Promising Signs for a Resurgent Tech Ecosystem in Japan

Shun Nagao, Venture Partner, White Star Capital

Shun Nagao, Venture Partner, White Star Capital

Japan’s tech sector has a lot going for it, a tech-savvy population, high internet penetration, and a thriving set of desirable cities. Yet, the last decade of technology growth in Japan has been limited. Coinciding with our tenth investment in Asia, and our first in Japan, White Star Capital has taken a closer look at how the Japanese tech sector and VC landscape is beginning to show promising signs of fresh growth.

What has changed?

A lot has changed since we produced our last report in 2018. However, despite some macro global concerns, we remain bullish about Japan in the long term. VC funding has accelerated in the last few years, triggering a surge in valuations across the country. As of the end of 2022, Japan’s tech sector has twelve unicorns1 .

Total capital invested in Japan’s startup ecosystem reached a record-high of $6.3 billion in 2021, after a slight drop in 2020. In contrast, to deal value, the number of deals has declined since 2018, indicating a fall in the number of early-stage startups, but promising signs of growth for Japan’s scaleups.

Trending Sectors and Verticals

Private companies with a valuation of ¥100 billion

" SaaS, AI & machine learning, and mobile were the three hottest verticals in terms of VC funding in 2021-2022 YTD "

SaaS, AI & machine learning, and mobile were the three hottest verticals in terms of VC funding in 2021-2022 YTD. The same three verticals also led the way in terms of deal count, with SaaS at 459, AI and machine learning at 331, and mobile at 226. While the top five fastest-growing sectors in 2021 in terms of funding were content curation, space, logistics, food tech, and Biotechnology. Sectors we expect to see continued growth in over the coming years.

The Macro Perspective

From a macro-perspective Japan has been somewhat at a stand-still for the past three decades, due to continued deflationary pressure, challenging demographics, the rise of competitive neighbors, and chronic resistance to change. However, under the hood, there have been promising technology and innovation trends, towed by budding entrepreneurs, which are now blooming. International technology investors are no longer passing over this market, as can be seen by the large early-stage deals participation in 2020.

In addition, the current government administration led by Prime Minister Fumio Kishida has announced multiple initiatives to support Japan’s startup ecosystem since assuming office in October 2021, including increasing the budget related to startup investments to ¥10 trillion ($7.7 billion) by 2027, as well as launching a ministerial post to promote startups. A five-year plan has also been formulated towards the end of 2022 which includes a roadmap to increase the number of startups by 10x over the next five years.

Looking Toward the Future

Whilst there is much focus on Japan’s low growth and aging population, Japan remains the world’s third-largest economy and has a highly attractive domestic market that international tech players are increasingly looking to target. We see a new generation of entrepreneurs coming out of these companies that drive the start-up ecosystem going forward. In particular, Japan is quickly emerging as a global leader in artificial intelligence research and business applications. The surge in unicorns that leverage this technology at their core is evidence of Japan’s increasing global presence in this field.

We continue to have a strong belief that the market is on an upward trajectory and that we will see great entrepreneurs create meaningful and impactful businesses extending beyond national borders.