6 investors explain why they are bullish about Japan’s startup scene despite an uncertain economy

Thinking of Japan often evokes notions of bleeding-edge tech mixed with deep tradition and culture. The country’s startups, however, haven’t seen the sort of growth that upstart tech companies in other parts of the world have. There are signs that those tides are turning, though, with startup funding increasing along with the number of active domestic venture capital firms. The Japanese government has also promised enthusiastic support to boost the startup ecosystem in an effort to ramp up annual startup investments tenfold to 10 trillion yen ($71.5 billion) by 2027.

2022 was a record year for the Japanese VC market, in stark contrast to global VC investments trending downward. Even in the first quarter of 2023, Japanese VC investment slightly increased owing to active seed and Series A funding deals; but later-stage funding was tough for startups, per a report by KPMG.

Gen Isayama, co-founder and CEO of World Innovation Lab, said this might be because “most of Japan’s startups are early-stage startups that tend to be isolated from periods of economic uncertainty and downturns — a function of being seven to 10 years from the time of the IPO.”

Startups in Japan received 877.4 billion yen ($6.2 billion) in 2022, up from 850.8 billion yen ($6 billion) in 2021, per a recent report by Initial. The amount of funding raised by Japan-based startups was estimated at $625 million in 2013, the report said. To put this in context, startups in New York alone raised $2.9 billion in 2013.

We spoke to investors who actively invest in Japanese startups to get a better understanding of how the startup scene in Japan has changed from before and after the pandemic and their following plans.

The money managers are optimistic despite uncertain macroeconomics, which could have a limited impact on Japan’s startup ecosystem, and geopolitical risks between the U.S. and China, which could benefit Japan. However, they pointed out that later-stage funding would still be challenging for startups in the country in 2023.

“The decline is happening in all markets [in the world] and at all stages … the impact on Japan is somewhat limited, but it is also true that Japan is a smaller market compared to its GDP and should be growing much more,” said the CEO of Sony Ventures Corporation Gen Tsuchikawa.

“There have been two things that have benefited Japan recently. One is that the rising concerns around China have caused investors to look at neighboring Japan as a more predictable alternative,” said James Riney, founding partner and CEO of Coral Capital. “Another is Warren Buffet’s investment in and endorsement of Japan. Many investors seemed to be listening to the Oracle of Ohama and locking in on Japan’s opportunities.”

Although global macroeconomics doesn’t help at this time, Japan is gearing up to accelerate its startup scene.

“We expect the amount of funding to increase with the government’s support,” said Tsuyoshi Ito, CEO of Beyond Next Ventures. “The Japanese government has designated 2022 as the ‘First Year of Startup Creation’ and announced a five-year plan to foster startups, which includes a record amount of approximately 1 trillion yen in startup support measures.”

“Large Japanese corporations have slowed down quite a bit in recent years. Startups and their innovation can help boost the Japanese economy one more time,” said Anis Uzzaman, founder and chief executive of Pegasus Tech Ventures. “… the current government’s initiative can help the country prepare and get ready for the next challenge and give birth to lots of startups.”

We spoke with:

  • Gen Isayama, co-founder and CEO, World Innovation Lab (WiL)
  • Tsuyoshi Ito, CEO Beyond Next Ventures
  • Katsuya Hashizume, Partner, Beyond Next Ventures
  • Gen Tsuchikawa, CEO, Sony Ventures Corporation
  • James Riney, CEO and founding partner, Coral Capital
  • Anis Uzzaman, founder and chief executive, Pegasus Tech Ventures

(Editor’s note: The following surveys have been edited for length and clarity. These answers are strictly limited to Japan and do not encompass all of Asia.)

Gen Isayama, co-founder and CEO of World Innovation Lab

We’re seeing a significant drop in VC funding in Asia’s first quarter this year. How has your VC investment strategy changed along with the market condition?

Our strategy has not shifted per se. Yes, the market is slowing down, but the top companies will always have something to offer. For example, according to the STARTUP DB ranking, the top 10 Japan deals in Q1’23 raised more money (59.2B yen) than the top 10 deals in Q1’22 (53.1B yen). Even during the VC funding boom, we were strategic and cautious and tried to pursue companies with what we found to be good intrinsic value instead of paying inflated valuations, and we plan on doing that going forward as well.

