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Study Group for the Creation and Development of
Start-ups
Final Report
- Creation and Development of Start-ups for Innovation in the Japanese
Economy -
April 30, 2008
Study Group for the Creation and Development of Start-ups
1
Contents
Introduction .............................................................................................................................. 6
Chapter 1 Importance of the creation and development of ventures, and present
conditions .................................................................................................................................. 7
§1 Present state of start-up creation .............................................................................. 7
§2 Importance of the creation and development of ventures ...................................... 10
1. Roles ventures play in innovation in the Japanese economy ................................. 10
2. Roles ventures play in the economic growth of Japan and job creation .............. 11
3. The roles venture start-ups play in turning the potential of individual
entrepreneurs into reality ........................................................................................ 13
Chapter 2 Expansion and enhancement of entrepreneurship education .......................... 14
§1 Importance of entrepreneurship education ............................................................. 14
§2 Entrepreneurship education at elementary, junior-high and high schools .............. 16
1. Present state ............................................................................................................ 16
2. Challenges .............................................................................................................. 18
§3 Entrepreneurship education at universities and graduate schools .......................... 19
1. Present state ............................................................................................................ 19
2. Challenges .............................................................................................................. 21
(1) More opportunities to take courses on entrepreneurship education ....................... 21
(2) Development of more practical education that should help venture start-ups in the
real world ................................................................................................................ 22
§4 Education and support for entrepreneurs at the stage of considering a business
start-up 23
1. Present state ............................................................................................................ 23
2. Challenges .............................................................................................................. 24
(1) More and better entrepreneurship education for venture start-up .......................... 24
(2) Cooperation between start-ups and entrepreneurs and effective use of private
education and support organizations for entrepreneurs .......................................... 24
(3) Enhanced support by incubators for entrepreneurs other than just offering facilities
25
Chapter 3 University-originated ventures ........................................................................... 26
1. Present status .......................................................................................................... 26
(1) Present status of university-originated ventures ..................................................... 26
(2) Challenges university-originated ventures face ..................................................... 28
(i) Challenges in terms of people............................................................................. 29
(ii) Challenges in terms of financing ........................................................................ 29
(iii) Challenges in terms of marketing channels ........................................................ 30
(3) Viewpoints to be considered in supporting university-originated ventures ........... 30
2
2. Challenges .............................................................................................................. 31
(1) Support of universities for university-originated ventures ..................................... 31
(i) Effective use of universities’ resources for support ............................................ 31
(ii) Use of universities’ names .................................................................................. 31
(iii) Actions to deal with challenges in financing (investment in university ventures,
etc.) ..................................................................................................................... 32
(2) Support provided for university-originated ventures by local governments, etc. .. 33
(3) Support for university-originated ventures provided by universities and local
institutions in cooperation ...................................................................................... 33
Chapter 4: Human resource strategies of Start-ups ........................................................... 34
1. Present state ............................................................................................................ 34
(1) People as a business resource of Start-ups ............................................................. 34
(2) Difficulty in securing people in competition with large companies ...................... 34
2. Challenges .............................................................................................................. 36
(1) Expansion of the labor market for start-ups ........................................................... 36
(2) Efforts to develop human resources ....................................................................... 36
(3) More jobs for women ............................................................................................. 37
(4) Actions to counteract our aging and shrinking population .................................... 38
(5) Effective employment of foreigners ....................................................................... 39
(6) Dissemination among start-ups of know-how of recruitment, human resource
development, organization building, etc. ............................................................... 40
Chapter 5 For expansion of the customer base and market .............................................. 42
1. Present state ............................................................................................................ 42
(1) Japanese market emphasizes proven records ......................................................... 42
(2) Japanese ventures are unwilling to expand overseas ............................................. 42
2. Challenges .............................................................................................................. 44
(1) Brand strategies, alliances with large companies, partnerships among ventures and
SMEs, use of technology assessment services, and other initiatives for
strengthening marketing of products and services ................................................. 44
(2) Effective use of public procurement and trial orders, etc....................................... 45
(3) SBIR system ........................................................................................................... 48
(4) Treatment of new products and services at approval and under regulations .......... 49
(5) Aggressive expansion of business overseas by ventures themselves ..................... 50
(6) Enhanced support for start-ups in overseas expansion ........................................... 50
Chapter 6 Enhancement of direct financing to start-ups ................................................... 51
§1 What meaning does direct financing have for start-ups? ....................................... 51
§2 Expansion of angel investors .................................................................................. 52
1. Current state of angel investment ........................................................................... 52
(1) Significance of angel investment ........................................................................... 52
3
(2) Angel networks ...................................................................................................... 52
(3) Angel tax ................................................................................................................ 53
2. Challenges .............................................................................................................. 57
(1) Survey of realities of angel investors in Japan, and collection of cases of success /
public relations campaign ....................................................................................... 57
(2) More applicability of the angel tax system, and simpler procedures for the system
57
(3) Treatment of failed ventures ................................................................................... 57
(4) Efforts to expand angel networks ........................................................................... 58
(5) Venture capitals of types to support angel investment ........................................... 58
§3 Increase of financing through venture capitals ...................................................... 59
1. Present state of venture capitals ............................................................................. 59
(1) Amount of venture capital investment ................................................................... 59
(2) Structure of the industry ......................................................................................... 60
(3) Current status of investment of venture capital firms ............................................ 61
(4) Return on investment ............................................................................................. 63
(5) Venture capital policies .......................................................................................... 64
2. Challenges .............................................................................................................. 65
(1) Diversification of suppliers of capital .................................................................... 65
(i) Capital from pension funds ................................................................................. 65
(ii) Capital from investors overseas .......................................................................... 68
