Development of the Startup Ecosystem in Japan
It has long been said that the formation of a Japanese startup ecosystem is indispensable for the creation of new industries in Japan. This involves establishing the mechanisms and environment conducive to the creation of many startups, just as exists in Silicon Valley. Compared to Silicon Valley, the startup ecosystem in Japan has only just set off on its journey to formation, but in terms of fundraising, in the past few years the Japanese startup environment has changed dramatically.
In 2016, the total amount of financing raised through equity in private companies in Japan reached 209.9 billion yen. In 2010, when I was engaged in the management of a tiny startup, that total amount of financing raised was 69.1 billion yen. The damage caused by the global financial crisis still lingered, and there was very little financing liquidity even globally. My software development startup was somehow able to raise 100 million yen, but at the time raising 100 million yen or more was an incredibly rare feat for a private IT company. Compared to then, the total amount of financing raised in 2016 by Japanese startups has grown almost three-fold in just 6 years. You now see stories about startups raising over 100 million yen on tech media almost every week.
When exploring the factors behind this rise in the total amount of financing raised, one factor that jumps out is the macro trend of higher capital liquidity on a global scale.
Recently a variety of measures supporting startups have been undertaken by the Japanese government, symbolized by a policy regarding accelerating industry metabolisms and startups[KL1] that is part of the second Abe administration's economic policy. Investment in startups through public & private funds and public institutions, as well as investment in VCs is becoming more proactive. Meanwhile, as a part of the transformation of universities, major national universities like Tokyo University, Osaka University, Kyoto University, and Tohoku University are seeing increased investment as more and more VCs are established to invest in their research findings.
In the private sector, many kinds of large companies, including financial institutions, internet companies, and manufacturers, are investing in startups and VCs, and in addition, we are seeing increased momentum in corporate venture capital (CVC) investments, which involve partnerships between large organizations and startups.
And most importantly, we cannot forget that the unflagging efforts of startup stakeholders, such as their management and investors who have been participating in Japanese startups up to now, are starting to bear fruit.
The Startup Ecosystem “After Market”
So, what needs to happen to make sure that the momentum behind the formation of this kind of startup ecosystem in Japan does not peter out, and instead reaches a new dimension? In my opinion, the development of the After Market holds the key to the startup ecosystem.
In general, when you think of startups, private emerging companies are what come to mind. But that is just a part of the startup ecosystem. There are also post-exit companies and businesses that have been acquired or gone public that I view as being part of the broader startup ecosystem. Without further growth from these types of companies, startup initiatives as a whole will not gain trust from society.
In 2016, 54 companies listed on the Mothers Section of the Tokyo Stock Exchange, and their average market cap at the time of listing was 6.6 billion yen, with the average amount raised by the issuing of new shares being 750 million yen. Compared to Silicon Valley startups, these companies would be roughly equivalent to early to middle stage startups in terms of scale. While this is a limited comparison to only the American market, it seems fair to say that Japanese startups are going public relatively early. Looking globally, the low barriers to going public in the Japanese market make it unique.
My purpose here is not to debate whether this is a positive or a negative thing. The role of supplying capital, which in the United States is undertaken by professional venture capitalists, in Japan is rather taken over by the average investor. So, the Japanese stock market is unique in that young companies with businesses still in the growth phase are being supported by these average investors.
Challenges Faced by Startups Post-IPO
Meanwhile, when a startup goes public many VCs take the opportunity to sell their shareholdings. For the benefit of their business, VCs need to undertake this process, but from the startup’s perspective, this means that they lose their outside support and must stand on their own.
Generally, due to the restrictions on share liquidity and investment scale, large institutional investors can only invest in companies with a market cap of 200 billion yen or more. There is also the factor of attention—according to the Tokyo Stock Exchange, in 2011 54.2% of the companies in the First Section were covered by an analyst, while only 22.7% of the companies in Mothers were. The main investors in companies that do not reach the scale required for investment by large institutional investors end up being individual investors. These individual investors must make their investment decisions based on the limited information available on the company in question, and the company then has the responsibility to explain their quarterly business trends to highly speculative individual investors.
After companies have gone public and raised funds, there are extremely limited opportunities for that company to issue shares to raise funds (one example is when changing markets). Going public ought to make it easier for companies to raise funds smoothly through the market, but when compared to the excess availability of funds for private companies, going public actually makes it more difficult to raise money.
By going public, post-IPO companies must bear the new responsibility of communicating with the capital markets, and they must also manage with less outside support than they previously enjoyed. That is no easy task.
Post-IPO Startups Will Create New Industries
Paul Graham, one of the founders of Y Combinator, said that “a startup is a company designed to grow fast.” (Link) According to Graham, whether a company was newly founded, works on technology, takes venture funding, or had some sort of “exit” is not relevant to being a startup. What is essential is growth.
If we accept Graham’s definition, that means that whether a company has gone public or not is not relevant to determining if it is a “startup.”
For startup stakeholders, the IPO is without question a major milestone. But at the same time, an IPO is simply an opportunity for a company to more broadly seek capital from the market to achieve further growth. Companies that truly seek to grow and expand their impact on society after the IPO are startups, and that includes of course freshly listed companies, but also long established companies as well.
This all makes me wonder. Would it be possible to further the development of the Japanese startup ecosystem by energizing the After Market? Would it be possible to create a system that helps emerging companies that often suffer for lack of available information in their dialogue with stock markets? Would it be possible to create a forum to share insights for managing companies after the IPO? All of these thoughts lead to the birth of Signifiant Style.
I myself have been involved in the management of a company listed on Mothers, and faced the incredibly challenging task of driving a company that was in stagnation into growth. I have also experienced the frustration of trying to share information about my company through the media, only to have that information not conveyed in the way I intended. Signifiant Style aims to try to help in solving these types of problems.
At Signifiant Style, we call companies that are trying to actively drive growth after going public the “Post-IPO Startups.”
The development of Post-IPO Startups is indispensable to the further growth of the startup ecosystem in Japan, and for the further evolution of Japanese industries.
Nothing would make us happier than to see Signifiant Style initiatives help Post-IPO Startups achieve further growth towards their next stage.