NIRA OPINION PAPER
No.39 | November 2018

NIRA OPINION PAPER
No.39 | November 2018

Is the lack of “Unicorns” in Japan
good news or bad news?
-Injecting a historical institutional perspective into debates about
Japan’s startup ecosystem Kenji Kushida
Research Scholar, Walter H. Shorenstein Asia-Pacific Research Center, Stanford University
Japan’s startup ecosystem is gaining new levels of attention as startup firms
are increasingly born from elite Japanese universities, attract top Japanese talent, andcollaborate with large incumbent Japanese companies. However, the lack “unicorns” –private companies whose valuations exceed 1 billion USD – has been a common causeof concern. Mercari, a C2C e-commerce service, became Japan’s sole unicorn in 2016,
joined in 2017 by Preferred Networks, an industrial robotics AI company. However,with Mercari’s 60 billion yen IPO in June 2018, the largest on Japan’s small cap Tokyo
Stock Exchange “Mothers” Market, there is now only one Japanese unicorn—or just a
handful, depending on the source. In contrast, there are 117 in the United States (amajority in Silicon Valley alone), 73 in China, 15 in the United Kingdom, and 11 inIndia, according to CB Insights.
Is the lack of unicorns in Japan evidence of an anemic startup ecosystem? Or
are there are other forces at play? This opinion paper contends that when taken in ahistorical perspective, Japan’s lack of unicorns demonstrates the very success of a
critical institutional shift in Japan’s startup ecosystem that improved the situation
remarkably since the late 1990s. As such, the current situation should be consideredat an evolutionary stage where unicorns can now emerge in Japan if venture
capitalists begin to take diverse strategies in investing –especially after the large IPOof Mercari.

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NIRA OPINION PAPER
No.39 | November 2018

Japan’s Startup Ecosystem and “Unicorns”“Unicorns,” venture capital backed startups with private market valuations of 1 billion
USD or more, are often used as a measure of a country or region’s startup ecosystem dynamism
and health. Large numbers of unicorns suggest that lots of startups are receiving large amountsof venture capital, and are able to grow rapidly. Since venture capitalists only get returns (“exits”)
from M&A or Initial Public Offerings (IPOs) of their portfolio companies, highly valuated startups
fetch high prices when they are purchased or go public, providing them with windfall returns.
With the expectation of windfall returns, venture capitalists look for startups that can be expected
to grow exponentially, disrupting existing markets and introducing new technologies that create
paradigmatic shifts to various business areas. Such is the often-idealized view of a robust startup
ecosystem.
In the US, a 2015 analysis found that for companies founded after 1974, VC-backed firms
accounted for 42% of the number of companies founded, 63% of the total market capitalization,
38% of employment, and 85% of R&D1. VC-backed companies Apple, Amazon, Google, andFacebook were among the top market capitalized companies, as well as the top cash holders,revealing not only investor sentiment, but also real cash value generated. This is seen as the highend of excellent returns from a robust startup ecosystem.
When considering Japan’s startup ecosystem, most analyses begin by noting the small
size of Japan’s VC industry compared to the US, Silicon Valley, and possibly the EU and China.
Figure 1 Venture Capital Investment Amounts (billions USD)
2010

2015

Japan

1.29

1.11

US Total

23.52

59.70

9.39

27.76

4.26

5.91

Germany

0.97

0.87

France

0.80

0.84

UK

0.79

0.62

Israel0.41

0.65

South Korea

0.96

1.78

Silicon Valley
EU(Note) UK's data is as of 2014.
(Source) Venture Enterprise Center, GVCA, BVCA, AFIC, IVC Research Center, KVCA

The disparity is real. However, the size gap is less extreme when compared to other G7
countries.
In particular, the lack of unicorns in Japan—only limited to Preferred Networks according
to CB Insights—are often seen as cause for concern. However, should this be the dominantnarrative? This opinion paper disagrees.
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NIRA OPINION PAPER
No.39 | November 2018

