Editor's note: this insightful guest post was penned by Norihiko Isawa, a strategy consultant at the Tokyo Office of Roland Berger.
Although the news was inconspicuous at the time in Japan, it was indeed remarkable that Airbus Ventures participated as a lead investor in the $7.3 million Series A round for Infostellar, a Tokyo-based satellite antenna sharing platform in September 2017. The financing was substantially the first lead investment by a venture capital arm of a prestigious European multinational corporation in the Japanese startup history.
In addition to Infostellar, Airbus Ventures participated in the $11 million Series A round for Trillium Secure, a presently Sunnyvale-headquartered cyber security technology startup originally established in Tokyo. The financing led by JAFCO Japan, one of the largest VC firms in the country, in July 2018 is another funding round which involved a venture capital arm of an eminent European MNC, Deutsche Bahn Digital Ventures this time.
The recent two investments above imply a newly emerging omen that European capital has gradually started to go towards Japan. However, contrary to the large market sizes of and trading volumes between Europe and Japan, both a number and amount of bilateral investments are still small for the time being. Major reasons behind this limited interaction are considered to be the low visibility of Japanese startups and a lack of necessary information for investment examination in Europe. Therefore, this article principally aims at introducing the latest ecosystem and rising deep tech startups in Japan to MNCs and VC firms in Europe.
Overview of the Recent Japanese Startup Ecosystem
The global top 8 VC investment markets in 2017 from top to bottom are the United States ($71.9 billion), China ($40.0 billion), the United Kingdom ($5.8 billion), Israel ($3.9 billion), Germany ($2.9 billion), Japan ($2.5 billion), France ($2.4 billion) and Sweden ($1.7 billion). So, in terms of a VC investment amount, Japan is ranked 6th in the world, behind Germany and ahead of France.
The VC investment amounts in Japan rapidly increased after the inception of the new economic growth policy "Abenomics" installed by the Abe Administration in 2013. The quantitative easing policy increased the amount of capital in the market and encouraged private-sector investment, resulting in the dramatic change in VC investment from $0.8 billion in 2013 to $2.5 billion in 2017 with a CAGR of 35.1%.
Unlike other countries, there is a notable characteristic in Japan that corporations, instead of VC firms or institutional investors, have been the principal player in the market. Indeed, shares of VC investment amounts by players in 2017 from top to bottom are corporations (41.0%), financial institutions (16.1%), independent VC firms (14.8%), governmental agencies and universities (12.5%) and others (15.7%).
A major reason behind this characteristic is the large amount of retained earnings as cash and deposits within Japanese corporations. The overall amounts of cash and deposits within Japanese corporations have continuously increased from $1.4 trillion in 2008 to $2.2 trillion in 2017. And the richest Japanese corporations such as Toyota, Sony and Mitsubishi have as much cash and deposits as the US "Tech Giants" such as Apple, Microsoft and Alphabet do.
Large corporations also play an important role as Limited Partnership investors or sponsors of major VC funds. For example, the LP investors of World Innovation Lab, or WiL for short, the largest and most prestigious VC firm in Japan, are 28 leading corporations in major industries ranging from automobile and TMT to transportation and financial services. In addition to WiL, the lead LP investors of Global Brain, another VC giant, include large corporations such as KDDI, a major mobile operator, and Mitsui Fudosan, the largest real estate developer.
Large corporations strategically invest in VC funds in order to search for promising startups as potential business partners, especially those in frontier domains. In the past couple of years, investment in deep tech startups has significantly increased.
Rise of Deep Tech Startups in Japan
VC investments in deep tech fields such as but not limited to autonomous driving, robotics and UAVs dramatically increased in 2017. Comparing numbers of VC investments in the top 50 largest financing rounds, they are 3, 18 and 9 in 2016, 2017 and 2018, respectively. ispace, a space resource exploration company, raised $90 million, the largest financing in the Japanese startup history, from large corporations such as Japan Airlines, KDDI, Suzuki Motor, Dentsu and Konica Minolta as well as VC funds such as Mirai Creation Fund, the CVC of Toyota. In addition to ispace, GROOVE X, a consumer robot developer, raised a significant amount of approximately $40 million, mostly owing to the fame of its founder Mr. Hayashi, the product manager of Pepper at Softbank.
Autonomous driving is a core field of deep tech which recently attracts a large amount of investment. Indeed, Preferred Networks, an AI for-IoT startup spun-out from the University of Tokyo, has raised $130 million in total until now, and its lead investor is Toyota which subsequently funded $8.2 million and $95 million in 2015 and 2017, respectively. The company is notable for its brilliant founders; they are among the most intelligent researchers in the field of AI and participated in the prominent International Collegiate Programming Contest by the Association for Computing Machinery. Preferred Networks has developed big data analysis infrastructures and deep learning frameworks, and now focuses on development of deep learning technologies for IoT. In this context, Toyota Research Institute, Toyota's AI laboratory, partnered with Preferred Networks in 2017 to co-develop AI for autonomous vehicles.
