that researched robotics for more than 40 years.
  • Archelis is a company that produces an exoskeleton suit that helps humans with the pain and injury of standing work. The idea of Archelis came from the voices of doctors, to reduce pain at the time of the surgery. The startup was a spinoff from a Yokohama-born manufacturing company established 54 years ago. Fifty years ago, the Japanese economy thrived with the power of manufacturing companies. Companies like Archelis can help modernize manufacturing companies all over Japan.
白い服を着ている男性

低い精度で自動的に生成された説明
 

Biotech and medtech

Last year we highlighted the startup Restore Vision that helps retinitis pigmentosa, and Nagoya University spinoff iCorNet that helps treat heart failure. The need for medical care continually leads to more innovation, including startups working on treatments for other serious diseases, such as:

  • SONIRE Therapeutics, which provides high-intensity focused ultrasound treatment for cancer. This company is a spinoff from research held collaboratively for 10-plus years by Tokyo Medical University, Tokyo Women’s Medical University, and Tohoku University. Tohoku University is situated in Sendai, another region developing its startup ecosystem.
  • atDose, a startup that develops a new mobile-type dosing and infusion device that will fundamentally change the conventional treatment of serious diseases such as cancer.
手に持ったタバコ

中程度の精度で自動的に生成された説明
 

Deep into the future

Deeptech is also important in the Japanese ecosystem, as verticals focus on coming up with answers to solve worldwide problems. Startups in cleantech, spacetech and the utilization of AI and computing are increasingly popular. 

  • PJP Eye is an energy solution company using its plant-based carbon batteries to deliver sustainable energy solutions worldwide. Although not a university spinoff, the company constantly works and does research with Kyushu University.
  • With aims to reduce greenhouse gas emissions, eliminate waste/ocean plastic, and improve recycling rates at a global scale, AC Biode develops its unique and innovative technology based on chemical recycling.
  • A Kyoto University Spinoff, yodayoda makes a mapping tool for robots; drones, wheel chairs, autonomous vehicles, construction robots and bikes.
  • Tenchijin, certified by the Japan Aerospace Exploration Agency, utilizes space’s big data to optimize and support companies to run their business at the best places and with sustainable practices in the areas of agriculture, city development and disaster management.
 

Millions ahead

Due to a fruitful economy, innovation in Japan was a humble movement for many years. However, after someone opens the door and challenges themselves to take the first step, quick acceleration and adapting to the new environment is in the heart of Japanese culture.

“If general perception changes from seeing the glass as ‘half-full’ to seeing it as ‘half empty,’ there are major innovative opportunities.”

— Peter F. Drucker

At Davos Agenda, PM Kishida recently mentioned the theory of the “glass half empty,” referencing the famous management scholar Peter F. Drucker. He positioned 2022 as the first of a five-year plan to work to get startups off the ground on a large scale. Japan is now beginning to see things from a “half empty” perspective. With so much opportunity for innovation, one can only imagine how quickly Japan is going to accelerate its startup ecosystem. For more details about Japanese startups: https://jp-ecosystem.startup-db.com/

Written and edited by: for Startups, Inc. & indigo, Inc.