Japan’s Entrepreneurial Ecosystem: Lots of Talent, Inverted Financing System

Japanese entrepreneurs often face trouble accessing local talent, despite the fact that about 35 million people live in the Greater Tokyo Area.

Dan Dumitriu, Co-founder of Midokura, a software company that produces virtual networking services for cloud platforms, has faced this problem first-hand. “There’s tons of talent, but most is locked up in very large corporations,” he says. Talented people often either don’t want to leave or don’t know they can, and can be deterred by linguistic and cultural barriers.

But despite these challenges, Dumitriu has built and expanded a conventionally successful company out of Tokyo. Private cloud software and associated networking services “is going to be huge,” he says. “Who’s going to be able to win it is definitely an open question.” Largely, he says, it’s the juggernauts like Microsoft, VMWare and Amazon, versus everyone else.

His team, he says, was eventually able to recruit a great pool of workers, but had to rely more heavily on headhunters and recruiters than personal networks.

In some cases, the ex-pat community in Japan may be skeptical of joining new companies. Jim Maricondo, a Stanford graduate who worked in Japan for over a decade, says he faced several challenges when he considered working at a local-startup. Compared to the US, he says, “the pay for engineers in Japan is very low.” On top of that, he found difficulty negotiating basic terms of employment. “In some cases,” he said, “when I started asking them basic due diligence questions–who are your investors, how much money did you get– they took it personally and got offended.” Maricondo eventually returned to the US to work for iSi-Dentsu of America.

Allen Miner, Chairman of SunBridge Corporation, has spent years building a better Japanese technology start-up ecosystem. Despite the personnel challenges, he believes there is good reason to be optimistic about the prospects for certain start-ups in Japan. “Until two to three years ago, almost no new start-ups being formed in Japan were growing beyond Japan’s borders,” he said. “The market was big enough that you could get quite big without taking on the bigger challenge of going overseas.”

Now, he believes companies like Midokura have the potential to succeed globally. The overall picture in Japan is less bleak than imagined. In 2009, the Japanese economy hit a roadblock following new regulations and the collapse of Lehman Brothers, dropping to about a billion dollars annually in 2009. Today, Miner says, it’s back up to about 1.4 billion, which is below 2008 levels but slowly on the rise. On top of that, the government invests another billion per year.

The key is to understand and work through Japan’s unique investment climate.

“Raising capital was very hard,” Dumitriu recalls. High-risk, high-reward business can be tough in Japan, where he says local venture capital firms have less appetite for risk. Midokura grew very slowly as a result, from 7 to 27 employees in two years.

In Silicon Valley, Miner says, large firms often don’t invest in Series A funding anymore. In Japan, he believes the situation is inverted. “The financial institutional VC’s in Japan will do seed stage or early stage investing,” he explains. “As an industry, the Japanese financial VC’s tend to think of it as a portfolio investment strategy to spread a lot of money to a lot of different companies. They’re using an efficient market theory approach to investing.”

After about two or three million dollars of investment, though, “typically the next step is get to operating profitability, grow to 10-15 million, and take the company public.” In short, the ecosystem in Japan is great at the start, but has a really weak follow-up ecosystem.

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