The problem with technology entrepreneurship in Japan

8 years ago by in Business

There are many things that make being a technology entrepreneur in Japan challenging and not all of these challenges are unique to Japan, but they are absent from the USA. So when we look at the innovation coming out of the USA I think its important to keep these things in mind.

The first is the lack of new startups. In Japan there has been a lot of activity around incubators in an effort to encourage new startup activity and I think the effort is admirable but flawed. Its flawed because the hiring system in Japan is completely structured around new graduates. The brightest new graduates are eagerly recruited by Japan’s top government or business organizations in what is meant to be a long career track to top management.

The downside is that there is a negative stigma for smart graduates who fail to get recruited into a company directly out of university. For a smart young kid in a top university starting a company out of college has the risk of failure and the risk of stigma that could prevent him from easily finding a traditional job in the future.

For a young graduate who wants to start his first business, the course of entrepreneurship becomes a lifetime commitment. If it was easier for a startup founder to find a new job after a failed startup they could fail faster, but instead in Japan we have a lot of zombie companies, startups without much hope of growth but the founder continues to run it because his options are limited.

So how do we encourage bright students to take the risk? The reality is that some of the smartest people I know in technology are risk averse. While Steve Jobs was an outgoing charismatic CEO it was Steve Wozniak who actually built the technology and he was extremely reluctant to leave his comfortable job at HP to work full time on building Apple.

My solution to this would require the Japanese government to become involved. The Japanese government could partner with incubators and major companies to create a fund for new graduates who have been recruited by a company but would like to try and start a business. The student would be given one year to build his business based on a business plan accepted by the incubator (not the company or government) and given mentorship while working out of the incubator.

The fund will be used to reimburse the company for the students salary for that year and cover minor cost for the incubator space and mentors. If the startup becomes a success and receives investment from VC’s during that year, the student can focus entirely on that and terminate his contract with the company that hired him in exchange for stock options or equity. If the startup fails, the student can return to his original employer with the next incoming class, more experienced and knowledgeable about business than before. Now this student is a true asset to the company.

Another challenge I have noticed in doing business in Japan that is fundamentally different than doing business in the USA is the approval process for signing contracts. In the USA a 19 year old can meet the CTO of a major company at a conference and demo his product to him by approaching him in the halls or lobby. If that technology is interesting the CTO will often try the service. The judgement criteria for the CTO is, can this technology help me, is it affordable, is the founder smart and is the company reliable and then maybe, who are the investors?

In Japan the CTO can’t make that decision alone. Even if they read about a great new service online or in the news most executives are very risk adverse and making bad product purchasing decisions can be damaging to an executive’s career. So the criteria for evaluating a new product or service is, who are the investors, who are the shareholders, is the company reliable, is the founder smart, is the product affordable and finally can this technology help me? The decision process is completely in reversed, putting startups at a disadvantage to established companies.

My employee explained to me, once a contract in Japan is signed, companies are very reluctant to cancel it, so even if the service is performing poorly they will keep the relationship until the expiration. This means that they spend a lot of time trying to avoid going into bad relationships in the first place. This is the Japanese paradigm and it would be naive to expect it to be changed. Instead my company offers a 100% money back guarantee now to companies that enter into contracts with us, but this only reduces the risk slightly.

New ventures that are self funded or created by new college graduates in Japan just don’t have the credibility, connections our legacy to make it easy to sign contracts with large companies. So the fastest growing technology companies I see in Japan all seem to be consumer focused. If the Japanese government really wants to encourage entrepreneurship they have to remove as much risk as possible for new college graduates to take the leap and for established businesses to partner with startups. A fund of this sort could be one route.