Japanese Venture – A New Frontier?

Recently, I have been introduced to the prospect of early-stage venture capital in Japan. A lot of attention (and money) has been focused on China and India – but what about Japan?

Japan is the world’s second largest economy and is home to powerhouse technology companies such as Sony, Toshiba, Fujitsu, NTT, Panasonic, Mitsubishi, Toyota, Honda, and others. The country has emerged over the past 50 years as an economic powerhouse, and while running into some issues over the past 10-15 years, has made significant strides to overcome many of those issues. Yet in years past, the Japanese venture market has been relatively none-existent.

In one sentence, I describe Japan as an emerging venture market in an established economy. Japan now has a venture-friendly ecosystem including a strong corporate community, sound legislation, innovative universities, robust liquidity (both IPO and M&A), and a younger generation of smart people who want to break out of the corporate culture in more entrepreneurial ventures.

Amazingly, in 1995 the average time it took for a Japanese start-up to go public in Japan was over 34 years. In 2005, that number shrunk to less than 9 years.

What contributed to the change? In the late 90’s, there were major reforms imposed by the Japanese government.  Among those included the institution of limited partnership law. Additionally, legislation was also loosened up to encourage M&A and spin-out activity in and among major Japanese corporations. Lastly, the initialization of the Mothers Market at the Tokyo Stock Exchange in 1999 and Hercules at the Osaka Securities Exchange in 2000 promoted more entrepreneurial ventures to be publicly traded much like AIM in London or NASDAQ in the U.S.

Recent comparisons of the 3 emerging stock exchanges of Japan (Mothers, Hercules and JASDAQ) and NASDAQ include the following number of IPOs over the past 3 years:  2005: 124 in Japan vs. 126 on NASDAQ; 2004:  143 in Japan vs. 148 on NASDAQ; and 2003: 100 in Japan vs. 54 on NASDAQ.

Numbers of M&A transactions have also had an upward swing:  2,725 in 2005; 2,211 in 2004; and 1,728 in 2003.

Amidst the change and pushing the paradigm are emerging Japanese firms such TNP. TNP was established in 2000 and has created an ecosystem that rivals many Silicon Valley or Boston firms – uniting universities, large companies, government, labs, VCs, angels, incubators, securities firms and other parties that would like to see acceleration in the Japanese venture markets. TNP’s two previous funds have, as a result of a strong IPO market, realized top-quartile performance. Other firms are following in their footsteps.

On January 31st-February 1st, TNP will be hosting a Venture Fair in Yokohama, giving outsiders a chance to witness the Japanese venture ecosystem in action. There will be an opportunity to meet advisors, VCs, portfolio companies and others involved in helping make a change in Japan. Anyone wanting to learn more can visit http://www.tsunami2000.co.jp/TNPG_E/VF/VF.htm and can also contact me at [email protected] if needing more information.