What caused the lowest funding in Asia since 2021? Do you think the VC funding will continue to decline this year? What are your prospects regarding funding volumes in Asia in 2023 and 2024? And do you expect it will bounce back anytime soon?

We are facing increasing uncertainty around the world. The rise in geopolitical risks, such as the Ukraine invasion and all-time high U.S.-China tensions, as well as increasing interest rates and uncertainty about economic stability, are all leading people and firms across the board to be more cautious about how they deploy their money.

6 investors explain why they are bullish about Japan’s startup scene despite an uncertain economy by Kate Park originally published on TechCrunch

Profitability over growth: 5 investors explain their mantra for South Korean startups

South Korea’s economic model has for decades leaned on export-led manufacturing operated by family-owned corporate giants. A 2015 report from McKinsey outlined how the country would need small companies to drive an innovative model in preparation for the next phase of economic growth. “The key to fostering such innovation is a vibrant startup community. … Currently, the Korean startup community falls far short of this ideal,” the report said.

South Korean conglomerates like Samsung, LG, and Hyundai still play significant roles in Korea’s primary economic growth; most of them, once focused on manufacturing, are now tech-driven firms. 

Along with the Big Tech giants in South Korea, the country’s startup ecosystem has immensely grown compared to 2014, as have startups in other Asian countries like China, India, and those in Southeast Asia. 

Back in 2014, there were just 10 unicorns —including Coupang, Naver, Kakao, Line (which relocated to Japan), and game companies like Nexon and N.C. Soft —among 29,561 startups. As of 2022, Korea had 22 unicorns, with a valuation of 1 trillion won (approximately $744 million), up from 18 unicorns in 2021. It might not sound like a massive leap from 2014, but the increased number of unicorns is a testament to the hard work being done by Korean startups.   

After the recent pandemic fueled the startup boom worldwide, the startup valuations in South Korea skyrocketed unrealistically just as they did globally. Jumping to the present, the startup funding landscape has shrunk, and valuations have dropped everywhere in the world in the face of uncertain macroeconomic conditions. Venture funding in Asia in the first quarter of 2023 declined 33% from Q4 2023 and 57% from Q1 2022, according to a report by Crunchbase

We spoke to select investors, who make investments in the South Korean market to hear their predictions for 2023, their investment strategy, which sectors excite them and more.

All the investors we spoke to said there are barely any changes in their investment strategies but approval for due diligence by committees has become rigorous. 

“The days of ‘swiping right’ on a deal are well over, and the required level of due diligence has also reverted to historical norms, taking three to four months rather than three to four days,” said Yeemin Chung, managing director of BRV Capital Management. 

The investors are now advising startup founders and executives to prioritize profitability over growth, extend their runway, and prepare to stay agile amid fears of a possible recession. 

And startups are now seeing a drop in valuations compared to the previous two years. Still, in a way, it is healthy as “people are approaching it more rationally,” according to Han Kim, general partner of Alots Ventures. 

“I think the current environment might feel a bit harsh for entrepreneurs, but in a sense, it’s doing a favor for the founders that can realistically map their growth path,” said Eunse Lee, founder and managing partner of 541 Venture. 

We spoke with: 

  • Han Kim, general partner, Altos Ventures
  • Tim Chae, managing partner, 500 Global
  • JP Lee, CEO and managing partner, SoftBank Ventures Asia
  • Yeemin Chung, managing director, BRV Capital Management
  • Eunse Lee, founder and managing director, 541 Venture.

(Editor’s note: The following surveys have been edited for length and clarity. These answers are strictly limited to South Korea and do not encompass all of Asia.)

Han Kim, General Partner, Altos Ventures 

We’re seeing a significant drop in VC funding in Asia’s first quarter this year. How has your VC investment strategy changed along with the market condition?

