“Why is it so difficult to create a thriving startup culture in Japan?” I was recently asked this question by an attendee at a talk I was giving about venture capital in Tokyo. There are multiple answers to that question, but I believe many of them are rooted in Japan’s risk-averse culture and attitude towards failure.
At PARC, I primarily work with very large Japanese corporations on R&D partnerships. But I have also worked extensively with startups in a variety of industries in both the U.S. and Japan, including witnessing and experiencing startup life during the San Francisco dot-com boom. After receiving my MBA at Carnegie Mellon University, I moved to Japan where one of my business school classmates and I co-founded Tilefile Japan, a social media sharing site very much like today’s Pinterest. Subsequently, I joined ngi capital, the company that funded Mixi — once Japan’s darling social networking site before the success of Facebook.
Through all of these business experiences, I noticed some stark differences between the startup cultures of these two countries. In particular, I observed that the Japanese, as a culture, are very risk averse and have a very high intolerance of failure. This, of course, makes it difficult to have a thriving startup environment.
Directly or indirectly, this risk aversion and failure intolerance contributes to the following major issues that inhibit the growth of a successful Japanese startup culture:
Difficulty in Recruiting Local Talent
The risks of leaving a well-established corporate position in a company are much higher in Japan than in the U.S. In the U.S., the experience of even a failed startup attempt can be viewed as valuable upon returning to the corporate environment. This often leads to higher positions and higher salaries. Not so in Japan. Although it is starting to change, the promise of “lifetime employment” is still enjoyed by many, but only as long as you remain with that company.
Extremely Long Sales Cycles, Especially to Large Corporations
Japanese business culture is based much more on establishing a relationship and building trust. In order to make a sale, there must be consensus among a large number of internal stakeholders. This is difficult and time consuming even for a brand like Xerox and PARC, but can be virtually impossible for an unknown startup. When cash-flow is a critical component to your survival, this is a difficult challenge.
During my VC days, I sat on the board of a B2B startup and their product was one of the best on the market. They had a strong pipeline of key Japanese companies, including the Japanese postal system. However, they were not able to close even a single deal and eventually ran out of money to continue their operations in Japan.
A Very Small M&A Market Makes It Unattractive to Go Public
Combining an inherently conservative nature with resistance to incorporating things that are Not Invented Here (NIH), the M&A market in Japan is very small. Although Japan has introduced measures to make it easier to go public, valuations that companies receive are very low. With the added regulatory overhead of being a public company, this makes it relatively unattractive to go public. All of these factors also make it unattractive for investors to invest in startups, an entrepreneur to start them, or potential employees to join them.
Venture Capital is not an Entrepreneurial Endeavor
Most venture capital in Japan are investment divisions of banks and other financial institutions or of major corporations. The investors are “salary-men,” who are assigned to the investment division for a limited amount of time (typically 3 to 5 years). After that, they will get moved to another division within the same or a related group company.
Contrast that to the VC firms of Silicon Valley and other parts of the U.S., many which have been started by successful entrepreneurs and are or have been ventures themselves. You can imagine that the types of risks and investments that the two different types of firms would make are quite different.
Lack of Disruptive Ideas
Although I did not go through it myself, I have seen that the Japanese educational system and its huge focus on rote learning and memorization is much more rigid in general than the U.S. Students are told to not question the teacher and refrain from expressing their own ideas. My Japanese friends are surprised when I tell them about the concept of show-and-tell or the practice of speaking up and expressing your own opinions. This, in the long run, inhibits the free creativity and non-linear thinking necessary for truly disruptive innovations. As a result, many of the startups that have been successful here are modifications/localizations of concepts brought from abroad.
In this article, I have only touched on the cultural reasons. There are, of course, structural, historical, and logistical reasons as well. Japan is not the only country that has these issues. Singapore, with its own type of cultural conservatism, also struggles with creating a startup ecosystem.
I also realize that changing the culture is one of the hardest things to do. There is no one simple, giant answer to this issue. For example, companies could set up entrepreneur tracks that allow people to return or join that company, at a level equal to or even above their peers, after experiencing a startup. At the end of the day, I believe there needs to be a series of many small steps and failures that will lead to bigger successes and, ultimately, significant changes in the long term.
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