Japan struggles to boost its meager unicorn population

The shortage of start-ups, startup, in Japan is becoming more and more pressing. After World War II, the country became a hotbed of entrepreneurs who built skyscrapers, high-speed trains and electronics giants like Sony. However, most of the time it was a top-down affair, with the state supporting a private sector dominated by the keiretsu, or huge conglomerates like Mitsubishi. It worked too well, complicating recent efforts to create dynamic startups.

After Japan’s asset bubble deflated in the late 1980s, most local companies built on their strengths, with research and development geared toward improving existing products. Most were unable to compete in the rise of software and the Internet. SoftBank’s Masayoshi Son has helped invest billions in tech companies around the world, but has largely ignored his own backyard. Most Japanese executives refuse to invest their companies’ surplus money.

Mistrust of foreign investors and cultural risk aversion have also hampered the development of an inventive ambition commensurate with Japan’s position as the world’s third largest economy. Since 2012, it has had an average of about $2 billion of venture capital invested per year, according to Preqin data. China registers 63,000 million dollars annually, and the United States 106,000 million; even India surpasses Japan in deal size and number of transactions. The number of unicorns (private start-ups valued at more than $1 billion) remains in the single digits.

New companies tend to be more efficient than more rigid conglomerates; they innovate and create jobs in new generation industries. Japan desperately needs more of them, but previous government initiatives have struggled to gain momentum. Prime Minister Fumio Kishida’s cabinet announced a program in June for the $1.5 trillion Government Pension Investment Fund to pump more money into early-stage companies and increase foreign participation. He is also looking at revisions to taxes and regulations that are seen as onerous for new businesses. The country’s largest business lobby wants there to be 10 times more national unicorns in five years.

But this is not a problem that can be solved from the top down. Taking out some of the 100 trillion yen ($730 billion) estimated to be held in reserve by stingy Japanese conglomerates requires sustained growth and stable inflation. Tackling people’s fear of business failure is another hurdle. Japanese workers understandably appreciate the stability of jobs in a keiretsuin which promotions are automatic and retirement comes soon.