Japanese government looking to startups to revive economy

By Andrew Deck

At a coffeeshop in Tokyo’s bustling Shibuya district, I sat down with Matthew Romaine, a Japanese-American startup founder at the forefront of a new wave of Japanese entrepreneurs.

Romaine is the CEO and co-founder of Gengo. Meaning “language” in Japanese, Gengo is a crowdsourced translation platform with bilingual translators working in more than 35 languages. Customers order translations online through Gengo’s website and API, with translations usually delivered within the hour.

Judging by their small quarters on the eighth floor of Shibuya’s Yushin building, you might not assume that the company is doing well, but it has secured upwards of $23 million in funding, with backing from 500 Startups Founder Dave McClure. Now several years into its operations, the company boasts clients that include YouTube, Alibaba, Mozilla and The Huffington Post.

A midsize startup, Gengo may not stand out in a crowd of Silicon Valley unicorns with billion dollar valuations. But Gengo’s success certainly stands out as a Tokyo-based operation, considering the city is dominated by large corporations and has comparatively scarce infrastructure and funding for startups.

This may soon change, however, as the Japanese government seeks to fill the economic void left by its struggling tech industry with startups such as Gengo.

While Japan has always been celebrated for its technological innovations, the corporate giants that made Japan’s renowned tech industry in the ’80s, including Toyota, Sony and Nintendo, struggled to maintain their success. In the ’90s corporate giants faltered when Japan’s asset price bubble collapsed due to an overinflated real estate and stock market, causing the country to enter a period of economic stagnation.

That stagnation continues today as Japan’s shrinking working-age population struggles to support a growing number of elderly. There are currently twice as many people over the age 65 than children under the age of 15, according to a 2015 Statistic Bureau report.

Demand for wage labor has also shrunk due to low-cost imports and automation, and the ethnically homogenous nation has few immigrants to revitalize the labor force.

Despite continued promises of economic recovery from the most recent administration, last quarter the economy entered a recession.

In its most recent efforts to revitalize the economy, the Japanese government plans to cultivate entrepreneurship and expand the startup ecosystem.

Prime Minister Shinzo Abe has publically called for investment in Japanese entrepreneurship and the deregulation of small and medium-size enterprises (SMEs) to counter the recession.

Last May, Abe made his first visit to Silicon Valley, touring Facebook’s campus in Menlo Park, California, and meeting with SpaceX CEO Elon Musk and Twitter CEO Jack Dorsey. On the trip he announced a new government venture called “Bridge of Innovation” to start a Japanese entrepreneurship training program in Silicon Valley.

If the Japanese government follows through with its plans to develop the Japanese startup community, they face a series of roadblocks, both cultural and financial.

The ‘salary man’

Matthew Romaine, Gengo’s bilingual Japanese-American co-founder and recently appointed CEO, began his career at one of Japan’s titular corporate giants—Sony. Unlike his co-workers, however, Romaine did not envision for himself the life of a “salary man,” as the Japanese call a white-collar businessman. As his colleagues prepared for lifetime employment at Sony, Romaine set off on a series of small-business ventures that culminated in the founding of Gengo.

“Some people around me thought I was kind of nuts,” Romaine said. “They didn’t understand how I could rationalize a decision like that.” That is, leaving a prized profession at one of the name Japanese companies.

Long-term employment with a corporation is socially valued in Japan. Romaine says at networking events his peers would “ooh and ah” at the Sony label on his business card. But many have cited this norm of long-term corporate employment as a deterrent to Japanese entrepreneurship, often manifested in family disapproval of entrepreneurs.

Romaine maintains he was lucky to have the full support of his family when he decided to leave Sony. The people he recruits to work for Gengo are not always so fortunate.

“With our Japanese recruits, we often times need to help them present a case to their spouse or parents,” Romaine explained. “We’ve actually created presentation decks to show family members that Gengo is not some ‘yakuza’ mafia front, and that it is in fact fully funded and has the support of great institutional investors.”

In Romaine’s perspective, this cultural norm also nurtures strong company loyalty, which Silicon Valley engineers often lack. Amazon and Google, for example, have two of the lowest employee tenure averages in the Fortune 500, with median tenures of 1 year and 1.1 years respectively.

There may be fewer candidates for engineering positions in Tokyo, but you can expect them to stay with the company for at least three to four years, Romaine said.

Despite the benefits of this employee loyalty, ultimately Romaine sees the cultural fear of failure and instability as a pressing issue, hindering talented people from starting or joining new ventures.

“In the U.S., failure is treated as a learning experience and even something worth investing in,” Romaine said. “It’s not treated that way in Japan.”

Prime Minister Abe agrees. “Here in the U.S. and Silicon Valley, risk-takers are respected,” he said during his visit to Silicon Valley. “This, I believe, is something that is most needed by Japanese businesspeople.”

Starting young

Brian Nelson, the co-founder and chairman of BNC Holdings, which runs the secure online wallet SIDO, similarly cites culture as an impediment to the continued growth of Japanese startups.

Nelson has decades of entrepreneurial experience in Japan, founding the first Japanese affiliate marketing network Value Commerce — one of the few Internet companies to make it out of the dot-com bust unscathed. Nelson took the company public as one of the first foreign CEOs to oversee a Japanese IPO.

Nelson was asked by former U.S. Ambassador John Roos to meet with the Japanese government as part of a delegation of Americans promoting entrepreneurship. His advice to them was simply, “Remember your past.”

“The Japanese have forgotten their long history of entrepreneurship,” Nelson said. “Yataro Iwasaki (founder of Mitsubishi) and Soichiro Honda (founder of Honda) existed long before Steve Jobs.

“These guys were bold innovators,” he added. “It’s about remembering those roots, not copying Silicon Valley.”

Nelson insists that the entrepreneurial spirit begins at a young age, and the educational system as well as the administration should foster that spirit. With this support, Nelson said young people in Japan will no longer fear entrepreneurship and there would be a paradigm shift.

“It starts as a directive from the government, then it becomes the norm,” Nelson said.

A lack of capital

The “risk-averse” nature of the Japanese startup world is not limited to its entrepreneurs and founders; it comes from the investment side as well. Currently Japan has less than $1.5 billion in investments per year, in contrast to the nearly $12 billion in Silicon Valley.

Gengo co-founders Romaine and Robert Laing went to Silicon Valley for their first seed round of funding before finding Japanese investors.

“Investment levels are very small right now,” Nelson said. “You might get $1,000 or $2,000 from an investor versus $10,000 or $20,000 in Silicon Valley.”

In the place of VCs and angel investors, corporate venture capital is a primary form of investment in Japanese startups. Nearly 80 percent of VC funding in Q2 of 2015 came from corporations.

Romaine said this fundamentally changes the objectives and exit opportunities for Japanese startups. VCs hope to invest in the next billion-dollar company, whereas corporations invest for R&D purposes and often acquire the company before it reaches a $1 billion valuation.

The investing landscape, however, is rapidly changing. Following a trail of seed funds and incubators that have set up shop in Japan in recent years, 500 Startups opened a $30 million fund for Japan in 2015. And, although it’s only supporting major electronics corporations, the Innovator Network Corporation of Japan, a government-backed investment fund, has 286 billion yen available for Japanese entrepreneurs.

Despite the roadblocks to a thriving startup scene in Japan, both Romaine and Nelson are optimistic about Japan’s economic future.

“With government support, Japan can tap back into its entrepreneurial roots,” Nelson said. “If they can do that, I believe it will begin a thriving era of innovation in Japan.”

About the Author