The Silicon Valley Model
Beyond a place, Silicon Valley represents a model, a specific set of complementary
institutions that mutually enhance each other. The Silicon Valley institutional model is a core casein comparative institutional analysis, a framework for cross-national or regional comparison ofunderlying institutions that support political economies2. The Silicon Valley model produced
multiple waves of new principles of competition that accelerated commoditization elsewhere, suchas modular architecture, cross-national production networks, and platforms3. Platforms, in which
third parties could utilize the resources provided by the platform player, which enhanced both thevalue of the third parties as well as the platform provider, but conferred greater benefits to theplatform provider, emerged as a critical driver of global competition since the 2000s4.
The six institutions of underlying the Silicon Valley model can be distilled into: (A) finance,(B) human capital, (C) industry-university-government interactions, (D) industrial organization,(E) entrepreneurship culture, and (F) business infrastructure5. See table below for the specificinstitutions: (1) finance centered around venture capital, (2) diverse and mobile human capital, (3)multifaceted

andmultidirectional

industry-university-government

ties,

(4)

industrialorganization comprised of both large firms and startups, with large firms engaged in “open”
innovation, (5) the celebration of entrepreneurship with monitoring and evaluation of failures, and(6) business infrastructure supportive of the startup ecosystem.
Table 1 : Characteristics of the Silicon Valley Ecosystem, Sorted into Core InstitutionsA) Finance• Finance and governance of startups by venture capital• High financial returns for successful entrepreneurs and startups’ early employeesB) Human Capital• High level and diverse human resources for all stages of startups• High labor mobilityC) Industry-University-Government Interactions• Top class universities• Diverse and multifaceted industry-university ties
• Supportive role of government in setting basic research trajectories
D) Industrial Organization• Dual ecosystem of large firms and small, fast-growth startups• Highly competitive industries, balancing between “open innovation” and secretprotection• Extensive government role in shaping technological trajectories and basic scienceE) Entrepreneurship Culture• Acceptance of failures (monitoring and evaluation of failures)F) Business Infrastructure• Business infrastructure (law firms, accounting firms, mentors, etc.) Legal platform(Source) Adapted from Dasher, Harada et al. 2015
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NIRA OPINION PAPER
No.39 | November 2018

Japan’s Startup Ecosystem in Historical Institutional Perspective
The institutional configuration of Japan in the postwar era was largely detrimental to thedevelopment of institutions of the Silicon Valley model: (1) its bank-centered financial system left
little room for venture capital; (2) life-time employment “locked up” high quality human capital;(3) numerous regulations constrained university-industry-government ties; (4) large firms
engaged in in-house R&D without relying on external entities; (5) entrepreneurs were notconsidered traditional elite; and (6) the business system and legal environment were not friendly
towards supporting startups.
Japan’s startup ecosystem has come a long way since the mid-1990s. Numerous
regulatory shifts and business environment changes provided new opportunities as Japan’s
political economy evolved. Many of the structural impediments to Japan’s startup ecosystem thatwere directly attributable to Japan’s postwar high growth era economic model had shifted
considerably by 2010: (1) new small cap markets were created and the VC industry developed, (2)labor fluidity increased while the prestige of large companies declined, (3) regulatory shifts
enabled universities to be more active in industry ties, (4) firms increasingly began embracing“open” innovation and collaboration with startups, (5) entrepreneurs are more celebrated than theprevious decade, and (6) the business environment such as the legal structure and other firms
such as law firms, accounting firms, and government programs are actively supporting the startup
ecosystem.
Table 2 Silicon Valley Ecosystem Characteristics Compared to Japan’s Impediments in
the 1990s, Changes by 2016
Silicon Valley Startup
Ecosystem Characteristic

Japan in the mid-1990s:
impediments

Japan in 2016:changes that facilitatestartup ecosystem

Financial System:
Venture capital

Bank-centered, traditional
financial markets

New small cap financial
markets, growing VC industry,rise of independent VCs

Labor Market:
fluid, diverse, highly skilled

Long term employment withseniority ties creating illiquid
labor markets. Best andbrightest locked into large firms
for entire career

Increasing labor mobility,
especially in IT sector and withforeign firms. Lower prestige
and opportunity with large
firms

Industry-UniversityGovernment Ties

Numerous formal regulatory
constraints on universities, lackof brain circulation

Active efforts by universities,
private venture capital, andgovernment to spin out
successful startups with
university technology“Open” innovation with large
firms and small firm symbiosis

Closed innovation with large
firms in-house R&D anduninterested in business withstartups

Firms more interested in open
innovation, participation in VC
funds, business with startups

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NIRA OPINION PAPER
No.39 | November 2018

