Renewed overseas investor interest in Japan may help the country’s overlooked startups defy a global venture capital slump, according to early-stage investor Coral Capital Inc. Chief Executive Officer James Riney.
(Bloomberg) — Renewed overseas investor interest in Japan may help the country’s overlooked startups defy a global venture capital slump, according to early-stage investor Coral Capital Inc. Chief Executive Officer James Riney.
Interest in Japan is surging as fears of sudden tech crackdowns in China prompt investors to reevaluate Tokyo’s slower pace of change. US investors including Warren Buffett are reallocating more of their Asia portfolios to Japan, helping to catalyze a shift that’s lifted the Nikkei 225 index for 10 straight weeks.
Buffett’s interest has put the spotlight on Japan, prompting more investors to look at different asset classes there, including private equity and venture capital, Riney said in an interview with Bloomberg TV on Monday.
“When it comes to investing on long-term time horizons, these investors want predictability,” he said. “Right now, China is not offering that. Japan is offering that.”
When it comes to nurturing startups, however, the world’s third-largest economy lags far behind the US and China. While the US has more than 600 startups worth $1 billion or more and China tops 150, Japan has six, according to the research firm CB Insights.
Prime Minister Fumio Kishida is trying to change that, with a five-year plan to multiply investment in the country’s startups 10-fold to ¥10 trillion ($70 billion). More tax incentives into new companies may help channel more overseas investment into Japan’s startup ecosystem, according to Riney.
Part of the problem has been a dearth of funding for later-stage startups, especially those preparing for Series D rounds and beyond. Such ventures grappled with a near-30% drop in valuations in 2022 on a global decline in VC investment and a sluggish market for initial public offerings, Riney has said in his blog.
Still, that’s mild compared with tumbling valuations elsewhere. Japan was spared astronomical valuation hikes seen in other markets in 2021, thanks to mega-funds largely passing Japan by. That allowed VC activity to grow in Japan in 2022 and defy a global selloff, Riney said. “The hangover afterward just wasn’t as severe.”
Japanese startups raised a record ¥877 billion in 2022, according to INITIAL Enterprise, which collects data for domestic startup funds. That’s roughly 10 times the figure in 2013.
“It’s quite clear that the Japanese government has made it a priority to invest in startups, and they’re going to do that for the long term at this point,” he said. “A lot of that pressure and engagement needs to really be enforced from the top.”
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