Why Japanese ‘unicorns’ are an endangered species

Twelve months ago, Japanese Prime Minister Shinzo Abe set out an audacious goal: producing at least 20 tech “unicorns” within five years. How is Asia’s No. 2 economy doing?

Poorly, according to international league tables. One, from CB Insights, puts Japan’s tally of private startups valued over $1 billion at a paltry two. China blows the doors off its far more developed neighbor with 93. And India, whose economy is 1.8 times smaller than Japan’s, has produced 18. South Korea? Nine.

But the most telling metric is not data, but investor Masayoshi Son. The SoftBank founder spent the last few years positioning himself as Asia’s answer to Warren Buffett. Armed with his $100 billion Vision Fund, Son is busily remaking the global venture capital game. Softbank says it is now betting on 75 current and potential unicorns around the globe.

Curiously, though, not one of Son’s targets is in his home country. Son’s might just be the most damning vote of no-confidence in Abe’s much-ballyhooed reform drive.

Since 2012, Abe’s team has been trying to find – or at least claiming to – new growth engines. The export-led model that propelled Japan into the ranks of Group of Seven is no longer a good fit for an affluent and aging population. Tokyo hopes to create new jobs and more ground-up energy by cultivating a thriving startup scene. Yet Abe has done little policy-wise to drive the transition.

Son and his senior executives often cite three drawbacks. One: a chronic dearth of risk capital. As national broadcaster NHK reported at the end of 2018, Japan’s venture capitalists deploy only about 1/80^th as much as their US peers. That alone helps explain why America has produced roughly 178 more unicorns than Japan.

Two, Japanese punters often look past any company that hasn’t yet gone public. The myth holds that if a company really has grand ambitions and can be trusted, it should list. This cart-and-horse problem can starve promising entrepreneurs of seed capital – and prod all too many innovators to go public before they’re ready. Going public too soon reduces the odds of attracting big institutional investors.

Three, Japan lacks a risk-taking ethos that encourages young innovators to shoot for the stars. Its top-down economic system, meantime, makes few allowances for scrappy disruptors keen on shaking up the Japan Inc. status quo.

The last time that happened, arguably, was in 2006. Back then, a blunt-talking, T-shirt-wearing, fashion-model-dating rabble-rouser named Takafumi Horie took Tokyo by storm. His internet portal Livedoor came crashing down amid securities-fraud allegations. At the time, many observers buzzed that the thirty-something’s real crime was speaking out about corporate Japan’s blinkered ways.

Until now, Japan’s efforts to catalyze a startup boom have focused on so-called special enterprise zones. As Abe, and myriad Japanese leaders before him, argued, the nation needs a laboratory where the rigidities, conformities and groupthink are repealed. That’s bunk, of course. Japan should impose the Silicon Valley model nationally, not just in a specific zip code or two.

Abenomics, unfortunately, has focused far more on yen depreciation, to protect exporting giants, than on promoting new business formation. Helping Toyota Motor and Sony Corp. is fine. But altering the tax code to nurture early-stage businesses and cutting red tape would pay much greater dividends. It also would generate the wealth and ground-up energy Tokyo lacks nearly 30 years after its 1980s bubble economy imploded.

Winning more of Son’s capital should be a top priority for Abe should his party score an expected win in July 21 elections. Come November 20, Abe would become Japan’s longest-serving leader. To make this third term count, Abe should step up efforts to reach his 20-plus-unicorn goal – and woo more venture capital from Son and his ilk.

It seems an ominous sign that the ethnically Korean Son is joining forces more with South Korea’s tech ambitions than with Japan’s. Son spent July 4 in Seoul meeting with President Moon Jae-in, during which he encouraged Asia’s No. 4 economy to raise its artificial intelligence ambitions. Moon, in turn, asked the billionaire to scope out Korean developers worthy of Vision Fund support.

Team Abe, of course, is busy trolling Korea with export controls on materials used to make LCD screens and semiconductors. Abe is retaliating for a series of court rulings against Japanese companies related to forced wartime Korean laborers. As strategist Vincent Tsui of Gavekal Research puts it, nobody gains in the long run from such “idiosyncratic risks to trade-dependent Asia.”

Japan’s moribund initial-public-offering scene is as much a turn off to the Masayoshi Sons of the globe as it is to the Warren Buffetts. The Sage of Omaha has been scouring Japan for value-investment targets for years now, to no avail. Much of the action these days is in Japanese private equity. Look no farther than Bain Capital in 2018 grabbing Toshiba’s memory chip unit for $18 billion. Or KKR & Co. dabbling in Hitachi assets.

The unicorn drought, though, is sobering. Japan once wowed humankind with inventions like the Walkman, the DVD, androids, electric calculators, the first digital camera. Where did Apple’s Steve Jobs get the idea to put a camera and internet connections on the iPhone? From Japan’s Sharp Corp. Now Japan finds itself looking on as Indonesia produces twice the number of unicorns.

Tokyo needs to relocate its innovative mojo. At the moment, Japanese unicorns are a bit of an endangered species.