Our strategy has not changed much. We’ve been investing more in our existing companies since the second half of last year, so there are more investment dollars in total. It’s slightly different from other investors. I think it’s because some funds don’t invest much [these days]. In a way, there’s more opportunity for us to invest more. (But those are not new startups but existing companies in our portfolio.) We usually invest between 1 billion won and 10 billion won ($750,000 and $7.5 million) in new companies and we sometimes invest even up to 100 billion won ($75.5 million) in existing portfolios. 

What caused the lowest funding in Asia since 2021? and do you think VC funding will continue to decline this year? What are your prospects regarding funding volumes in Asia in 2023 and 2024?

If you look at the data, it includes China. I think that has been a little bit impacted by China. Chinese VCs have faced some regulations on big businesses’ [investment], and now the U.S. also regulates investing in Chinese companies. There are a lot of checklists [for investment in China]. It’s my guess, but at least this year, I think until the tensions between the U.S. and China fade away or resolve, this challenging atmosphere won’t be easy to bounce back. 

How does the investment trend in South Korea differ from other regions like the U.S. and Europe?

Now the trend is profitability before growth. I think this trend is becoming more important in South Korea. The U.S. used to be growth over profitability, but now it has changed to profit over growth, but the U.S. has more leeway than Korea. In other words, U.S. investors have more patience than investors in South Korea.

Profitability over growth: 5 investors explain their mantra for South Korean startups by Kate Park originally published on TechCrunch

How are global chipmakers preparing for the US-China chip war?

Great results can be achieved with small forces,” Sun Tzu wrote in “The Art of War” some 2,500 years ago.

That quote is so old it’s now an adage. But it appears the U.S. isn’t content to wager that small actions can achieve the wide-ranging impacts necessary to gain an edge over China in the development of AI and machine learning technologies.

After implementing sweeping restrictions on the export of semiconductors to China last October, the U.S.’ recent deal with Japan and the Netherlands to restrict the export of vital semiconductor parts and chip-making technologies to China is throwing the $600 billion global semiconductor industry into turmoil.

The implications of these restrictions are broad, given that China accounts for approximately 80% of the world’s electronics production and is a large consumer of semiconductors. To make things even more complicated, nearly every major chipmaker has Chinese customers.

But Washington doesn’t seem to be concerned with the worries of global chipmakers or near-term supply chain volatility. It’s looking far to the future: It wants to choke out China’s ability to develop and access AI technology while diversifying its sources of the increasingly important semiconductor.

The United States’ aggressive moves are about “AI dominance, which underpins what many call the fifth industrial revolution, and ultimately, about global economic leadership in the next few decades,” according to Josep Bori, research director at GlobalData.

And the recent deal with Japan and the Netherlands, which includes “preventing legacy deep ultraviolet (DUV) machine exports and outright advanced AI chips,” targets China’s semiconductor business and its ability to develop its AI technology well beyond just hardware, Bori said.

You can’t make pancakes without a pan

You see, while China makes a ton of different semiconductors, it doesn’t have some of the advanced equipment that’s needed to make the fastest processors, chips and memory storage devices.

Manufacturers in the country import a lot of the chips and equipment from companies across the world, including Taiwan’s TSMC; the U.S.’ Intel, Nvidia, and AMD; South Korea’s SK Hynix and Samsung; the Netherlands’ ASML Holdings; and Japan’s Nikon and Tokyo Electron.

This, to an extent, means that Chinese manufacturers like Semiconductor Manufacturing International Corporation (SMIC) rely heavily on the global semiconductor industry for the machines to make high-end chips.

According to Bori, a number of the high-end logic and memory chips are made using extreme ultraviolet (EUV) and deep ultraviolet (DUV) lithography machines.

“Initially, the [U.S.’ export] bans to China only affected EUV machines, used for the most advanced process nodes, such as 3 nm, 5 nm, and 7 nm,” Bori said.

This played into the U.S.’ strategy to slow Chinese companies’ advances in AI, machine learning and other cutting-edge tech. Basically, the smaller the distance between each transistor, the faster and more power-efficient a chip becomes. The smallest process nodes, such as 3 nm, 5 nm and 7 nm, are used to develop artificial intelligence systems, smartphones, cloud data centers and self-driving cars and are used in military applications.

