An extract from The Venture Capital Law Review, 1st Edition

Overview

i Market trends

Prior to the covid-19 pandemic, VC investments had been very active in Japan for several years. According to a report published by Venture Enterprise Center, Japan,2 investments by VCs in Japan increased continuously every year from 2014 to 2019. (In 2019, there were 1,432 deals totalling around ¥216 billion in aggregate investments.) However, the covid-19 pandemic led to a downturn in the start-up investment market, which resulted in fewer investments in 2020 (1,160 deals of around ¥150 billion in aggregate).

On the other hand, the number of newly formed VC funds and the total amount raised by these funds increased from 2019 (47 funds; around ¥235 billion) to 2020 (54 funds; around ¥344 billion), which suggests that investors are still active and that the size of VC funds is growing.3 The trend is stable in the first quarter of 2021 (nine new funds; around ¥75 billion).

ii Types of funds

While a majority of VC funds invest in various sectors and have no specific areas of investment focus, there are a moderate number that expressly focus on specific industries. For example, there is now a drone technology-focused fund (first established in 2017), and there are many area-focused funds such as in the IT/TMT, life science, proptech (property technology), and space industries. Another trend that has been featured recently in the ecosystem is impact funds that seek to invest in start-ups that will contribute to society as a whole.

Corporate venture capital (CVC) is also growing rapidly. While the objectives vary, CVCs tend to focus more on strategic alliances with start-ups, which lead to potential mergers and acquisitions, than on maximising financial returns.

There are also VC funds organised under the programmes and mostly by the funds of the Japanese government called public-private (kan-min) investment funds. These funds aim to invest in areas such as emerging technologies that may potentially contribute to the Japanese economy from a long-term perspective but have a risk-return profile that is not attractive for private sector funds.

iii LP investors

Most VC funds obtain funding through private placements. Currently, the most active investors in VC funds are financial institutions (i.e., banks, insurance companies and securities firms) and corporate investors. Various Japanese corporations are seeking collaborations with start-ups (open innovation) and becoming more interested in investing in VCs as a source of information on new technologies, in addition to making direct investments in start-ups. Another major investor is the Organization for Small & Medium Enterprises and Regional Innovation (SMRJ), which is an independent administrative agency tied to the Japanese government. In a typical scheme, the SMRJ can invest up to 50 per cent of the entire commitment of a VC, with a cap of ¥8 billion.

While Japanese pension funds were historically not so interested in allocating their assets to VC funds, they have started to show interest and are gradually increasing investment allocation in VCs.

iv Ecosystems and locations

Geographically, many start-ups, funds and other supporters such as business incubators, professionals and co-working spaces are still based in Tokyo, but there is a trend towards establishing start-ups in other locations to foster development in regional economies. In 2020, the Japanese government designated four consortiums composed of local governments, academia and private players located in major areas (i.e., Greater Tokyo, Nagoya, the Osaka and Kyoto region, and Fukuoka) and several other cities as 'start-up ecosystem hubs' that the government will intensely support. This general trend is backed partly by the remote work environments currently being used due to the covid-19 pandemic.