(2) Collection and provision of information about venture capitals ............................ 68
(i) Why is collection and provision of information about venture capitals
necessary? ........................................................................................................... 68
(ii) Mechanisms to be prepared for the collection and provision of more information
about venture capital investment ........................................................................ 69
(3) Further investment in companies at the early stage of business start-up ............... 70
(4) Development of human resources of capitalists for more hands-on support ......... 70
(5) Challenges in legal and accounting systems .......................................................... 71
(i) Ways to apply accounting standards to venture capital investment.................... 71
(ii) Regulations of venture capitals ........................................................................... 72
§4 Ways to increase participants in emerging equity markets and revitalize them ..... 73
1. Current state of emerging equity markets .............................................................. 73
(1) Increased numbers of emerging equity markets ..................................................... 73
(2) Increasing cases of companies delisted due to breaches of the law, etc. ................ 74
(3) Retail investors support emerging equity exchanges ............................................. 74
(4) Volatile / depressed stock prices at present ............................................................ 75
(5) More rigorous examination for listing ................................................................... 76
(6) Difficult assignment of auditing firms ................................................................... 78
4
(7) Introduction of the internal control reporting system ............................................. 79
(8) Deteriorating listing conditions for start-ups ......................................................... 79
(9) Concerns about a slump in investment in start-ups in general ............................... 79
2. Challenges .............................................................................................................. 80
(1) Enhanced self-discipline and governance by start-ups themselves ........................ 80
(2) How should listing procedures be from now on? ................................................... 80
(i) Listing procedures that strike a balance between the growth of start-ups and the
protection of investors ........................................................................................ 80
(ii) Exchange of information about listing examination procedures for better
understanding of the procedures ......................................................................... 82
(iii) Necessary actions to solve issues with auditing firms ........................................ 82
(3) Shift of focus from listing examination to post-listing actions .............................. 83
(i) Necessary recognition as ex post facto supervision system ............................... 83
(ii) Study of Japanese Nomad (system for support for disclosure after listing) ....... 83
(iii) Voluntary efforts by securities firms and exchanges .......................................... 83
(iv) Examination of effective use of intellectual property reports and intellectual
assets management reports ................................................................................. 84
(v) Observation of and action to outcomes of the internal control reporting systems
introduced ........................................................................................................... 84
(vi) Examination of potential growth after listing ..................................................... 85
(4) Efforts to increase participation of institutional investors...................................... 86
(i) Enhanced efficiency and further globalization of exchanges to make them more
attractive ............................................................................................................. 86
(ii) Examination of an analyst introduction system .................................................. 86
(iii) Development of an index of the emerging equity exchanges ............................. 87
(iv) Liquidity provider program ................................................................................ 87
(v) Development of venture stock exchanges for professionals............................... 88
Chapter 7 Capital ties with existing companies ....................................................................... 90
1. Present State ........................................................................................................... 90
(1) Sale of Start-up stocks from venture capital funds to existing companies ............. 90
(2) Repurchase provisions in investment contracts with venture capitals ................... 92
(3) Moves of corporate venture capitals ...................................................................... 93
2. Challenges .............................................................................................................. 95
(1) Development of secondary markets for shares of unlisted Start-ups ..................... 95
(2) Improvements in repurchase provisions in investment contracts with venture
capital funds ........................................................................................................... 95
Chapter 8 Viewpoints of existing companies on ventures ..................................................... 100
1. Present state .......................................................................................................... 100
(1) Expectations for corporate ventures ..................................................................... 100
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(2) Current state of large companies in the use of ventures ....................................... 102
(3) Background to the current situation ..................................................................... 103
(i) Challenges concerning the awareness of large enterprises and their governance
103
(ii) The problem of risks people have to assume when leaving a large enterprise and
setting up a new business .................................................................................. 104
(iii) Challenges in social systems concerning corporate venturing ......................... 105
2. Challenges ............................................................................................................ 106
(1) Reformed awareness and management for corporate venturing .......................... 106
(i) Making visible how effectively a company uses its own technology assets
(setting an indicator of the return on technology assets) .................................. 106
(ii) Collecting and sharing best practices ............................................................... 107
(iii) More and better “arenas (platforms)” for VCs and others to work as an
intermediary and match business resources between companies ..................... 109
(2) Reforms to reduce risks employees assume when leaving a large enterprise to set
up a new business ................................................................................................. 111
(3) Reforms of systems of the national government for corporate venturing, etc. .... 111
(i) Study of incentives for venture investment in R&D ........................................ 111
(ii) Increase of funds that deal with corporate venturing........................................ 112
(iii) Enhanced support programs for corporate venturing ....................................... 112
(iv) Reviews of implementation of R&D programs by the government, etc. ......... 112
6
Introduction
The creation and development of ventures, which often use and promote new technologies
and/or business models and take on greater risks to tackle the challenge of new business, is
essential to promote innovations in Japan’s industry and encourage growth and revitalization
of the whole economy of Japan.
Over this decade, Japan has rapidly developed institutional and social frameworks for
ventures, such as promoting the expansion of entrepreneurship education, the development of
incubators, the growth of a labor market for start-ups, the abolition of minimum capital
requirements, the growth of venture capitals, and the opening of emerging equity exchanges.
In this sense, it could be said that dramatic improvements have been made in Japan for the
creation and development of ventures.
However, compared with countries where ventures play a great role in the growth of their
national economies and promote innovation, such as in the United States, Japan should create
more room for the growth and development of start-ups.
At present, the rate of new business openings and total entrepreneurial activities are slowly
rising, although there are some areas of concern, including the deteriorating conditions
concerning listing on stock exchanges for start-ups.
To examine and consider such circumstances, the Study Group for the Creation and
Development of Ventures was established. We have reviewed what conditions ventures are
now placed under and discussed what policies should be introduced.
This report, the final conclusion of the Study Group, describes the challenges ventures are
facing and suggests what should be done to deal with them.
7
Chapter 1 Importance of the creation and development of ventures, and present
conditions
§1 Present state of start-up creation
Over the past decade, systems and institutions for ventures have been greatly developed.
For instance, emerging equity exchanges were opened, minimum capital requirements for
joint-stock companies were abolished, and systems for financing without the need for
collateral or a guarantor were introduced. During the global IT boom around 2000, many
IT service-related start-ups also came into the spotlight in Japan. In the country as a whole,
however, the opening rate of establishments (the proportion of start-ups among existing
businesses) stood at 5.1% (2004 - 2006), smaller than the closing rate (the proportion of
discontinued companies among existing businesses) of 6.2%. This has also stayed at a
lower level than that in the United States (10.2%), the United Kingdom (10.0%), and
France (12.1%). (The year of reference is 2004 for all three countries).
