How Japan’s evocative machines are quietly creating new startup unicorns

This is a rather personal episode. We have no guests this time.

It’s just you and me.

Today, rather than diving deep into a specific aspect of startups in Japan, we are going to take a hard look at both what is and what is not working within the Japanese startup ecosystem as a whole.

And at the end, I'm going to answer the most common question I am asked by overseas audiences. "Where are the Japanese unicorns?"

You might already know about Japan's two existing unicorns, but I'm going to explain where the next four will be coming from.

I guarantee that it's from somewhere you would not have expected.

So let's get right to it.

UPDATE: Evocative Machines are starting to take off in Japan. If you are interested in the subject, please check out The Evocative Machines Project.

[shareaholic app="share_buttons" id="7994466"] Leave a comment Transcript Welcome to Disrupting Japan. Straight talk from Japan's most successful entrepreneurs.

I'm Tim Romero, and thanks for joining me. Once again, I’ve got a special show for you today. There will be no guests, no beer, no playful banter with someone speaking English as a second language. Today, it’s just you and me. It’s been a while since I’ve done one of these one-on-one episodes. Way too long really. I truly enjoy doing them and they tend to be my most popular episodes, but man they take a lot of time to write and put together. This episode, in particular, I had to rewrite two or three times, to make sure you would really understand what I am trying to explain. Because by the end of this episode you and I will definitely be in new and uncertain territory, and I for one love being in new and uncertain territory. By the time we’re done, you’ll have a solid idea of where Japan’s next dozen unicorn startups will be coming from. First, I want to tell you what inspired me to create this episode for you. In fact, it was kind of a strange situation. I mean twice a month we sit down and talk about innovation in Japan. I’m privileged to talk with and to introduce you to some of the most interesting founders and innovators in Japan. I spend a lot of time talking, writing and thinking about how the startup ecosystem is changing. But. You know, I think I missed something. Something important. And, I think the reason I might have missed it was because I watch things so closely that when …. Well, lets back up a bit so all of this will make sense. Actually, it was my friend Allen Miner who first pointed out the change. For those of you who don’t know him, Allen was one of Japan’s first modern VCs and he also brought both Salesforce and Oracle to Japan. And by the way, if you have not listened to the Disrupting Japan episode where Allen tells the story of Oracle’s Japan market entry, you really need to go back and listen. Someday business schools will make proper case studies from that story, but until then, it’s a Disrupting Japan exclusive. It’s a story of fake it till you make it on a multi-billion dollar scale. The plot involves intrigue, secret dealings, and … rock-concerts. What more could you possibly want? Go and listen to it right now. I'll wait. … Welcome back. Did you listen to the episode? No, of course, you didn’t. Nobody ever does. It’s a silly conceit. I don’t know why we podcasters keep using it. We should stop. Anyway, give Allen’s interview a listen when you get the chance. Now back to our story. For the past eight years, the Japan Society of Northern California has given out annual innovation awards to startups in both Japan and the US. They are a really worthwhile organization that has been around for more than 100 years. I’m on the advisory committee for the awards, and last month in Tokyo I attended the awards ceremony for the Japanese startups. The winners, by the way, were Mujin, Soracom, and Cloudian. Ken, the founder of Soracom was on the show last year, and you’ll be hearing from the other two founders on the show soon. So, Allen was making an informal speech at the awards and he made an observation that made me question if I had missed something big in Japan’s startup ecosystem. He mentioned that for the past seven years there had always been a gap, a significant gap, between the quality of the Japanese startups who won the awards and their US counterparts. The American startups had always seemed to have expanded faster, to have more real-world deployments and to be frank, the US startups just seemed more innovative than the Japanese were. But this year was different. The three startups that won this year's awards could stand up with any silicon valley startup of the same age and industry. And he was right. I’m always talking about how fast the startup ecosystem is improving and how the quality of both founders and startups is rapidly approaching that of what we see in America. But what if it’s already happened and I missed it. Disrupting Japan has always been about bringing you the best and most interesting things that Japan’s startup landscape has to offer. But is it possible that I’ve missed the forest by focusing too much on the individual trees? In these one-on-one episodes, I usually go deep on a specific topic that I think is very important but little understood, but today we are going to do the opposite. We are going to go wide. We are going to take a step back and take inventory of the entire startup ecosystem and see where we really stand. We’ll take a look at what’s working, what’s truly exceptional and what is still lacking. We’ll look at the state of fundraising and financing, the changing social attitudes towards startups, the true state of innovation in Japan, and we’ll wrap up by talking about Japan’s future unicorn farm, and where exactly the second era of Japanese innovation will come from.

