TT-587 -- Where Start-ups Get Money From, e-biz news from Japan

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A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, October 24, 2010, Issue No. 587


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- Short Takes
- News
- Candidate Roundup/Vacancies
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It doesn't need to be said that Japan is a tough place to
start your own company. But whatever the reason,
whether it's the market competition, lack of sources for
funding, or a risk averse culture, the number of new
start-ups is falling steadily, meaning that the future
commercial base of the country is being eroded.
According to the Statistics Bureau there were somewhere
around 29,000 small and medium-sized companies
started up in 2006, down substantially from the 45,000
started in 1999.

The lack of start-ups in general, and particularly
"quality" start-ups (i.e., those with genuine technical
or some other inherent advantage), has to be concerning to
the powers that be, since it's well-known that not only do
small firms create innovative new technology and solutions,
but they also provide 70% of the nation's employment and
thereby fulfill one of Japan's most important business
concepts -- the social contract between companies and
society which ensures high employment.

So why is there a lack of new, innovative companies being
established in Japan? Our guess in order is: lack of a risk
taking culture and general apathy that goes with it,
followed by difficulty in raising initial capital to run
the business, then the sheer competitiveness of the

Today, let's look at raising capital.

Traditionally Japanese start-ups go only to banks for
financing, rather than raising equity as is common
elsewhere. This is because the debt system here is
well established and accepted, and because the
banks are considered experienced enough to help
lenders navigate the new waters of business. However,
the problem with bank loans is that for a start-up you
need to have guarantors, and right from the start the
company directors are asked to put their personal
guarantees (and thus their assets) on the line for
such loans -- considerably disincentivizing directors
from joining start-ups....

[Continued below...]

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[...Article continues]

In other countries, Venture Capital (VC) firms play a
fairly major role in helping new companies get started.
Silicon Valley epitomizes this relationship, and on average
VC investment in the USA is about 10 times greater than
here. One likely reason why Japan lags far behind other
markets could be because stock market listings (IPOs) are
way down and thus VCs have a very slim chance of getting a
profitable return. Then of course there is the boring old guy
entrepreneur factor referred to previously, as well.

2009 produced a record-low (in recent times) number of
IPOs: just 19, and this year will not be much better. In
stark contrast, perhaps surprisingly so, the South Korean
IPO market is booming and there were 66 IPOs in Seoul last
year, with an expected 70 lined up for FY2010.

As a result of the poor IPO market, and possibly the
resistance to the idea of VC-led non-IPO "trade sale" M&A
by CEOs who look at their companies as their own family
jewels, fiscal 2009 venture capital investments fell 40%
over those made in 2008, for a total of JPY63.7bn by the
nation's top 20 VC companies. To put things into better
perspective, in a recent UK firm's survey of 100 global
institutional investors about the attractiveness to VCs in
Asia and Oceania, Japan ranked bottom of the list...

So if there is little venture capital, where do start-up
companies get their funds from? We can see from the
government's Stats Bureau that in 2006, there were 12,078
companies funded with capital of between JPY3m and JPY5m --
we speculate that these companies were probably self funded
by the founders and perhaps a few family members and
friends. After the initial round, the founders will most likely go
on to raise money from the various government institutions
available in the government's "debt conveyor belt" system --
such as the Japan Finance Corporation and the Tokyo Credit
Guarantee Corporation.

The next most common capital amount given in the Stats
Bureau numbers is 7,700 companies started with funds
ranging from JPY10m-JPY30m. This is surprising and shows
that a significant share (almost 25%) of start-ups are
getting larger amounts of cash not normally available to
salary men. Our guess is that much of this comes from larger
companies helping a division to spin-out, or making a
strategic investment in someone they know and trust. This
is a very common act in Japan and is generally a great way
to raise capital when needed.

Last but not least, and just to round out the picture on
small company start-ups stats, there were 3,637 businesses
funded with capital of JPY5m-JPY10m, which again, in our
opinion probably represents money put in by family and

Can foreigners tap into the Japanese debt stream for
start-up companies? Absolutely. So long as your firm is an
incorporated business, we would recommend looking into
the Japan Finance Corporation loans -- which typically
come with an interest rate of around 2.5% or so and which
do not require you to be profitable at the time of applying.

There are many other loans as well. The best place to find
out about these is through your local "gyousei shoshi"
(Administrative Scrivener) who specializes in loan
applications and who for a percentage of the fees will
make your loan application on a success-only basis.

...The information janitors/



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+++ NEWS

- Record number of companies in business in China
- Skype-KDDI service coming
- Leading investment fund bullish on Japanese Real Estate
- Embassy wine cellars overflow
- Tsukiji fish market to move

-> Record number of companies in business in China

Corporate data research firm Teikoku Databank reckons that
a record 10,778 Japanese companies are now present and
commercially active in China. Of these, about 42% are
manufacturers and 35% are wholesalers. 67% of firms had
more than 50 employees. Not many of those companies are
doing so well, however, with just 20% saying that revenues
increased in FY3009. (Source: TT commentary from, Oct 22, 2010)

-> Skype-KDDI service coming

KDDI has obviously realized that it has missed the boat on
smart phones, and not only is it moving quickly to roll out
Android OS handsets, but it is also rolling out some
groundbreaking services. One of these is Skype on its Au
mobile service, allowing Au callers to, presumably, connect
to Skype users globally from the cell phone, regardless of
whether it has access to a broadband connection or just
through its Au 3G connection. (Source: TT commentary from, Oct 19, 2010)

-> Leading investment fund bullish on Japanese Real Estate

Fortress Investment Group said at a Tokyo investment
conference this last week, that it thinks Japan's
distressed real estate sector is about to enter into a boom
period (or bust period if you're the seller). Fortress expects
about US$50bn in distressed loans to come on the market
over the next 3-5 years, requiring banks to take foreclosure
measures. Currently the total commercial mortgage debt
market in Japan is worth around JPY1.12trn. ***Ed: So what
they're saying is that Japan is about to enter into another
real estate slump, where land holders won't be able to get
mortgage renewal fundings. If they are right, and distressed
assets do make their way on to the market, there will be a
feeding frenzy by funds - who'd love to be in on a Japan
play for super-cheap assets.** (Source: TT commentary
from, Oct 20, 2010)

-> Embassy wine cellars overflow

As the government continues to look for waste and
misallocation of tax money in the nation's various organs
of power, someone decided to do an audit of the 211
diplomatic missions overseas. What they found was an
amazing stockpile of 8,000 bottles of high quality wine at
a number of embassies around the world, including the OECD
mission, which has 7,896 bottles of wine in stock! ***Ed: As
these are embassies and are unlikely to serve cheap wine,
conservative estimates are that the wines are worth
somewhere around JPY400m.** (Source: TT
commentary from, Oct 19, 2010)

-> Tsukiji fish market to move

Not one to back down in the face of a fight, rambunctious
Tokyo governor Shintaro Ishihara has said that he approved
the budget needed to move Tsukiji fish market to a new
location in nearby Toyosu. This, despite the fact that the
new location has been found to contain contaminated soil,
and that both the DPJ ruling party AND Tsukiji employees
are against such a move. The relocation is expected to cost
around JPY128bn. ***Ed: Can someone PLEASE put Ishihara out
to pasture so we can have a financially responsible
governor in charge for a change?** (Source: TT commentary
from, Oct 22, 2010)

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.



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