Japan Startups: Is the Samurai Spirit Back?

The promise of venture funds is beginning to lure Japan's best and brightest out of corporate anonymity and into the light of entrepreneurship

by Kenji Hall

For years, Japan has been trying to rekindle its renegade Samurai business instincts and create a new class of startup corporate warriors to lead the economy forward. But Japan isn't an easy place to buck convention. Just ask Yoshito Hori. As the founder of Tokyo venture fund Globis Capital Partners and dean of the Globis Management School, Hori has spent the past 14 years silencing his skeptics and chipping away at his country's rigid corporate norms.

He's done that by putting young execs through B-school boot camp to teach risk-taking and finance, offering them an alternative to the anonymity of working for Japan Inc. And for the brightest prospects he's dangled the promise of venture funding.

Not long ago, Hori, 44, might have been considered a maverick. But these days he's got plenty of company, thanks to the popularity of Japan's 50 B-school programs and the spotlight on benchaa —or venture— celebs who are breaking the rules of Japan's clubby business world. One former startup, online retailer Rakuten, grabbed headlines last October after quietly amassing a stake in TV network Tokyo Broadcasting System and then proposing close management ties.

NOT QUITE THERE.

A big reason for the change is that the once-stagnant economy is sputtering to life, and corporate profits are improving. That means even the small fry have a shot at getting funds. But here's the downside: Despite promising signs of growth, Japan's venture capital scene lacks the sensational growth of China's and looks puny compared to the $21 billion U.S. market.

"It may require another generation to become established," says Richard Dasher, director of Stanford University's U.S.-Asia Technology Management Center.

Still, the tech sector's growing crop of young talent offers evidence of progress. For instance, 31-year-old Kenji Kasahara is the brains behind Mixi, Japan's most popular social networking service. He's also the chief executive of the $160-million business.

IPO CRAZY.

Another example is Kentaro Iemoto, the 24-year-old CEO of Clara Online. He was just 16 when he raised $10,000 to start his Web-based server-hosting company. And at the core is a contingent of entrepreneurs in their 40s—Rakuten CEO Hiroshi Mikitani, DeNA founder Tomoko Namba, and Takeshi Niinami, the head of convenience store chain Lawson's. He attended B-school in the U.S in the 1990s before returning home to set up shop.

Initial public offerings have put many young Turks on the fast track to success. In fact, so many of the country's famed Netpreneurs now either live or work in Tokyo's posh high-rise Roppongi Hills district that they're referred to as Hirusu-zoku: Hills' clan.

You don't become a member of the clan by going for the low pay and predictable promotions at Sony (SNE) or Sharp. "I hear more young entrepreneurs talking about their dream of an IPO than ever before," says Globis's Hori.

TOUGH FUNDING.

Dreaming is still a lot easier than locking down the money. Japan's startups attracted just $1.7 billion in venture capital in the fiscal year through March, 2005, according to the Venture Enterprise Center, a state-funded research firm that surveyed 105 venture funds.

That puts Japan's market at roughly half the size of China's and less than a tenth that of the U.S. (U.S. venture capitalists spent a mere $100 million in Japan last year.) And startups that can't get funding early on can kiss goodbye any hope of listing on Japan's small-cap markets, such as the Tokyo Stock Exchange's Jasdaq and Mothers bourse.

You can't blame Western investors for chasing the potentially astronomical profits in places like China or India over the modest gains of Japan's market. And why struggle with a slow-moving, old-fashioned corporate culture in Japan when there are other countries adapting to a global market that's changing at Internet speed?

THEY'RE NO ANGELS.