Overseas investment is making its mark on Japan's startup sector, yet it still has a long way to go compared to other countries. This article explores the current state of overseas investment in Japan, the factors driving it, and the challenges that lie ahead.

Unlock the Potential of Japan's Startup Ecosystem with Overseas Investment

Japan's Fusion Startup Success Story

Earlier this year in July, Kyoto Fusioneering, a Japanese fusion startup, received funding from In-Q-Tel. The investment arm of the US government and its allies recognized the startup's global plans and willingness to engage with foreign investors. As Olivia Jones, director at In-Q-Tel, stated on a panel at the GCV Asia conference in Tokyo last week, "Kyoto Fusioneering brought us to the Japanese market." The firm has since stationed a team member in the country to scout for more startups. This fusion startup became In-Q-Tel's first direct investment in Japan, and the investment team was fortunate to find a startup that was willing to facilitate the transaction with an overseas investor. For example, the startup translated the deal documents into English. However, Jones also acknowledged that this may not be representative of future investments.

Japan's government is actively working to attract more foreign investment in the startup sector. Tokyo is positioning itself as a startup hub, aiming for a tenfold increase in the number of unicorns and startups in its ecosystem. Total investment in Japanese startups has increased by 25% between 2013 and 2023, reaching $5.4bn in 2023. But despite this growth, Japan's venture capital sector is still relatively small, with VC investment being about half that of South Korea and only 3% of the US market.

Historically, Japan's startups have focused mainly on the domestic market, which has been a barrier to attracting foreign VC investment. However, the government is now pushing startups to plan for global expansion through accelerators and mentorship programs. US accelerator and seed investor Techstars has recently set up in Japan and is encouraging startups in its program to think globally to attract foreign investment. The average series A funding round in Japan is $5m, which is only a fraction of what startups in the US raise at that stage. Japanese startups also need to improve their marketing efforts to overseas investors, as Japanese people are often not good at storytelling about what they are building.

Overseas VC Investment in Japanese Startups: On the Rise

Despite the challenges, overseas VC investment in Japanese startups is on the rise. Foreign investment has grown more than sevenfold over the past decade, reaching a peak of around $30m in 2021. The number of startup deals financed by overseas investors has consistently increased since 2013, reaching 405 in 2023 from 55 in 2013. In-Q-Tel points to the depth of technical expertise in Japan as a reason to invest. The country has a strong deeptech manufacturing base that startups can leverage through their corporate investors. Japanese corporate investors are significant players in the startup ecosystem, representing 30% of VC investment compared to 10% from overseas investors. The proportion of domestic VC is expected to increase further as many Japanese corporates set up venturing units. Corporate-affiliated capital for startup investment increased to $3.4bn in 2023 from $140m a decade ago.

Japanese CVCs are also becoming more global in their thinking. With Japan's aging consumers leading to a decline in growth in sectors like consumer finance, corporates are looking abroad for new markets. Japanese corporates are increasing their investments in high-growth markets such as India and the Nordics. As Kazuki Nobue, principal of 31Ventures, the CVC arm of Japanese real estate company Mitsui Fudosan, said, "We have to convey the attractiveness of Japan's ecosystem. We have to strengthen that."