Japan government fund backs 500 startups to draw more VCs

[TOKYO] Japan, eclipsed by China in startup activity, is boosting efforts to get foreign venture capital firms more involved with its entrepreneurs.

The government-backed Cool Japan Fund said Thursday it will contribute US$10 million to become the largest limited partner in the Japan-focused fund of 500 Startups, a San Francisco-based venture firm specialising in early-stage investments.

The partnership aims to help startups in the archipelago expand abroad by leveraging the venture firm's global network in about 60 countries.

The deal is unusual in a country where startup funding is dominated by local corporations, and marks the first time the state has directly backed a non-Japanese venture capital firm.

The investment helps to show that foreign venture backers will be supported if they dedicate more resources to Japan.

"If people in Japan's VC scene are in closer communication and sharing information with American VC firms, that would be a plus for Japanese companies," said Tsuyoshi Ogawa, Cool Japan's senior director, who worked on the deal. "So far, 500 Startups is the only leading American VC with an office here. If others did the same, it may be possible for us to develop close ties with them too."

The investment brings total capital raised for the venture firm's Japan fund to US$35 million, exceeding its initial target of US$30 million when it debuted last year.

So far the firm has invested about a quarter of that amount in more than 20 local startups, including satellite services provider Infostellar Inc. and high-tech wheelchair maker Whill Inc. Its parent firm oversees US$350 million and has invested in about 1,800 companies globally.

By joining with 500 Startups, Cool Japan is aiming to bring in more local entrepreneurs. After nurturing businesses in their early stages, the government-backed fund may step in with additional financing in later rounds.

Cool Japan, established in 2013, invests in companies that promote Japanese culture. The government provides about 85 per cent of the firm's 69.3 billion yen ($630 million) in capital. Since its inception, it has taken stakes in more than 20 companies, including Japanese TV channel operator Wakuwaku Japan Corp. and cafe chain Green Tea World USA Inc.

3500 Startups is one of the few foreign venture firms that operate in Japan. Others include Salesforce.com Inc's venture fund and Eight Roads, the late-stage venture capital arm of Fidelity Investments. Silicon Valley accelerator Plug and Play Tech Centre will open its Japan office as early as this month, Bloomberg News reported last week.

More foreign backers could help boost venture activity in Japan, where startup funding reached 210 billion yen last year, according to Japan Venture Research Co. Still, that's far below China, which climbed to US$31 billion in 2016 from US$3 billion three years prior, according to KPMG.

James Riney, the head of 500 Startups in Japan, says foreign venture firms can help change a culture dominated by corporate funding. He says companies dominate Japan's startup ecosystem, accounting for 72 per cent of venture funding in 2016, compared with 24 per cent in the US, according to CB Insights. Corporate oversight can stifle risk-taking and innovation, and result in startups going public too soon, he said.

"Andreessen Horowitz, Sequoia, Founders Fund, please come here, that's how I feel," Riney said. "Japan is still a blue ocean."

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