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.