Young Japanese companies are struggling to continuously expand their revenues compared with their peers in the US and Europe, partially owing to their significant lack of access to capital needed for growth, a Nikkei analysis shows.
Over the past five years, sales grew at an annual rate of 3.5% at Japanese companies listed for six to 10 years, less than half the rate at American and European companies. The growth rate of young Japanese companies was also slower than their older domestic counterparts who have been listed for 11 years and longer.
Many startups at their initial stage experience the hardship of launching products and services and chalking up profit from them, which is called the “first death valley” in the startup community. After weathering the first one, however, startups in Japan face the “second death valley” as their growth comes to a halt for failure in post-listing fundraising.
Behind the phenomenon is the shortage of investors who can take the risk of providing funds to unlisted companies, forcing Japanese startups to seek going public at an early stage. But if they get listed with small businesses, pension funds and other risk-sensitive investors stay away from them.
Mitsuo Okada, CEO of cybersecurity company Capy, is making preparations to bring its registry back to the US where he founded it, citing that the company cannot foresee its future “if we get listed in Japan.” While the number of investors and their funding resources in the US are overwhelmingly larger than in Japan, there is a culture that tolerates startups to make losses from bold investment, he said.
It is evident in the following set of examples showing clear differences between Japanese and American startups.
Japanese online marketplace Mercari went public in 2018, six years after foundation, for investment in the US and other purposes. But the company has failed to turn around its US operations and its market capitalization shrunk to around JPY 330 billion (USD 2.2 billion), down from a peak of more than JPY 1 trillion (USD 6.7 billion). Faced with the difficulty of making additional investment in the US, the company laid off a considerable number of employees from its US subsidiary in June.
In contrast, US-based private lodging operator Airbnb avoided an IPO for 12 years after it was founded in 2008. The option was possible because venture capitalists provided the company with funds for growth out of capital from investors such as pension funds. Airbnb was able to make upfront investment overseas and establish the foundation of growth without pressure from shareholders with low risk comfort. The company’s market capitalization has increased to over USD 70 billion.
In the US, listed companies’ active returns of surplus capital to shareholders also serve as a bridge for the flow of funds from mature listed companies to unlisted firms with room for growth.
American listed companies with excess liquidity carried out share buybacks and dividend payments totaling USD 8 trillion over the past five years in response to shareholders’ demand for an improvement in the efficiency of capital, while raising only USD 870 billion through share issues. On a net basis, listed companies are passing capital back to investors. Redeemed funds are reallocated to unlisted companies through investment by venture capitalists and in private equities. The amount of such investment over the past five years totaled USD 3 trillion, equal to 42% of net profit logged by listed companies.
“As Japan is in the process of change from the financial system featuring banks’ supply of funds, investment in privately owned businesses by pension funds and others has just started,” said Hideaki Miyajima, professor of commerce at Waseda University. The emerging practice will “take 20 years before taking hold,” he said.
There are signs of such a change as asset management companies are developing trusts for investment in both unlisted and listed companies. “We will fill the split between unlisted and listed companies,” said Yoshiharu Takeda, head of the product management department at Sumitomo Mitsui DS Asset Management.
Startups welcome the recent policy trend, too. Hiroto Yamazaki, CEO of Umami United Japan engaging in the development of plant-based egg powder, said “fundraising has become easier thanks to the government’s five-year plan to foster startups.”
Japan’s mature listed companies have ample money as on-hand funds have grown to a record level. If the reallocation of surplus funds to younger startups takes hold, Japan’s economic metabolism will make strides.
This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.