The 2007 Global Entrepreneurship Monitor Report revealed that, in terms of Total
Entrepreneurial Activity (TEA: the ratio of people involved in setting up a new business
among those between the ages of 18 and 64 (those who are preparing a new business and
those who started one within the past 42 months) Japan ranked eighth from the bottom
(4.3%).
The trend in the last few years, however, shows that the opening rate and TEA are both
improving slowly. This fact seems to demonstrate that the efforts Japan has made to
promote ventures and start-ups are gradually bearing fruit.
Figure 1-1 Opening and closing rates of businesses (excluding primary industry)
Opening rate
Closing rate
(year)
8
The Establishment and Enterprise Census, the primary set of statistics used to calculate
opening and closing rates in Japan, is conducted once every few years. It would be
desirable to publish annual statistics of start-ups in order to see how the constantly
changing conditions affect the opening of businesses.
Figure 1-2 International comparison of opening rates
Japan United States United Kingdom France
Figure 1-3 Total Entrepreneurial Activity (TEA) in countries
Source: Small and Medium Enterprise Agency, “2008 White Paper on Small and Medium Enterprises in Japan”
Note: Average of 2004 - 2006 for Japan; 2004 for the others.
Sources: “2008 White Paper on Small and Medium Enterprises in Japan” for Japan, and
“2007 White Paper on Small and Medium Enterprises in Japan” for the others
Source: Global Entrepreneurship Monitor 2007 (GEM)
Note: TEA = Total Entrepreneurial Activity: ratio of people involved in setting up a new business among
those between the ages of 18 and 64 (those who are preparing a new business and those who started
one within the past 42 months)
(%)
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Figure 1-4 Changes in Total Entrepreneurial Activity (TEA)
US
UK
Germany
France
Japan
A series of recent cases where some ventures (or former ventures) window-dressed
accounts or violated the law also weakened expectations for start-ups and hurt their
reputation, temporarily, but the situation seems to be recovering. Global Entrepreneurship
Monitor surveys showed the percentage of people in Japan who respected successful
entrepreneurs rose to 56% in 2004 from 8% in 1999 before falling to 45% in 2006, and
that the figure slightly recovered to 48% in 2007.
Figure 1-5 Evaluation of social status of entrepreneurs (percentage of people who respect
successful entrepreneurs)
(%)
(Year)
Source: Global Entrepreneurship Monitor 2007 (GEM)
Source: Global Entrepreneurship Monitor 2007 (GEM)
Note: TEA = Total Entrepreneurial Activity: ratio of people involved in setting up a new business
among those between the ages of 18 and 64 (those who are preparing a new business and those
who started one within the past 42 months)
Japan US UK
10
§2 Importance of the creation and development of ventures
1. Roles ventures play in innovation in the Japanese economy
Ventures (start-up companies that launch a new business based on new business models as
their core in pursuit of rapid growth) are one of the important sources of innovation of the
entire economy of Japan, as they are a driver that creates innovative technologies and
stimulates creative business models.
In particular, ventures bring with them or create possibilities to stimulate great changes or
transformations in technologies and/or business models that existing companies are not
able to realize, because they take greater risks than established companies and take on the
challenge of a new business with novel technologies and/or business models as their
weapons.
In the service industry, ventures may also contribute to the higher productivity of the
whole sector as they introduce new business models and up-to-date technologies,
including IT, and promote innovation in the industry.
In the United States, it is said, research laboratories of major companies used to play a
central role in innovation, but since the 1980s, when the US economy’s industrial
structure started to change, universities and start-ups have played an important part in
innovation. In the ranking of the “World's Most Innovative Companies” published by
BusinessWeek, the group of top 25 innovators includes 18 US-based enterprises, among
which as many as nine were established in and after 1970. That suggests that innovation in
the US economy owes much to ventures.
Figure 1-6 BusinessWeek, “The World’s Most Innovative Companies”
Among the 18 US-based companies, nine were young enterprises established in or after 1970. There
are no such new companies among the three companies based in Japan.
Rank Company Country Established in Rank Company Country Established in
United States United States
United States
United States
United States
United States
United States
United States
United States
United States
Japan
Finland
Japan
Japan
United States
United States
United States
United States
United States
United States
United States
United States
Germany
Korea
United Kingdom
11
Source:
2. Roles ventures play in the economic growth of Japan and job creation
Start-ups, which bring about novel technologies and new business models and, as a result,
create new markets, make a great contribution to the growth and revitalization of the
whole economy.
The relationship in OECD members between opening rates of establishments and GDP
growth shows that, in general, economies with more start-ups launched often grow faster.
According to a survey in 2007 by the Global Entrepreneurship Monitor, countries with a
higher GDP per capita than Japan generally have a higher level of Total Entrepreneurial
Activity (TEA: ratio of people involved in setting up a new business among those between
the ages of 18 and 64 (those who are preparing a new business and who started one within
the past 42 months)).
Ventures are also important as a source of job creation. Most of the new jobs in Japan are
created by newly opened establishments. According to the National Venture Capital
Association (NVCA), in the United States companies financed by venture capitals
employed more than ten million people, 9.0% of those working in the private sector as a
whole, in 2005.
Figure 1-7 GDP growth and start-ups
??1?3 ????????????????2007 ??????
Source: OECD “Science, Technology and Industry Outlook: Drivers of Growth: Information
Technology, Innovation and Entrepreneurship, 2001 Edition”
12
Figure 1-8 Relation between TEA and GDP per capita
GDP per capita (US$): PPP, 2006
Figure 1-9 Effects on job creation of establishments opened and closed (10 years)
10 thousand jobs Jobs created Jobs lost
Establishments Establishments Establishments
ongoing opened closed
Note: Establishments opened refer to those that did not exist as of the 1994 survey but did as
of the 2004 survey.
Source: Small and Medium Enterprise Agency “2007 White Paper on Small and Medium
Enterprises in Japan”
Source: Global Entrepreneurship Monitor 2007 (GEM)
US
Japan
T
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7
13
3. The roles venture start-ups play in turning the potential of individual entrepreneurs into
reality
The creation and development of ventures play an important role in turning the potential
of entrepreneurs into reality; they help entrepreneurs realize their own dreams, fulfill their
ambitions, put their philosophies into practice, build their own way of life, and work for
communities, for instance.