Another notable deep tech startup is Tier IV, a Nagoya University-origin startup established in 2013 which develops and provides corporations with Autoware, open source software for autonomous driving, and other hardware necessary for demonstration experiments. Tier IV has partnered with NVIDIA and intends to become a global de-facto standard in the field of autonomous driving software, through the distribution of Autoware for free. The company has raised over $25 million in total from large corporations such as KDDI, Sony, Yamaha and Aisan Technology, a surveying technology company. KDDI, Aisan Technology and Tier IV started a demonstration project of autonomous driving in February 2019.
In the field of Urban Air Mobility, a hoverbike developer A.L.I. Technologies is remarkable. The startup was established in 2016 by students from the famed Department of Aeronautics and Astronautics at the University of Tokyo. It has been funded by Drone Fund, a fund dedidicated to investments in UAVs, and itself in turn invests in drone startups to construct a technology portfolio of drone-related IPs. The startup now develops a hoverbike called Speeder and relevant traffic control systems for UAVs.
In addition to large corporations, it is funded by KSK Angel Fund, a family office of Keisuke Honda, a Japanese professional football player who once played for VVV-Venlo, AC Milan and CSKA Moscow in Europe.
There exist several reasons why deep tech startups have successfully raised vast amounts of capital from and partnered with large corporations.
In short, there is a clear win-win collaboration opportunity between large corporations and startups. Large corporations have for long focused their in-house R&D activities on strategic themes which are directly related to their core businesses, in order to increase the ROI/ Return on Investment and other efficiency indices. Therefore, they have hardly been able to deal with frontier technologies which are far from their existing businesses, resulting in a lack of innovations from Japanese corporations. This inconvenient mechanism in corporate R&D activities has produced motives for large corporations to search deep tech startups as their co-development partners. Since Japanese high-tech corporations require frontier technologies which cannot be developed in-house, startups spun-out from universities which usually have more advanced technologies become their main targets.
In general, technologies in leading universities are considered to be 10 to 20 years more advanced than technologies in large corporations. However, deep tech startups spun-out from universities tend to lack know-how and capabilities to commercialize. Therefore, they are motivated to collaborate with and look for corporations which can support them to transform their technologies into viable products and services.
Thus, the clear win-win collaboration opportunity has led to the recent tide of deep tech investments and corporate venturing.
Global Expansion by Japanese Deep Tech Startups
It is remarkable that some Japanese deep tech startups are already open to global. For example, ispace has an office in Luxemburg with 12 staffs. In addition, Rapyuta Robotics, a developer of cloud-connected low-cost multi-robot systems for security and inspection, is a spun-out venture from ETH Zurich. Furthermore, Xtreme-D, a developer of plug-in computing for next generation high-performance computing, has already opened an office in Silicon Valley, with the cooperation of WiL. Tier IV has also opened an office in Silicon Valley. One of the co-founders of Ascent Robotics, a startup for automation algorithms, is from the United States.
As already mentioned, Infostellar and Trillium Secure have been funded by Airbus and Deutsche Bahn. In addition to the two, Floadia Corporation and Cerebrex, which are both semiconductor startups, have been funded by UMC Capital, the CVC arm of UMC, the world's second largest semiconductor foundry based in Taiwan. There only exist a few examples of such globally-funded startups, but they indicate an omen that their followers will appear soon.
In terms of hiring, some deep tech startups are comprised of multinational teams. Startups such as Ascent Robotics actively recruit staffs, especially engineers, globally and their job descriptions are prepared in English.
Potential Collaborations between European MNCs and Japanese Deep Tech Startups
As described above, Japanese deep tech startups have rapidly gained power for the last couple of years, through constant capital injection from and co-development with large corporations. At the same time, European MNCs such as Airbus and Deutsche Bahn have also reached and invested in some Japanese deep tech startups. These recent trends indicate that there exist further potentials of collaborations between Europe and Japan; Japanese deep tech startups could be relevant business partners and promising investees for European high-tech MNCs. This hypothesis is backed by four reasons.
Firstly, quite a few Japanese deep tech startups are ventures spun-out from leading universities, and thus their technologies are foremost of its kind and generally more advanced than those in large corporations which themselves are front-runners in the world. This means that Japanese deep tech startups are worth partnering in terms of technology acquisition for European high-tech MNCs.
Secondly, European and Japanese large corporations have similar organizational cultures and behaviors. For example, conservative senses of values, relatively slow and bureaucratic decision-making processes and high quality standards can be seen in both European and Japanese large corporations. This means that Japanese deep tech startups which have been co-working and therefore are now familiar with cultures and behaviors of Japanese large corporations could easily adapt to those of European ones. From the viewpoint of European high-tech MNCs, hurdles to collaborate with Japanese deep tech startups are fairly low now.
Thirdly, economic and trade relationships between Europe and Japan are expected to strengthen due to the Agreement between the European Union and Japan for an Economic Partnership which just came into effect on February 1 st, 2019. The EPA will further encourage trade of goods and services and investment between the two parties. In addition to the national-level policies, the Tokyo Metropolitan Government has been promoting global expansions of startups based in Tokyo, through the X-Hub program in which selected startups are able to receive business support from mentors such as venture capitalists and seed accelerators in partner countries. Indeed, Tier IV and Ascent Robotics have been selected as startups of the Germany onward program.
Lastly, Japanese deep tech startups have recently been more open to the global market but do not have proper business partners in Europe. This means that there exist white spaces for European high-tech MNCs to become their business partners.
Featured image credit: bobby hendry on Unsplash