Having the opportunity to meet and talk with many corporate and angel investors we were able to discuss about Japan's current tech start up scene and the trending issues they face. We also get a better understanding of the current Japanese labor market. Our author further shares his thoughts.

Mo’ money mo’ problems

I attended Slush Tokyo this year, a large-scale tech entrepreneurship event native to Finland, with a Japanese version running for the past 3 years. I mostly go there to drink wine with interesting people, of which there are many. It’s also a fantastic place to meet the future leaders and companies of Japan. The event attracts a hungry, young crowd of startups and investors, both foreign and Japanese. Startups have an opportunity to pitch their ideas and exhibit their ideas to prospective clients and investors. There, I was able to speak with were a handful of investors, both corporate and angel. By the end of the day, I had the same story burning in my ears. After listening to dozens of pitches from mainly Japanese entrepreneurs, none of them seemed promising enough to invest even a few thousand dollars. None. Zero. Zilch. Common complaints from the investors were

• a low volume of overall startups

• a lack of experienced entrepreneurs with strong executional capability, and

• a lack of strong communication skills.

Perhaps they were being a bit harsh, or selective about their investments, which they should be. But their main concern was the relative few entrepreneurs (and their corresponding ideas) –hence the lack of a variety of good ideas to choose from. Ample cash, not enough innovators. According to the Global Innovation Index, Japan has one of the highest numbers of patents per units of GDP and ranks sixth for citations of these patents by other countries. Unfortunately only a dismal amount of them make it to market; commercialization of these ranks #72 in the world (thanks to Claude L’Eglise for this great piece of information)! Great ideas, no execution

The result? Some of the best leaders, like Taizo Son-san, are already starting to leave the country, which doesn’t help. Perhaps he can make a bigger impact elsewhere, or perhaps he likes the weather in Singapore (and tax savings). Cultural and structural issues are an uphill battle.

Removing the red tape that impedes businesses like Airbnb and Uber, or getting past Dentsu cronies to tap into the heretofore monopolized advertising space all take time. As these changes are slowly made, we’re basically waiting for the old generation to die out and the new generation to get a foothold. It’s important the leaders are actually there to make this happen. Hopefully Taizo won’t be gone for too long, as we need him here more than ever.

The Labor Market

This connects to the unbalanced labor market and the Bloomberg article that made big news about Japan’s struggling labor market, citing some worrying numbers. There are 2.4 job openings for every applicant, meaning there are too many jobs and not enough people getting hired. The job to application ratio has been in the highs since the global financial crisis. After 2009, Japanese firms drastically decreased the number of new grad hires and realized that they would have to compete in the global economy.

Japanese employees woke up to an unfortunate truth — they didn’t necessarily have their jobs for life. But large financial and consulting firms are doing well and in a strong position to attract talent simply because of their brands. Sadly, this doesn’t solve any problems — the labor shortage remains, and Japanese innovation is slow to cross the seas. These are not the next Apples, Googles or Amazons. Many of these firms are unlikely to be recognized broadly as innovations from Japan. Indeed, Japan has only produced one privately owned unicorn company (valued over US $1 billion USD), Mercari. From an HR and recruitment perspective, within tech specifically, there are similar trends in new graduate hires. That is, it’s hard to find the right Japanese people with strong communication skills, the lack of which can, and already does have detrimental effects. Companies unable to hire talent in Japan fail to launch a product/service in timely manner, their bottom lines are impacted, and they possibly lose out to competition. In turn, companies are less inclined to invest in Japan, and the Japanese economy continues to stagnate.

What are the solutions?

Let’s assume as a company you use a recruitment agency and hires 20 sales people and 5 engineers at the common 35% fees. One could easily spend half a million dollars in hiring/recruitment costs, not including any hiring mistakes that might cost you. What if you are only able to hire half of the sales people and one engineer? Or none of them? You could have potentially lost out in millions of dollars in revenue from not closing a sales deals or launching a product at all. Furthermore perhaps you have lost traction and time to competition because of slow action. Particularly if you are a big name entering the Japanese market, the opportunity cost of waiting could easily be in the millions of dollars. Here’s an idea — acquihires.

An acquihire is when company X acquires company Z simply because company Z has strong talent, not necessarily because of their product or business. This is very common in Silicon Valley with Google/Facebook or other large tech firms who, rather than fiercely competing with other companies for talent, they instead choose to acquire companies for their people. While acquihires (and their doubtless pros and cons) are on the decline in the US, they might present some opportunities in Japan, especially when it comes to finding the great developers in dire shortage here. While it is expensive to acquire a company, or part of a company (maybe they just acquire a business unit), it’s arguably more expensive to wait 6-9 months to find the right hires — if ever.

Of course, finding the right talent, sourcing the company and executing an acquisition easier said than done. But I wonder how many firms have even considered this option. There are two more straightforward strategies to make Japanese enterprise more competitive in attracting top talent. One is to completely overhaul the history of Japanese employment by providing great working conditions, competitive pay and benefits, and career paths for employees. The second, and more easily actionable, is to open up and start honestly eyeing all those hireable foreigners out there with great skill sets. I am glad to see some of the startups we work with, like Finc and Japan Foodie, opening up their minds to this potential.