Social system encouraging
entrepreneurship

Entrepreneurship seen as low
prestige vis-à-vis large firms
and government, financiallyrisky

Professional services
ecosystem

Small size of professional
ecosystem

Rising attractiveness ofentrepreneurship as large
firms enter competitive crises,
increases cases of successful
startups
Law firms and accounting firms
setting up startup-focusedpractice areas to foster andbenefit from growing startup
ecosystem

Evolution of the Japanese Economic Model
A longer analysis of these changes can be found in a longer paper at the URL address
below6. Suffice it here to say that a large number of the complementary institutions, identified by
Aoki (2001) as core elements of the Japanese economic model, have shifted to new values7.
Change was difficult and gradual since each of the institutions depended on one another, andpiecemeal adoption did not bring about satisfactory performance. However, almost three decades
since the bubble burst in 1990, the evolution of Japan’s economic model has proceeded to adegree that is often underappreciated8.

Japan’s Financial System Evolution: Creation of Small Cap Markets
In the late 1990s, a critical impediment to Japan fostering a vibrant startup ecosystem
was the lack of opportunities for venture capitalists to exit from their investments—initial public
offerings (IPOs), and mergers and acquisitions (M&A) by large companies. The situation with
IPOs, in particular, was grim, with the average number of years for companies to go publicspanning decades. The need for a small capitalization market for IPOs was acute.
After part of Japan’s “Big Bang” financial reforms in the mid to late 1990s deregulated
the creation of new stock exchanges, two competing small cap markets were created in 1999,
providing a stable source of exits enabling VCs to realize returns. The story of the creation andevolution of these markets is interesting in of itself, but beyond the scope of this short overview.
The small cap markets are now operated by the Tokyo Stock Exchange.
Critically, the scale of firms listed on Mothers is far smaller than that of the US
NASDAQ. Moreover, the actual relative cost of listing on Mothers is far lower than other Asianmarkets9.

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NIRA OPINION PAPER
No.39 | November 2018

Table 3 Amounts Raised in IPO, Small-cap Markets in Japan, US (million $)Average

Median

Japan

Japan

(Mothers/JQ)

US NASDAQ(Mothers/JQ)

US NASDAQ

2015

7.6

116.0

3.5

75.0

2014

8.7

121.6

5.7

65.0

(Source) Tokyo Stock Exchange, NASDAQ

On the one hand, this hinders truly large high-growth firms from emerging, since once
firms are listed at a smaller scale, they tend to become more risk averse and pursue stable rather
than exponential growth. VCs aiming for stable returns on their portfolio tend to push startups to
IPO, even if they are small, to realize gains.
On the other hand, since it is easier to IPO in Japan than in the US, Japanese VCs may
actually face a more predictable exit strategy environment, especially given the relatively low
levels of M&A in Japan10.
To use a baseball metaphor, the Japanese VC industry tended to produce one-base hits
rather than homeruns since the Mothers enabled small scale IPOs, with relatively little M&A
activity in Japan.