In 2007 the Ministry of Economy, Trade and Industry (METI) sent questionnaires to
entrepreneurs who had received investments from venture capitals, and asked whether
they were happy to have started a business themselves. Among the respondents, 97%
answered “Yes.”
Figure 1-10 Do venture founders feel “happy to have started a business?”
Yes No
Source: METI, “2007 Survey of Creation and Development of Start-ups” (December 2007)
14
Chapter 2 Expansion and enhancement of entrepreneurship education
§1 Importance of entrepreneurship education
No start-ups could be created without entrepreneurs. Especially at the early stage of the
entrepreneurial process, a start-up is inseparable from the founders themselves. The
person of founder is the most important key to the subsequent birth and development of
the company.
As stated in Chapter 1, in terms of the number of entrepreneurs, Japan’s level of
entrepreneurial activity remains relatively low in the world.
As for the skills of entrepreneurs, a survey in 2007 by the Global Entrepreneurship
Monitor also showed that in Japan a far smaller proportion of the people between the ages
of 18 and 64 thought they had the necessary entrepreneurial skills.
Figure 2-1 Proportion of people between the ages of 18 and 64 who think they have
entrepreneurial skills
Russia Japan Taiwan Korea Hong Kong France China Germany U.S. UK
For Japan to overcome this shortage of entrepreneurial people, entrepreneurship education
has a really important role to play. Entrepreneurship education of course helps people
acquire the mindset and skills entrepreneurs need and increases the number of
entrepreneurial people. In addition, in Japan, where the way of life as an entrepreneur is
not familiar to everyone and not everybody fully understands what benefits they might
receive and what risks they should assume if they choose to live as an entrepreneur, this
Source: Global Entrepreneurship Monitor 2007 (GEM)
15
type of education is also important to help as many people as possible realize they also
have a real choice of living an entrepreneurial way of life.
The qualifications entrepreneurs should have (i.e., entrepreneurship and entrepreneurial
skills) are necessary, even if you refrain from choosing a career path to becoming an
entrepreneur, to start creative and novel businesses and activities as a member of various
types of economic/social organizations. Entrepreneurship education, therefore, has the
benefit not only of giving birth to entrepreneurs but also of making the society and
economy of Japan as a whole more creative and more vibrant.
Ventures are rapidly developing, and they have the potential to be a driving force of
Japan’s economy. Before funding a venture, however, prospective entrepreneurs must
acquire a rather high level of skills and have a clear sense of purpose. To help them obtain
such skills and realize their mission, it is necessary to offer them a high level of expert
education based on a high standard of professionalism, as well as general expertise on
how to start a business.
Figure 2-2 Qualifications entrepreneurs should have
Entrepreneurship
Vision/Ambition
Spirit of challenge
Creativity
Decisiveness (quick
decision-making)
Tolerance of risk
Leadership
Dedication to teamwork
Entrepreneurial skills
Communication skills
Planning skills
Risk-management skills
Skills to form alliances
Knowledge of legal, accounting
and financial affairs needed to
create/develop a venture
Linguistic skills
16
§2 Entrepreneurship education at elementary, junior-high and high schools
1. Present state
The spirit of challenge, creativity and other elements of entrepreneurship have much to do
with the awareness/values and behavioral principles of people. To fully develop such
personalities, it is crucial to encourage children to learn entrepreneurship at the stage of
elementary and secondary education.
From such a point of view, METI has provided assistance since 1999 to: (a) develop and
try out educational materials and programs for elementary, junior-high and high school
students and manuals for teachers; (b) invite business owners or people engaged in
start-ups to elementary and secondary schools, and send teachers to start-ups for research
and training; (c) implement model programs for participation/experience-style learning of
entrepreneurship; and (d) commend organizations and individuals that have worked for
entrepreneurship education.
Thanks to such initiatives, entrepreneurship education is spreading among elementary and
secondary schools to a certain extent. For instance, model programs for
participation/experience-style learning of entrepreneurship, as mentioned above in (c),
were carried out between 2002 and 2006 at 833 schools for 68,923 students in total. The
Keizai Doyukai (Japan Association of Corporate Executives) and local New Business
Conferences have been regularly sending lecturers to schools.
Entrepreneurship education, however, has yet to have become prevalent among a wide
range of ordinary elementary and secondary schools. For instance, among the local
governments that have implemented model programs as stated above, only half continue
to provide entrepreneurship education. Most of the municipalities that discontinued such
education say they gave up because of a “shortage of budget” or a “shortage of teaching
hours.”
17
Figure 2-3 Why was entrepreneurship education discontinued after model programs ended?
In terms of a “shortage of teaching hours,” many pointed out duplication or redundancy
between entrepreneurship and career education. Career education is provided to help
young people find their own abilities, aptitudes, and ambitions and develop awareness as a
worker, professional or business person. This type of education has been introduced as a
result of recent concerns about an increasing number of youngsters who work part-time
(Freeta) or those called NEETs (Not in Education, Employment or Training). Comparison
between entrepreneurship and career education shows they share many objectives because
they are both intended to support students in acquiring knowledge to collect and search for
information, the ability to carry out their plans, the expertise to find solutions, and skills
for communication.
Career education is rapidly prevailing among schools mainly because related issues have
been incorporated into the Guidelines for the Course of Study of the Ministry of
Education, Culture, Sports, Science and Technology (MEXT), and because MEXT and
three other ministries have jointly completed a promotion plan. For instance, in 2006,
94.1% of public junior high schools (9,528 among 10,124 schools) provided job
experience programs for students, and 62.0% of public high schools (2,914 among 4,699
schools) offered opportunities for internships.
Source: METI, “Survey of Entrepreneurship Education” (December 2007)
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18
Figure 2-4 Comparison between entrepreneurship and career education
Entrepreneurship education Career education
Skills and abilities entrepreneurship education is Skills and abilities for career development (examples)
expected to develop (examples)
2. Challenges
Entrepreneurship education at elementary, junior-high and high schools should now
advance from the stage of model programs to the phase of penetration.
Challenges that lie in the way in spreading entrepreneurship education among schools are
the shortage of teaching hours and budget. Teaching hours might be secured by offering
entrepreneurship education as a part of career education, which has been introduced to
more primary and secondary schools in parts of Japan and has a lot in common with
entrepreneurship education.
