What is a good way to measure the innovation power of a country? The number of patents filed by its companies? The R&D budgets in a country? The “reputation” of a country as an innovation hub?
Let me focus here on one particular aspect as indicator of innovation: the number of “Unicorns”, privately held companies with a value of over USD 1 B. There are some other common denominators as well: most of these so-called Unicorns are disruptive, they are high on technology and the majority of them are B2C. Well-known examples are Uber, Airbnb, SnapChat in the USA. New York based consulting company CB Insights recently published a list of all 494 Unicorns in the worlds and remarkably: more than 85% of all these companies in the world are located in only five countries: United States, China, UK, India and Germany.
There are two countries that dominate the world of Unicorns: the USA (250) and China (118).
But where is Japan, the 3rd economy in the world – and for that matter the Netherlands? Japan counts 4, the Netherlands 3 Unicorns. In a recent article published by Tokyo-based HCCR, “Japan is losing the tech race. One AI startup is hoping to change that”, several reasons are summed up to explain for the low-number of innovative companies in Japan, let alone sizable ones like Preferred Networks, one out of 4 Japanese Unicorns. “Japan is home to a culture that frowns on failure,” states Seijiro Takeshita, dean and professor at the University of Shizuoka's School of Management and Information. “in Japan it's more important not to fail than to succeed.”
Also, the co-founder Preferred Networks (PFN), Daisuke Okanohara, explains why Japan is lagging behind in innovation power. His company focusses at practical applications of deep learning and other emerging technologies “in order to solve real-world problems”.
PFN employs roughly 270 people, and about 10% are foreigners, representing more than 30 countries. By comparison, foreign-born individuals make up roughly 57% of Silicon Valley’s technology workforce. “We need more diversity to think or adapt more new, radical ideas,” says Okanohara, adding that Preferred Networks wants to create an environment where “new ideas can be easily adopted and tried.”
Kenji Nonaka, senior partner with McKinsey, proposes that Japanese startups also need to have global ambitions. “Many startups have been very comfortable with succeeding in Japan. Japan is not a small market, but it’s small compared to the US and China. They need to think of their growth in the US and China when they start their business.” He adds that “in Japan, there is a very limited startup community, everyone wants to go to large enterprises.
Another obstacle is, strange as it may sound, the overwhelming presence of Japanese investor Softbank. SoftBank founder and billionaire tech investor Masayoshi Son is the country’s biggest tech cheerleader, but his USD 100 billion Vision Fund has notably not invested in any Japanese startup. Instead, the fund is pouring billions of dollars into big global startups like Uber, Chinese used car startup Chehaoduo and Indian hospitality group Oyo. Its lack of interest in Japan could be because of the slim pickings - most of Japan’s options likely don’t meet Son’s criteria, which requires late stage companies that are only a few years away from going public.
Now, these existing conditions are not easy and quickly to change. So how could Japan INC. counter these obstacles and boost its innovation power?
One way is to go abroad and establish a company in one of the innovation hubs likeSilicon Valley, Boston, Vancouver, Delft, Tel Aviv, Hong Kong. That is what many Japanese companies do. The Japanese presence in the Bay Area is large: out of the 241 International and US companies having an innovation outpost one third are Japanese (72), followed by US companies (39), France (22), Germany (20), China (19) and the UK (12). When it comes to Corporate Venturing in the Bay Area, Japanese companies are avid investors with a typical “total deal size” in the range of USD 8M – 20M. From 2015 – 2019 Japanese companies closed 288 deals with a total value of USD 28B. In comparison, with 2 Dutch innovation outposts Dutch companies closed 47 deals with a value of USDS 2.1B. But there are disadvantages for Japanese companies and for the start-ups in the Bay Area: a lack of consistency (each 3 years replacement of expats), of communication (weak collaboration between the expats and HQs in Japan) and risk avoidance (“better safe than sorry”). Let’s look to the venture capital scene in Japan itself in the next article...