But the January agreement targets older DUV machines that could let Chinese manufacturers make 14 nm chips, as well as 18 nm DRAM chips and NAND flash chips with more than 128 layers, Bori added. DUV machines let you make chips at the 14 nanometer, 28 nanometer and larger process nodes; such chips are commonly used in automobiles, industrial equipment and home appliances.

How are global chipmakers preparing for the US-China chip war? by Kate Park originally published on TechCrunch

The seas are getting even rougher for Chinese startups

The third quarter was far from favorable for Chinese startups looking to raise money. Data shows that for upstart tech companies in the country, Q3 2022 was the worst time to raise venture capital since Q1 2020, with far less capital invested than either the rest of 2020 and 2021, or for most of 2018 and 2019.

China is hardly alone in seeing its domestic startup scene see slowing capital inflows, but recent news puts the country-specific information into new context: Given today’s Chinese tech share sell-off, there is fresh pressure on technology companies’ valuations in the country, and that could impact startup fundraising.

If China saw fundraising decrease 10% in Q4 2022 from Q3 2022 — measured in dollar terms, not the number of funding events — we’d see startups facing the slowest quarter since the onset of 2018, according to CB Insights data. A steeper decline would put Q4 2022 as the nadir in the nation for the last five years.

Why are Chinese tech stocks suffering today? After a period when the sale of the nation’s equities onshore was at least somewhat meddled with, the value of major and minor Chinese tech companies fell today in the wake of the Chinese Communist Party’s every-five-year confab. This time ’round, current Chinese Premier Xi Jinping secured not only another five years in power, he also solidified a cabinet of like-minded allies.

The context is clear: The Xi method of managing China remains ascendant. And investors in tech companies, still licking wounds brought on by a regulatory barrage led by Xi — which included some reasonable ideas like dismantling certain anti-competitive practices along with some less enticing policies — are not enthused.

The result? A bloodbath (American share price changes as of the time of publishing):

The seas are getting even rougher for Chinese startups by Alex Wilhelm originally published on TechCrunch

What’s driving China’s autonomous vehicle frenzy?

China’s autonomous vehicle industry first started seeing some traction around 2016, when a bunch of ambitious startups mushroomed following advances in lidar, computing and machine learning. But the nascent sector was still driving in low gear, as the people working on the tech mostly had computer science backgrounds, and there weren’t many with extensive experience in the automobile industry.

Everyone wanted to build robotaxis at the time, recalls Hongquan Jiang, chairman and managing partner at Boyuan Capital, Bosch’s newly minted venture capital arm in China. “Back then, if you told people you were doing Level 2.5 or 3 [the human driver is expected to take over], you would be scorned. But people in the industry quickly realized Level 4 [the driver can take a nap in most circumstances] was still a distant dream,” Jiang told TechCrunch.

Regardless, these founders’ ambitions kept them on the path, and the industry is finally seeing a resurgence in China. Unlike the previous generation of founders, the space is now seeing more automobile expertise flow in. This generation also seems to be more pragmatic, and rather than shooting for the stars, they’re focused on market demand.

A lot of things can happen in China because of government support, but not necessarily elsewhere. Hongquan Jiang

This focus is reaping fitting rewards for startups. The industry saw a period of unprecedented acceleration in 2021, with over $8.5 billion invested in robotaxi startups, self-driving truck developers, lidar makers, smart electric car manufacturers, and chipmakers focused on vehicle automation, according to Crunchbase.

Investors these days have good reason to throw money at this industry, too: Sensors are getting cheaper and more capable, talent from the AI and automotive industries is coalescing, the government has introduced a slew of beneficial policies, and demand is rising as China prepares to cope with a drop in its working-age population.

There’s no fear when the state’s got your back

Momenta has a strategic partnership with the government of Suzhou, its home city, to put robotaxi fleets on the city’s roads. Image Credits: Momenta

Like other sectors that depend on public infrastructure, companies working to put driverless taxis, trucks and buses on the road in China have benefited greatly from government support.