To secure a budget, it is necessary to pursue entrepreneurship education that can be
provided with limited financial resources by ordinary teachers. For instance, studies
should be made on whether and/or how help desks for entrepreneurship education should
be set up and programs should be prepared to send entrepreneurs to schools to give
lectures. Opportunities for entrepreneurs to visit primary and secondary schools and talk
directly with students are important, especially to show them how exciting it is to start a
business and to get them interested in and attracted to entrepreneurial activities.
Sources of descriptions of career education: MEXT, “Manual for Promotion of Career Education at Elementary,
Junior-high and High Schools - Support for Every One of the Students in
Developing Awareness of How They Should work and What Job They
Should Take”
Entrepreneurship education refers to education provided to train
people to develop “entrepreneurship” and “entrepreneurial skills”
and to be able to “find their own mission, discover themselves
what to do with it, and carry it out themselves.”
Career education refers to “education provided, based on the
“concept of careers,” for students to support each of them in
developing their careers and help them acquire the motivation
and attitudes necessary to build the careers they deserve.” In
short, it is education to have “every one of the students develop
an awareness of how they should work and what job they
should take.”
Entrepreneurship
Spirit of challenge: a forwar-looking attitude to try something new and
address the challenges that emerge
Ambition: motivations and causes
Passion: zeal
Courage: willingness to expose themselves to certain risk
Entrepreneurial skills
Ability to dream: imagination, creativity, problem-finding, positive
attitudes, optimism, etc;
Ability to explain a dream: communication skills, logical thinking,
presentation skills, personality and honesty, etc;
Ability to realize a dream: skills to collect information, problem-solving,
ability to make plans, vitality,
judgment/decisiveness, patience, etc.
To
develop
human
relations
Ability to
make
effective
use of
informa-
tion
Ability to
design
the future
Ability to
make
decisions
Skills/Abilities Description
Ability of students to understand themselves and others
Ability to have deeper understanding of themselves and others, to appreciate the diversity of
personalities of people, and to act with respect for each other
Communication skills
Ability of students to develop communication with members of a diversity of groups and
organizations and establish rich human relations with them to attain their own growth
Ability to collect and search for information
Ability of students to collect and search for a variety of information about careers and jobs, to
select and use the necessary information, and to consider what career they should choose and
how they should live
Ability to understand jobs
Ability of students to understand the relation between what they are learning at school and
what they will do in society and at a workplace, and to find what they should do now
Ability to understand/recognize roles
Ability of students to understand what roles people play in private and professional life, what
they are performed for, and how they are related to each other, and to gain a deeper
understanding of what roles they themselves should play
Ability to implement plans
Ability of students to consider objectives in how they will live and what career they should
build, to prepare a career plan to achieve them, and to carry it out in, for instance, choosing
something in practice
Ability to make appropriate choices
Ability of students to compare and examine alternatives, to settle conflicts between them, and
to exercise independent judgment in order to make choices and decisions appropriate for
themselves
Ability to solve problems
Ability of students to assume the responsibility that accompanies decision-making, and to
adapt to what results from their own choices, as well as to find what they should do to realize
the career they hope for and to solve the challenges involved
19
§3 Entrepreneurship education at universities and graduate schools
1. Present state
One of the factors that hold back the business start-up rate in Japan might be insufficient
entrepreneurship education at universities and graduate schools. According to a survey
conducted in 2000 by the Japan Small Business Corporation, in Japan only 1.6% of adults
(people between the ages of 18 and 65) had attended an entrepreneur training course at a
university or a graduate school.
This figure is much smaller than those in the United States, United Kingdom and France,
where between 14% and 21% said they had taken such a course. Another survey,
conducted by the European Commission (as of 2007), showed that in Europe 34% of
full-time students had received entrepreneurship education and that in the United States
13% had done so.
Comparison among countries of the proportion of people who received entrepreneurship
education at a university or a graduate school and the business start-up rate reveals that
countries with a higher percentage of people who experienced such education often have a
higher rate of business opening.s
Figure 2-5 Percentages in major countries of people who attended entrepreneurship
education courses at universities/graduate schools, and business start-up rates
Business start-up rate in major countries Proportion of people who attended entrepreneurship
education courses at universities/graduate schools
Results of telephone survey of random sample of people between the ages of
18 and 65 in each of the countries
Japan U.S. UK France Japan U.S. UK France
Note: For Japan, the average between 2004 and 2006,
and for the others, figures as of 2004.
Source: For Japan, the Small and Medium Enterprise
Agency’s “2008 White Paper on Small and
Medium Enterprises in Japan,” and for the others
the “2007 White Paper on Small and Medium
Enterprises in Japan.”
Source: Japan Small Business Corporation, “Survey
Report: Comparison between Major Countries in
Entrepreneurship and between Prefectures in
Power of Entrepreneurs,” (January 2001)
20
As seen above, entrepreneurship education at universities and graduate schools in Japan
has still to reach the level of prevalence in the United States or the EU. But a steadily
increasing number of universities are introducing courses for entrepreneurship education.
According to a survey by the University of Tsukuba, in 2003 almost 40% of the more than
700 universities in Japan offered courses for entrepreneurship education. A survey
conducted in 2007 by Daiwa Institute of Research, which covered 22 universities in Japan,
found that two-thirds of the courses for entrepreneurship education were offered by
graduate schools mainly for MBA (Master of Business Administration) and MOT
(Management of Technology) degrees.
Figure 2-6 Numbers of universities in Japan that have courses for entrepreneurship
education
FY 2000 FY 2001 FY 2002 FY 2003
Source: Daiwa Institute of Research, “Growing Entrepreneurship Education at Universities” (2006
spring), University of Tsukuba, “Research on Challenges for University-originated Ventures
and Actions for Their Development” (March 2004)
Note 1: Different populations are used for years. The populations for 2000 to 2002 are from surveys by MEXT, and
that for 2003 is from a research by the University of Tsukuba.
Note 2: In Japan there were 87 national, 89 prefectural/municipal and 568 private universities as of May 2006,
while there were 100 national, 76 prefectural/municipal and 526 private universities as of May 2003.
