The Secret Weapon of Japanese Start-Ups

 Some Things Never Change

It may seem like a strange claim, but Japan’s current generation of young Internet entrepreneurs enjoy the same essential advantages that their grandfathers, who led Japan’s post-war industrial expansion, enjoyed in the 1960s and 1970s.

That period of Japanese history has been studied extensively by economists and historians all over the world, and it is widely agreed that one of the most important factors in Japan’s massive post-war economic expansion was the existence of the large, but protected, domestic market.

Fifty years ago, a combination of corporate tie-ups and government regulations kept all but the most determined foreign firms out of Japan, and this gave domestic manufactures the chance to develop and refine their offerings and to establish stable, cash-rich enterprises before expanding overseas. Although the domestic market was still relatively small back then, it was big enough and competitive enough to ensure that Japanese firms would be ready to go toe-to-toe with their global competition when the time came, and that, of course, was the real goal.

A lot has changed in Japan over the past fifty years. Economic growth has slowed, the keirestu don’t wield nearly as much influence as they once did, the government has largely opened up Japan’s markets, and successful foreign firms are quite common today.

Despite all of these changes, however, today’s Internet venture companies enjoy the same critical advantage that the huge industrial firms enjoyed half-a-century ago: a large domestic market that is protected from foreign competition.

 

An Ideal Growth Strategy

Foreign firms entering the Japanese market today face relatively few regulatory or legal barriers. With few exceptions, those hurdles disappeared long ago. In fact, in many ways running a small company in Japan today is much simpler than running one in the United States.

However, Japan’s unique linguistic and cultural characteristics still make it very challenging for foreign forms to compete in the Japanese market. Even those Western firms who understand the Japanese market and are committed to Japan often become frustrated by the expense and time required to successfully grow a business here.

In fact, most Western start-ups pass up the large Japanese market to focus on the much smaller, but much simpler, European and Australian markets. These companies put off Japanese market entry for years, waiting until they grow large enough to devote significant resources to the task.

The end result is that today a small team of Japanese founders can refine and perfect their offering in the protected domestic market. They can then grow their company organically with much less investment than their Western counterparts require and build a stable revenue base in their home market. Finally, when they are ready, our stable Japanese firm can aggressively expand overseas.

This formula should sound familiar. It’s the same one that worked so well fifty years ago, but on a micro scale.  This strategy is being used to great success not only by such well known firms as Rakuten, Gree and Uniclo, but also by smaller internet startups such as Cerego, Naver, SanSan and a host of others who are now taking on the world from their stable base in Japan.

It is important to realise that the last part of the formula — expanding aggressively overseas — is absolutely required. Foreign competition will come into Japan eventually. Enterprises that stop to enjoy the comfort the large profits to be gained when they have the market to themselves will be horribly unprepared for the competition when it finally arrives.

Mixi, for example, once boasted strong cash-flows and a richer feature set than either Facebook or MySapce. Mixi, however, never expanded overseas to compete directly with them. As a result, while Mixi enjoyed it’s domestic dominance, the Western competition got stronger and stronger. Last year Facebook surpassed Mixi in the number of Japanese users, and Mixi is now putting itself up for sale.

For small ventures with big dreams, Japan provides a truly powerful launch platform.

 

Japan’s Unique Advantage

It might seem that startups in all countries would enjoy a similar home-field advantages, but it turns out that this is not the case in practice. In fact, Japan is nearly unique in this regard, particularly when talking about Internet-based start-ups.

Startups in Australia or Western Europe, for example, enjoy large and healthy markets, easy access to venture capital and a well-developed entrepreneurial infrastructure. However, since these ventures must operate in English, new start-ups are forced to compete with the largest global firms from day one. There is little room for error, and they certainly do not have to opportunity to build a stable user and sales base before taking on the competition.

Singapore is well known for being a focal point for venture capital is Asia, and firms throughout the region seek funding there. The Chinese language also provides a natural barrier to foreign firms. However, the Singapore market is far too small for a new venture to develop a stable, profitable business capable of taking on global players.

Both Singapore’s population and her market are less than 5% of Japan’s.  The entire Singapore economy is between the size of the economies of the cities of Nagoya and Fukuoka. Easy access to capital does not change the fact that such a small market can not support domestic companies that can scale to take on the world’s strongest players. Singapore start-ups must go global from day one.

China is also receiving a great deal of attention these days. It has a huge and growing market that is protected from foreign competition not only by a strong language and cultural barrier, but also by a government that actively restricts how foreign companies can enter or operate in the market.

However, in China’s case, the structures that work so well to restrict foreign competition also restrict domestic competition and make is very difficult for small companies to raise funds — or even enforce contracts. The ventures that succeed in China tend to have close ties to the government or to larger firms with such ties. Regardless of how big these firms eventually grow, their DNA is simply not structured to compete in the open global marketplace.

That leaves Korea, which is particularly interesting market. Much like in Japan, Korean start-ups also enjoy a large and protected, but on a smaller scale. And Korea, more than any other Asian country, successfully adapted and implemented Japan’s formula for industrial expansion.

In the years to come, Korea could quite possibly become a powerhouse of new ventures, but right now it seems that Korean society is not particularly enamoured of startups. Despite a few notable successes, most Korean ventures are forced to look overseas for both capital and customers. Korea is likely to be a fast follower once Japan refines the process of moving from an risk-averse industrial economy to one that fosters start ups.

Not only do Japan’s start-ups enjoy a unique combination of a large, stable and protected domestic market, but they have one advantage that their grandfathers could not have imagined fifty years ago. The existence of the Internet and pay-as-you go Software, Platform as a Service and Infrastructure available as a service has changed the game for Japanese startups. Today, three people with a great idea can start a company with very little money and smoothy scale their business to become a global player.

Today’s four-person Japanese startup may lack the connections, capital and government  backing of the industrial giants of the post-war economy, but they still enjoy one of the most powerful and unique competitive advantages in the world. The ability to refine and grow strong in a protected market before taking on the global competition.

 


This article was originally published in Japanese by IT Media.