[Interview] Longtime startup watcher predicts more 'unicorns' in Japan

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J-STORIES - By numbers alone, startups in Japan pale in comparison to some other nations. The number of unicorn startups in Japan is less than a dozen, compared to hundreds that have found a footing in the United States, or China. 

But long-time startup watcher in Japan, Tim Romero, is optimistic for the future growth of Japanese startups, which are led here by the likes of AI startup Preferred Network and news aggregator SmartNews. Indeed, he anticipates seeing more of these "unicorns"—young, tech-driven companies exceeding $1billion in value—coming out of Japan due to the rapidly changing investment landscape. Furthermore, they are being helped by a growing number of local entrepreneurs with global ambitions, and Japan’s unique characteristic of collaborations between startups and big companies. 

“I think one of the reasons that we don't see as many unicorns in Japan as we do in comparable markets—or even in smaller markets—is that, historically, Japan's venture capital (VC) industry has been set up to have a safe, steady stream of low-value initial public offerings (IPO),” said Romero, who leads Google’s startup initiatives as head of Google for Startups Japan. 

“That's just how the industry was structured. Founders were pressured into IPO early,” he said. “Had those companies been in the United States, they would have stayed private longer.” 

More unicorns from Japan? 

Romero, a Tokyo-based serial entrepreneur who has also interviewed more than 200 startup entrepreneurs in Japan for his own startup podcast Disrupting Japan, says Japan should see more unicorns coming out of the country if Japanese startups follow suit and stay private longer. And in fact that’s the trend he’s starting to see. 

“What we're seeing now is largely due to more foreign capital coming into the market, founders have more options there,” he said. “It's easier to raise money to continue to grow.” 

Meanwhile, Japanese VCs are also starting to raise bigger rounds than before, meaning that they eventually need to make bigger cheques by waiting until their investee companies become highly profitable. This is another factor that could help keep Japanese startups private longer and generate more unicorns, Romero said. 

Originally from the U.S. east coast, Romero believes what is unique in Japan is the level of collaboration between startups and big companies, especially the amount of funding provided for startups by corporate venture capital (CVC) funds.

“In the U.S., startups and enterprises are kind of natural enemies. Every startup wants to grow up to put the enterprise out of business and take their place,” he said, adding that in Japan, startups and big brands tend to establish partnerships rather than animosity. 

Still, such collaboration between startups and enterprises could cut both ways, he says. 

“It results in startups growing more slowly because they have to wait for partners to catch up to them and drag them along,” he said. “But it allows for much more stable growth.” 

Romero thinks an increasing number of Japanese entrepreneurs are having ambitions of going global. 

“I think Japanese founders, compared to say 10 years ago, or even five years ago, are much more internationally minded. I talk with far more founders today who say they are 'global' from day one, ” he said. 

Romero explains that the change he’s been witnessing in the venture capital industry, whereby more money is available for late-stage growth rather than forcing startups to go public quickly, is making it easier for them to have global ambitions. 

However, he adds that Japanese startup founders still need to be “much more globally conscious and much more aware of potential competition coming from overseas.”

According to Romero, what matters more is not the size of the market, but where the market is. 

“China is a good example," he says. "The Chinese market is bigger than the Japanese (market), not in GDP, but the kind of addressable market that most startups are going after. But Chinese startups tend to be very international. It's not just the size of the market. I think it really it's just a mindset.” 

Romero believes Japanese startups should go back to the attitude of the 1960s, a time when industries were “incredibly global.” The Japanese companies might have had a lower English-communication level, but they were more innovative because of their international mindset, according to Romero.

“They understood what was happening in their industry everywhere in the world,” he added.

Wanted! Role models 

Igniting the entrepreneurial fire within aspiring startup founders today can be as simple as having “role models.” But they don’t have to be industry superstars like Rakuten CEO Hiroshi Mikitani or Softbank CEO Masayoshi Son. What they need are role models who are similar and relatable.

They can include people who are maybe five or 10 years older than they themselves are, or those who've been successful overseas," Romero says. "Those we can call, ‘hey, well, look at these people.’ And a university or high school student will more likely see them and say, ‘Oh, they're kind of like me, right? I can do that,' ” Romero said.

While stressing the importance of this "closer" age link, Romero did not downplay the path to success taken by older entrepreneurs, but said “the gap is just too big” for the average student to aspire to that older generation. 

Romero explained that another factor that can help startups in Japan is visible government support. He said it is a good thing if the government invests money and other resources, but being public about it is a form of validation that can inspire confidence.

“When the government gets involved and takes a very visible role, it encourages larger companies to work with startups," Romero said. "It makes startups seem more legitimate. It makes it easier for people to join startups.” 

He mentioned the U.S. government's involvement in startups, citing as an example how Silicon Valley was built “on DARPA (Defense Advanced Research Projects Agency) and U.S. Defense contracts and budgets.” 

He added that while the U.S. government prefers to be seen as playing a minor role at the back of the stage, he believes the Japanese government should move more into the spotlight.

“In Japan, it's great that the government is recently investing more money and resources into supporting startups,” he said, adding that the support should be more visible to create a “halo effect.” 

By so doing it makes startups seem more legitimate, he adds. "It makes it socially easier for people to join startups. And I think right now, that's one of the most important things that the government's involvement is providing. I mean, the money is great, too. Don't get me wrong. But I think that full validation is also really important.”

Romero opined that Japanese entrepreneurs seem to lack a “sense of urgency,” describing how he noticed it when he came back to San Francisco last year.

“Japanese founders are on a level of anywhere in the world in terms of knowledge and innovation technology. But what really seems to be missing is that in San Francisco, there is this sense of urgency, the sense to do it right now," he says. “It’s like ‘Wow, they'd be a great customer. We gotta call them today. If we grew 20 percent last quarter, we got to have 25 percent growth this quarter!’ That (kind of urgency) is missing in Japan.”

Another ingredient Romero believes is missing from the Japanese startup menu is the “sense of community.” He wants to see an “ecosystem” where everyone is helping one another.

“We really need to improve that kind of pay-it-forward community where everyone is working together, bouncing ideas off each other,” he said.

Writing by Toshi Maeda

Editing by Robert Gilhooly

Top page photo by J-STORIES

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