(MEXT, School Basic Survey)
Private
Prefectural/
Municipal
National
21
Figure 2-7 Number of courses on entrepreneurship education at 22 universities in Japan
Number of courses on entrepreneurship training/venture theory (survey in 2007) Surveyed in
2006
Surveyed in
2005
Does it have
online
syllabuses that
can be
searched by
outsiders?
Courses for
undergraduates
Courses for
MBA
Courses for
MOT
Other courses
at graduate
schools
Total
(excluding
overlaps)
Total
(excluding
overlaps)
Total
(excluding
overlaps)
Ritsumeikan yes 23 3 4 1 29 22 8
Waseda yes 5 6 7 2 13 13 9
Keio Shonan
Fujisawa
Campus
6 3 0 3 13 12 8
Nihon some depts. 7 5 0 1 13 10 6
Doshisha yes 2 5 0 3 11 10 5
Chuo yes 2 2 0 4 9 7 3
Kyoto some depts. 2 6 2 1 9 4 2
Meiji yes 6 1 0 0 7 8 3
Hosei no 1 5 0 0 6 6 2
Rikkyo yes 2 4 0 0 6 6 3
Tohoku yes 2 0 0 4 6 4 0
Tokyo Univ. of
Science
yes 1 0 4 0 5 3 1
Kyushu yes 2 1 0 3 4 3 3
Hitotsubashi some depts. 0 3 0 0 3 6 4
Tokyo some depts. 3 0 0 0 3 3 1
Osaka some depts. 2 0 1 1 3 4 2
Tokyo Tech some depts. 1 0 0 2 3 3 3
Nagoya some depts. 0 1 0 1 2 2 2
Tsukuba some depts. 0 1 0 2 2 2 2
Kobe some depts. 0 2 0 0 2 1 1
Aoyama Gakuin no 0 1 0 0 1 1 2
Hokkaido yes 0 0 0 1 1 1 1
Total (including overlaps) 67 49 18 29 151 131 71
2. Challenges
(1) More opportunities to take courses on entrepreneurship education
As described above, only a limited number of students in universities and graduate
schools attend entrepreneurship education courses, and this type of education is provided
mainly by graduate schools. Environments should be developed to allow more students to
take such courses. Especially, more courses should be offered to undergraduates.
As for entrepreneurship education courses at graduate schools, given that there is a great
need for such courses for those seriously considering starting a business, studies should be
started on whether and/or how graduate schools should be allowed to offer, in addition to
entrepreneurship education classes for those working to attain a master’s or doctor’s
degree, more several-- or six-month courses that people can attend at night on weekdays
or on days off, even if they have no intention of obtaining a degree.
Source: Daiwa Institute of Research, “Growing Entrepreneurship Education at Universities: Follow-up
2007” (2007 summer)
22
(2) Development of more practical education that should help venture start-ups in the real
world
Entrepreneurship education should be provided at more universities and graduate schools,
and more courses should be offered. But it just as important to improve the quality of
entrepreneurship education as it is to expand it. Currently, many universities offer a
diversity of courses: some offer practical courses intended to support actual business
start-ups; others offer courses in which venture theories are studied. With a view to
helping more people start new ventures, in particular, it is desirable to increase and/or
enhance practical courses where students, for instance, develop specific business plans
and learn the skills necessary to set up a company in the real world.
From such a viewpoint, it is also important to invite more businesspersons, including
those who have started a venture themselves, to work as lecturers in entrepreneurship
education courses. This is also an effective method of practical education to give students
internship opportunities, for example, at venture firms.
It is as important to offer more opportunities to attend courses to businesspersons who
have already started a new business or are considering how to start one. The participation
of such people would benefit other students as they could learn from those with the
experience of business how practical skills work and how a real business operates. The
attendance of both types of students in such courses could help them learn from each other
and might encourage them to develop more sophisticated plans for real business.
When individual universities are facing difficulties in collecting a sufficient number of
students or lecturers by themselves, alliances could be formed to establish joint courses.
In order to spread and disseminate higher-quality entrepreneurship education among
universities and graduate schools in Japan, information about teaching techniques and
materials should be exchanged between schools all over the country, and expertise in
entrepreneurship education should be shared and accumulated nationwide.
From this viewpoint, model programs for high-quality entrepreneurship education should
be conducted, and studies should be made especially to find what programs should be
developed to encourage people engaged in entrepreneurship education at universities and
graduate schools in Japan to exchange information and share teaching skills.
23
§4 Education and support for entrepreneurs at the stage of considering a business start-up
1. Present state
Education and support for entrepreneurs at the stage of considering business start-ups is
provided by private institutions, national and local governments, and other organizations
in various forms of projects.
Since 1999, hundreds of “sogyo-juku” (Venture Schools), providing short-term intensive
training courses mainly on business planning for business start-ups, have been held at
commerce and industry associations and chambers of commerce all over Japan with the
financial support from the national government. They have been attended by more than
90,000 prospective entrepreneurs in total, and probably more than 30% of those who
completed the courses have launched a new business.
Since 2003 the government has also been conducting programs for providing
consultations through the internet on procedures for setting up a company and tax, legal
and accounting issues, and those for developing and supporting prospective entrepreneurs
by offering internship opportunities to work closely with experienced entrepreneurs (the
“Dream Gate” program). In addition, the government has been providing information and
receiving requests for consultations through symposiums, seminars, SNS (social
networking services), e-mail newsletters, websites, and other media.
Private sector companies are also engaged in many projects; they give a variety of lectures
to teach skills necessary to launch a new business, issue magazines to provide information
concerning business set-up, and hold business plan contests.
In Japan, incubation institutions have been developed all around the country since 1999,
when the Act for Promotion of New Business Start-ups came into effect. There are 190
institutions that satisfy specific conditions, including support being provided by an
incubation manager. When institutions that rent rooms are included, the number has
reached 323. Many private sector firms employ prospective entrepreneurs and support
them in starting new businesses. They function, in effect, as incubators.
24
Figure 2-8 Present status of incubators in Japan
2. Challenges
(1) More and better entrepreneurship education for venture start-up
Venture start-up and other ordinary types of business set-ups have some features in
common, of course, but they are, however, different in many aspects. Among others, they
differ in terms of speed of growth, scale, and the employment of new or novel
technologies and/or business models. As a result, they need different types of information,
skills, and management. As described above, the government has given attention to
business start-ups in general in terms of entrepreneurship education for people considering
starting a new business because the government’s main purpose has been to expand the
base of prospective entrepreneurs. The government, however, should now place more
emphasis on education and support for venture start-ups that aim for rapid growth.