Startup Financing and Fundraising in Japan First, let's talk about fundraising and the availability of capital. There is plenty of risk capital in Japan, and by all measures, the amount is increasing. Japanese venture firms raised more than $2.5 billion in 2017, which is more than a 400% increase from 2012. But numbers don’t tell the whole story. Sure, everyone like numbers, because they seem objective and it’s easy to think that you understand what they mean, but let’s look at what these numbers really tell us about the startup ecosystem. The biggest effect of this increased funding is that is has made founders a lot more confident and aggressive, and a lot less stressed. Years ago when I began asking founders why and how they started their companies, most had stories about how they had to convince their wives, or their parents, or their parent’s wives, to let them start a startup. Most founders had people begging them not to do it, and some even lost friendships. A decade or longer ago, when financing was hard and valuations were low. Most founders had to scrimp, to deprive themselves of basic necessities. One founder, Kanemoto-san from OKWave, came on the show and explained that he was actually homeless when he was bootstrapping his company. Another told me about how he had to secretly use his wife’s jewelry as collateral for a loan to get the money he needed to keep his company going, and by the way, he also told me emphatically.

"Tim, Tim. Your startup is important, but there are some things that you should just never do."

This just doesn’t happen anymore. Newer founders rarely have a dramatic origin story. I mean sure, just like founders all over the world, they work hard, and they’re happy to talk about their passion and their vision, but newer founders also tend to receive social support. Family, friends and even co-workers encourage their efforts. I’ve actually had a number of people tell me, “I had two VCs who wanted to give me money, and my friends and parents thought it was a good idea, so why not?” And that is awesome! Over the past decade starting a company in Japan has gone from “Am I really willing to bet my entire future on this.” To “Hey, why not? What’s the downside?” And that’s the way it should be. When you are not worried about your next meal. When you are not worried about making payroll next month. When you are not worried about gangsters trying to collect a loan secured by your wife’s jewelry, you are going to dream bigger. You are going to double down and roll the dice again rather than try to protect whatever gains you have already made. You are far more likely to grow a billion dollar company with this attitude. And that’s exactly what we are seeing in Japan. From dozens of newly minted founders who are explaining how they are going to disrupt their industry, to iSpace, who raised over $90 million to commercialize the moon. Japan’s startups are finally dreaming big. On the VC side, however, while the progress has been impressive, the transformation is less complete. VCs everywhere in the world are basically skittish and risk-averse creatures, they are herd animals by nature. Oh, they like to see themselves as hunters, as lions scouring the startup savanna for stray unicorns, but in truth, they have more in common with the jittery gazelles. We see the same dynamic in Japan, but its a bit more pronounced. Japanese VCs are very willing to invest in standard startup business models with clear metrics. If you have B2B SaaS startup or a mobile marketplace with promising metrics, you *will* get funded. If your idea is a little more innovative, but you have a good pedigree; you come from the University of Tokyo or a top-tier investment bank, you’ll get funded. And if you are more off the beaten path? Well, you’ll have to work a lot harder and raise money at lower valuations, but the money is there. There is another odd effect that is a result of both the herd nature of Japan’s VCs and the fact that there are still relatively few deals.