Startups and Japan
This post is a reply to Richard Katz post on “How to Restore Japan as a startup nation”.
I have a lot of thoughts on this, having worked for a number of US, UK, and Japanese startups in various positions (up to CTO and founder). I’ve also created companies in US, UK and Japan. And received Angel funding for my US company (Reticula).
In this post I’m going to compare the startup environment I’ve seen in Japan and the US…
Company Creation
Summary: Company creation in Japan takes months and >$3000. As opposed to days and $10s in the US.
Let’s just briefly talk about the most basic part of the process, creating the company. I’ve created companies in the US, UK, Estonia, Hong Kong and Japan. Japan is by far the most complicated and expensive company creation process.
To create a Japanese company you need to:
- Pay ~$2000 in government fees.
- Create a custom set of 3 ink stamps (Hanko) for the company.
- Pay ~$1000 in fees to a company creation service (unless you do it yourself).
- State and show that you have a specific transfer in your bank account for a “capital amount”, normally $10,000.
- Wait >1 month for the creation process to happen (in total it took me 3 months).
This is for the Japanese LLC equivalent. For a Limited company I suspect it’s significantly more complex.
In contrast to this creating a company in the UK costs ~$20 can be performed entirely online and your company with be active in ~1 day. The US is similar, I used a lawyer that differed all fees and the process took <1 week.
On top of this, in Japan you will need to pay ~$1000 a year to keep the company active. Accounting fees also higher than elsewhere.
This is the most obvious thing that could be fixed. Make it cheaper, quicker and easier to create companies.
Seed funding
Summary: International seed funding is not available in Japan and there are essentially no domestic sources of seed funding. In contrast to this, in the US multiple sources of seed funding are available.
Richard’s article talks a lot about Angel funding. I recently received Angel funding for my startup. But I think individual Angel funding is probably only one of a number of drivers of startup creation in the US and at this point, may not be the most important. An argument can be made that this was more important in the creation of the Silicon Valley startup ecosystem. But even so, I doubt that tax breaks were a significant factor here.
Venture Capital
The US has a large number of seed funds (like YCombinator). I’ve interviewed with YC twice and have worked for 3 early stage YC startups, so I have a rough idea of how this works. I would guess that in the majority of cases YC is the first money into a startup. YC alone fund 400+ startups twice a year. All these companies are incorporated in the US. YC will fund companies physically based outside the US, but to my knowledge they have never funded a team which has stayed in Japan.
These kinds of accelerators/seed funds simply don’t exist in Japan. Those that do (e.g. DG Ventures) don’t invest in a large number of companies, and have various other issues…
Deep tech (science based) startups in Japan often work slightly differently. In the US these would often go the VC route or get government grants (see below). In Japan. however, VCs often seem go out and find some interesting university research then try and pair them with a non-technical CEO. The idea, I guess, is that the work is basically done and the CEO just needs to build a team and execute on this core IP… In the US deep tech startups generally start with a technical CEO… or at least one with a few successful exits.
Government Grants
The US has a government grant program called the SBIR, branded as “America’s seed fund”. Grants are often “themed” for example accepting applications in Genomics or COVID19 diagnostics etc. They work well for deep tech startups needing to perform proof-of-concept experiments. They can provide funding of $200,000 to ~$2,000,000. Funding is 100%, and for smaller grants the reporting requirements are minimal. It’s possible to start a company, get SBIRs and complete all your seed stage work without losing any equity in the US. Many US university spinouts have followed this route.
I’ve seen no such funding in Japan. There are NEDO government grants. These are I believe 50% matched funding. Once you get the grant you may be able to reclaim 50% of the cost of purchases from NEDO. From what I can tell each item requires competitive quoting. The reporting requirements are huge, and not covered by the grant. I would most likely reject a NEDO grant if offered one, the overhead is too high.
Angel Funding
There’s a much higher density of Angel funding in the US. There are multiple Angel networks, in some sense this is a function of a successful startup scene. Successful founders often want to continue to be involved in startup creation through Angel funding. I’m not aware on any significant Angel networks in Japan.
Miscellany
Summary: The US corporate environment is more mature. There are easier routes to getting patents filed and in general institutions are working to help new startups grow.
When starting my company in the US, I was able to find both corporate lawyers and patent lawyers who would differ payment until I raised $1,000,000. This makes it much easier to get things moving. Experienced IP lawyers are more readily available in the US, and filing in the US first is preferable in many cases.
Conclusion
The US has built a very mature startup environment which is unlike any other in the world. That being said, Japan has some clear barriers to startup creation which could be removed. Japan also has a strong high tech work force, which is paid relatively poorly. $100,000 might be entry level pay in the US. In Japan this offer would likely double the salary of many PhD level scientists. While there isn’t the density of engineers that exists in the Bay Area, with equal financing, you can likely hire experienced staff relatively easily at seed stage.
Many people have talked about the Japanese being “risk averse” and wanting to work for large companies. I’ve not seen much evidence of this. Rather, it seems that the required funding sources simply don’t exist in Japan, which limits startup creation.
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