(2) Cooperation between start-ups and entrepreneurs and effective use of private education
and support organizations for entrepreneurs
For those who are considering whether and/or how to start a new business, it is quite
useful to see veteran entrepreneurs who have launched a venture firm and gotten through a
period of growth and to ask about their experience and know-how. What is important is to
offer such new entrepreneurs opportunities to consult with experienced entrepreneurs and
those who have worked to support venture start-ups. Occasions for people in different
Types of institutions/
their current services
Support
institutions that
rent offices
(with no supporter
stationed)
42 (13%)
Support
institutions that
rent offices
(with supporter
stationed)
91 (28%)
323
institutions
in total
Narrowly-defin
ed BI
institutions
190 (59%)
(Note) satisfying the four definitions of BI
Four definitions of business incubation (BI) institutions
(1) Have offices and other facilities that can be offered to
entrepreneurs;
(2) Provide support by incubation managers or someone in charge of
giving assistance for starting a new business and developing it;
(3) Have specific restrictions for tenants; and
(4) Make distinctions between companies that leave the institution as
“graduates” and “others.”
Total of companies that entered: 6,352
Total of companies that graduated: 2,449
Among which went public (IPO) 16
(Note) Compiled data of 180 institutions that made
valid responses among the 190 narrowly-defined BIs.
Numbers of incubation institutions
by year of starting service
I
n
s
t
i
t
u
t
i
o
n
s
and before
I
n
s
t
i
t
u
t
i
o
n
s
:
c
u
m
u
l
a
t
i
v
e
Japan Association of New Business Incubation Organizations (JANBO), “Report: 2006 Survey of Business
Incubators” (March 2007)
Cumulative
total
25
industries to exchange information would also allow prospective entrepreneurs to receive
advice relevant to specific sectors and have people and/or outlets in industries introduced
to them. The government and related parties should work together to afford such
opportunities for information exchange.
Governments, national or local, and other public organizations that intend to provide
appropriate services to meet the needs of entrepreneurs should not only offer them their
own advice from an independent, neutral position but also make effective use of programs
prepared for education and support services for entrepreneurs by private-sector
organizations that, for instance, finance part of the initial capital and give hands-on
support as a joint-owner of the business.
(3) Enhanced support by incubators for entrepreneurs other than just offering facilities
The number of incubators has increased, but they have still been slow to provide support
other than their facilities and equipment (often referred to as “soft-support”) for start-ups
they accommodate. It is important especially for both the national and local governments
to help incubation managers and other people in charge provide more and better support
for entrepreneurs by developing more practical training for the people working for
incubators, linkages with MBA and MOT education, and networks between them.
26
Chapter 3 University-originated ventures
1. Present status
(1) Present status of university-originated ventures
Universities, which are supposed to be a base to create knowledge and innovation, are also
expected to work for entrepreneurship education and put their knowledge into practical
and commercial use to return what they have obtained to communities. Most of them also
function as a hub, or center, of research institutions in a community, so they are expected
to work as a member of an academy-industry alliance there or as catalyst to create a new
industry in the region. That is why great expectations are placed on university-originated
ventures, new businesses founded by universities to use their knowledge for practical and
commercial purposes.
Universities, industry, and governments have made great efforts together to encourage
university-originated ventures, including the “1,000 University-Originated Ventures Plan,”
announced in May 2001, (also known as “Hiranuma Plan” after the name of the then
minister of METI). As a result, the number of such start-ups increased to 1,590 in March
2007, or grew almost threefold (up 170%) during the five years from 2001.
Figure 3-1 Numbers of university-originated ventures (cumulative total)
Total
among which core ventures
Core ventures: “ventures founded on results of researches achieved by universities” + “student
ventures in close relation with a university”
Source: METI, “2006 Basic Survey of University-Originated Ventures”
F
Y
1
9
9
9
a
n
d
b
e
f
o
r
e
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
27
The chart below shows the numbers of university-originated ventures founded in “urban
areas” and other “rural areas” separately. In 2001 the number of ventures that had been
established in the “urban areas” (339) was larger than that of those in the “rural areas”
(259). Many ventures were then set up in “rural areas,” and as of March 2007 the number
of start-ups there (819) surpassed that of peers in “urban areas” (771). In other words,
ventures operating in “rural areas” increased more than threefold (up 220%) during the
five years between 2001 and 2006.
Figure 3-2 Comparison of university-originated ventures in urban and rural areas (unit:
company)
more than
tripled (up 220%)
more than doubled
(up 130%)
March 2002 March 2007
Urban Rural
Different university-originated ventures go in different directions of growth. Some intend
to go public (IPO). Others aim at growing in such a steady manner as to make a certain
level of profits and create jobs in a community, which would contribute to the local
economy. They pursue growth in a variety of ways for a range of purposes.
Note: Urban districts: Prefectures of Tokyo, Saitama, Chiba, Kanagawa, Osaka, Kyoto and Hyogo
Rural districts: Other prefectures
Source: METI, “2006 Basic Survey of University-Originated Ventures”
28
Figure 3-3 Diverse directions of growth among university-originated ventures
Sales (¥ million)
(2) Challenges university-originated ventures face
In the process of their growth, from foundation through research and development to
commercialization, university-originated ventures encounter three major challenges:
acquisition and development of people, financing, and development of marketing
channels.
They have such difficulties because they are characteristically burdened with “weakness
resulting from people” (as their management is often composed of university teachers,
who in general have little experience of business management) and “weakness resulting
from technologies” (as most of them intend to put into commercial use achievements of
quite novel research that has not been much more than a “seed.” Such projects often
require a longer lead time, which raises technological risks, and also have higher
commercialization risks because new markets must be developed.)
Note: Results of cluster analysis of 212 university-originated ventures, which answered all of the 14
questions that characterize university ventures, including “years after foundation,” “capital,”
“target market,” “status of financing,” “location of headquarters.”
