How is the Japanese VC market faring?
James is the CEO & Founding Partner of Coral Capital, where he seeks to invest in founders building the most important companies in Japan across all sectors and stages from SaaS all the way to fusion. He is speaking at SuperReturn Japan on 30 November about the outlook for venture capital in Japan. We caught up with him before hand for a chat about the state of the Japanese VC market, where he's seeing the most opportunities and how Japans VC market stand out compared to the rest of Asia.
The Japanese VC market has grown significantly in the past year, with some saying it’s now ‘coming of age’. What do you think has contributed to this growth? 
While global markets have experienced a significant sell-off and a decline in fundraisings recently, Japan stands out as one of the few countries where the venture market has continued to thrive. More broadly, startup funding has grown nearly tenfold over the last ten years due to a number of factors, most notably the government's strong support for the industry. The Japanese government has unveiled a 5-year plan aimed at increasing venture investment to the JPY 10 trillion mark, representing another tenfold increase from where we are now. This initiative, combined with a shift in investors' sentiment away from China, has made Japan an even more attractive market. Since we started in 2016, the number of startups, the number of deals, the amount of capital raised, and the level of talent attracted by startups have all accelerated, elevating Japan’s position in the global startup ecosystem.
What does Japan’s VC landscape offer in comparison with both the rest of Asia but also North America and Europe's quite bustling VC landscape?
Due to the language and cultural barriers, Japan is probably one of the most misunderstood startup markets in the world, so global investors need to use a different lens when examining it. First of all, since the local IPO market is both large and developed relative to other markets outside the US, many companies can go public locally both earlier and at a much smaller scale (Series B - D by US standards). Some of these companies then go on to become billion dollar entities. However, since the term “unicorn” has been a gauge for startup ecosystems globally, these young public companies have gone unnoticed and uncounted under the technical definition of a “unicorn.” We call these young public companies “hidden unicorns,” and have counted 41 of them between 2011 - 2021. So it is a misconception that Japan is not producing billion dollar outcomes. Historically, the lack of capital and the ease of listing in Japan have encouraged many companies to go public prematurely, often falling under the radar of global investors as successful 'unicorn' companies. Now that there is much more capital in the private markets, we are starting to see the rest of the iceberg as companies forgo an early IPO and stay private longer. From an early investor’s perspective, having both the option to go public and get liquidity earlier and now the option to raise privately and wait for a bigger outcome makes Japan particularly attractive.
Where are you seeing the most investment opportunities?
When assessing investment opportunities, we focus on three key themes. The first involves identifying areas where a potential Japan category leader could emerge. If a concept has already proven successful in other markets but faces inherent entry barriers like regulations or market structures making localization challenging for global players, there's an opportunity for a local player to dominate the market. A great example is SmartHR. While Rippling and Gusto have thrived in the US, the specific payroll, tax, and insurance requirements in Japan create hurdles for these companies to establish a foothold in the Japan market. Another theme centers around deeptech, where startups leverage Japan's existing strengths, such as advanced manufacturing or robotics, to compete globally. This strategic advantage is what we call the "Japan advantage." One concern frequently raised about Japan is the perceived lack of startups expanding globally. However, there are plenty of situations where that is not the case. Take, for example, our portfolio companies Kyoto Fusioneering, which is developing advanced components for the fusion energy sector, or GITAI, which is building robotics for the space industry. Both of these companies are securing contracts globally and emerging as leaders in their respective fields. Deeptech is an area where language is less of a barrier, and Japan can leverage its technological and geopolitical strengths to achieve global success.The third investment opportunity lies in startups addressing pain points or dynamics unique to the Japanese market. As an example, our portfolio company Kakehashi, is developing a SaaS solution for Japan's fragmented pharmaceutical industry, and kikitori is collaborating closely with the Japan Agriculture Cooperatives (JA) to digitize the agriculture industry.
What are the biggest challenges and risk factors involved when entering this market and how can you mitigate against or tackle them?
As with any market, finding the right local partners that can bridge the gap between language and culture is key. Unfortunately there are still very few local firms that shed light on the black box that is Japan.
Let’s talk about exits: What are the options?
Japan has a mature IPO market that has historically had lenient requirements to go public via an IPO. As a result, many startups have chosen to go public instead of opting for M&A. We will likely continue to see this; however, as venture-backed companies like Mercari and Freee continue to evolve, we may see an increase in M&A activity. These companies tend to have a higher risk tolerance and a strong appetite for innovation. They are also founder-led and were startups themselves not too long ago.
As we move into 2024, what is the fundraising outlook for growth and venture look like and how confident are LPs about making new commitments?
Despite a significant correction in the global venture market over the past year, valuations in Japan never reached the same elevated levels, resulting in a less pronounced correction. I anticipate this market will maintain a strong trajectory in 2024, and startups with healthy growth metrics will continue to attract capital. Venture is a long-term game, and LPs understand that. It has been great to see investors show more interest in Japan, and hopefully we will see this reflected in capital commitments in the coming years.