Evaluate the Current Situation as a Vast Improvement from the Past
Japan’s current small cap market situation is a vast improvement from the past. VCs areable to invest in companies and have stable expectations about profits from an IPO within a few
years. While IPO sizes have been almost a tenth that of the US Nasdaq, this value should beseen in historical perspective rather than a simple comparison with Silicon Valley. Compared tothe past, when VCs in Japan had little expectation of IPO or M&A as an exit, and therefore
extended loans as a primary means of funding startups—as was the case until around 2000—thecurrent situation is a major step forward.
The IPO of Mercari provides another opportunity. If startups want to pursue larger IPOs,
and VCs are supportive, as was the case of Mercari, it has now been proven possible in Japan. VCs
in Japan can aim for homeruns. Mercari’s large IPO brought windfall profits to the VCs thatinvested – millions of USD became hundreds of millions. Mothers now has now demonstrated its
potential for being a market that can sustain both small IPOs and large ones. VCs in Japan havean example to point to in pursuing larger IPOs rather than only smaller ones.
What does this mean for the pathway of Japan as it develops a more mature startup
ecosystem? Will it follow in the footsteps of Silicon Valley, or create something new, different, anddistinct?
From an institutional standpoint, it is already clear that Japan is at a potentially different
path from that of Silicon Valley. Small-scale IPOs provide an option for VCs to invest in startup
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NIRA OPINION PAPER
No.39 | November 2018that will not scale the way that purely software, or marketplaces such as Mercari are able to, andstill make stable, if lower returns. For the startup ecosystem, this opens space for deep sciencebased startups, or those whose scalability is still unclear, such as regenerative medicine, orservices that require collaboration and deep integration with large firms. Such startups cannot
grow explosively, even if they could grow at a healthy rate and achieve stable, sustained returns.
In Silicon Valley, small-scale exits occur through M&A, but M&A is not as popular in Japan,
though numbers are increasing. Yet, the startups bought by M&A often take very different path ofdevelopment than those who IPO and remain independent, since post-M&A firms usually losesignificant autonomy as they are integrated to varying degrees into purchaser company operations.
Therefore, it may be reasonable to expect a different set of firms in Japan to emerge as small-scale
IPOs vis-à-vis Silicon Valley.
At the same time, Japan has proven that institutionally, creating unicorns is also a valid,
potentially attractive model for VCs, both in Japan and for potential international investors. Thereis the potential for a multiple equilibria situation, in which less scalable startups have a steady
pathway to IPO, while those that may scale pursue the road towards a unicorn. At the core ofJapan’s startup ecosystem, this ability to either IPO small or scale is a critical difference from
Silicon Valley, and as the number of deep science-based startups increase, we will see whether it
becomes a strength for Japan. In particular, symbiosis with traditional industrial firms may be anarea that less fast growing Japanese startups can contribute to startup ecosystems worldwide.

References
1 Gornall, W. and I. A. Strebulaev (2015) “The economic impact of venture capi- tal: Evidence frompublic companies.”
2 Aoki, M. (2001). Toward a comparative institutional analysis. Cambridge, Mass., MIT Press.
3 Baldwin, C. Y. and K. B. Clark (2000). Design rules. Cambridge, Mass., MIT Press.
Borrus, M., D. Ernst and S. Haggard (2000). International production networks in Asia rivalry

or riches? London New York, Routledge.
Kushida, K. E. (2015). "The Politics of Commoditization in Global ICT Industries: A Political
Economy Explanation of the Rise of Apple, Google, and Industry Disruptors." Journal of Industry,
Competition and Trade.
Sturgeon, T. (2006). Modular production's impact on Japan's electronics industry.
D. H. Whittaker and R. E. Cole (2006) Recovering from success: innovation and technology
management in Japan. Oxford University Press.

Copyright Ⓒ 2018 Nippon Institute for Research Advancement

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NIRA OPINION PAPER
No.39 | November 20184

Gawer, A. and M. A. Cusumano (2002). Platform leadership : how Intel, Microsoft, and Cisco
drive industry innovation. Boston, Mass., Harvard Business School Press.
Kenney, M. and J. Zysman (2016). "The rise of the platform economy." Issues in Science andTechnology 32(3): 61.
5

Dasher, R., N. Harada, T. Hoshi, K. E. Kushida and T. Okazaki (2015). "Institutional Foundations
for Innovation-Based Economic Growth." Nippon Institute for Research Advancement.

6

http://www.stanford-svnj.org/s/SVNJ-WP-2018-1-Kushida-Abenomics-Third-Arrow-r6de.pdf

7

Aoki, M. (2001). Toward a comparative institutional analysis. Cambridge, Mass., MIT Press.

8

Vogel, S. K. (2006). Japan Remodeled: How Government and Industry are Reforming Japanese
Capitalism. Ithaca, NY, Cornell University Press.
Kushida, K. E., K. Shimizu and J. Oi, Eds. (2014). Syncretism: Corporate Restructuring and

Political Reform in Japan, Shorenstein APARC.
9

Riney, J. (2016). "7 Things Investors & Founders Need to Know about the Japan Startup
Ecosystem."
Retrieved 2016, June 1, from http://500.co/japan-startup-ecosystem-foundersinvestors/.

10 Ibid.

Kenji Kushida
Dr. Kushida is the Japan Program Research Associate at Stanford University’s Walter H.
Shorenstein Asia-Pacific Research Center. He holds a Ph.D. in political science from the
University of California, Berkeley, and specializes in the study of political economy. He also
serves as the Project Leader of the Stanford Silicon Valley – New Japan Project.

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