Group of ventures that have
grown large and are going
ahead of others
Leading
type
2 ventures
High Potential Firms
Put innovative technologies into
commercial use to develop new vast
markets, and rapidly expand business
scale
Rapid-growth
type Group of ventures that receive
support from VCs and pursue
fast growth
49
ventures
Foundation Firms
Put newtechnologies into commercial
use and acquired a certain scale of
market and business scale
Steady-growth-in-existing
-market type
Small-scale
new-entrant type
Stagnant type
Group of ventures that pursue
a modest but steady growth in
existing markets
Group of small but steady
ventures that nevertheless aimat
entering new markets
Group of ventures that are in
serous shortage of finds whose
business is stagnant
62 ventures
62 ventures 37 ventures
Lifestyle Firms
Put newtechnologies into use but
are satisfied with a level of family
business
Others
3.9 4.7 5.4 6.5
Years
1,145
132
58
34
Description
Leading type: Having already gone public (IPO) or
are about to go, and having been in business for
relatively long period; mainly bio-tech startups with a
larger scale of business.
Rapid-growth type: Supported by VCs to conduct
applied research. Targeting new, developing markets.
On a solid growth track.
Stagnant type: Many located in rural areas. In part
because they are beneath the radar of VCs, They may
have a serious shortage of funds. Many are
stagnating..
Steady-growth-in-existing-market type: Operating in
a modest way and targeting existing markets, few
intend to go public (IPO), so out of VCs’ support
parameters in the first place. Obtaining funds they
need mainly in the form of loans.
Small-scale new-entrant type: Working aggressively
to create new markets. But because few are intending
to go public (IPO) or because they too young, they
face difficulty in obtaining funds from VCs or
receiving loans.
Source: Prepared by METI in reference to comments of Kanetaka Maki, assistant professor, Keio SIV
Entrepreneur Laboratory
A
B
?
D
?
?
E
C
?
?
29
Figure 3-4 Challenges of university-originated ventures
1st 2nd 3rd
The two weaknesses that are attributed to university ventures seem to be the very factors
that bring about the three challenges.
(i) Challenges in terms of people
At most university-originated ventures, the management is composed of teachers and
students of the university. As most of them have little experience of business management,
often the company is not administered well enough. Even when the venture succeeds in
growing to a certain level, the management is slow to be replaced by people who can
handle the business at this stage. “Right-hand persons” who should assist the management
can be found rather easily in the field of R&D and they can be employed to supplement
R&D abilities of the company. But university-orginated ventures often have difficulty in
finding and employing “right hands” who should support them in business administration
and financing.
(ii) Challenges in terms of financing
Many university-originated ventures face difficulties in financing at the R&D stage and
the initial stage (phase of foundation including just before and after the event). The
business of most university ventures is based on achievements that are themselves based
on pure research. In part because they must go through a longer lead time before they are
commercialized, such ventures assume higher business and technological risks. As a result,
Source: METI, “2006 Basic Survey of University-Originated Ventures”
Difficulty in acquiring and developing people (2006)
(2005)
(2004)
Difficulty in financing (2006)
(2005)
(2004)
Difficulty in developing marketing chalets and customers (2006)
(2005)
(2004)
Difficulty in securing offices/laboratories (2006)
(2005)
(2004)
Slower pace of R&D than expected (2006)
(2005)
(2004)
Sour relationship with the university (2006)
(2005)
(2004)
N = 325 (2006)
319 (2005)
371 (2004)
30
it is not easy for them to raise funds from venture capitals.
(iii)Challenges in terms of marketing channels
Many university-originated ventures explore “new markets” with achievements of
“research and development no other has ever undertaken.” They often try to develop new
markets and distribution channels through people they meet and connections they built
mainly in the process of R&D, and/or through companies they worked with for R&D. But
the task is not easy for university ventures because few of them have sufficient resources
to establish marketing channels. Most of their products are for business use, but Japanese
customers often place more importance on past record and established reputation, which
makes it all the more difficult for new firms to secure outlets.
(3) Viewpoints to be considered in supporting university-originated ventures
To help university-originated ventures solve challenges presented by their own
characteristics, it is critical for universities and local governments and communities to
give support to the ventures, taking into consideration viewpoints as stated below.
University-originated ventures are a “front runners” that offer novel products, or new
value, to the economy. Because one of the roles national universities should play is their
part in contributing to the society by putting their achievements to commercial/business
use, it is important for them to develop environments where university-originated ventures
can operate smoothly.
Many university ventures operate in rural areas. They are expected to revitalize local
economies because their growth may encourage innovation in a community and create
more R&D jobs for those who have received sophisticated education. A cluster in a
community of university ventures established to put to commercial use achievements of
research at a university may attract another cluster of industries, which might add value.
That would also contribute to its development.
31
2. Challenges
(1) Support of universities for university-originated ventures
(i) Effective use of universities’ resources for support
Many universities use their alumni resources for advice on business management,
personnel loans, and aid in commercializing their research, as well as in R&D activities. It
is important, to make effective use of such resources, for universities to develop stronger
management functions and build closer cooperation with other universities, companies
and local governments.
(ii) Use of universities’ names
Most of the markets university-originated ventures target are “newly created markets.” To
explore such markets and develop marketing channels, they should work to build up the
reputation of their products among customers and in markets.
Some university ventures use the name of the university for their products with the
expectation that it helps them enhance credibility among customers and in markets, and do
enjoy certain reputation in markets. On the other hand, there are only a limited number of
universities that are very willing to allow their affiliated ventures to use their names.
As the name of a university has a certain level of established market value in the form of a
trademark or trademarks or a proven reputation, its use by a university-originated ventures
for its products may be effective in lowering barriers that may be encountered in
developing markets and outlets. Permission to use the name is expected to create a ripple
effect on the university itself because it may bring revenues to the school.
One of the reasons few universities are willing to allow university ventures to use their
names is the fear of being held responsible for defective products by customers, a situation
that the universities may be ill-equipped to deal with. Against such circumstances, it
would be desirable to examine risks that should be anticipated when university-originated
ventures sell their products under the name of the university and study whether and/or
how guidelines should be prepared so that universities and affiliated ventures will both
manage such risks in an appropriate way.
32
(iii)Actions to deal with challenges in financing (investment in university ventures, etc.)
University-originated ventures play an important role in making use of knowledge
universities have acquired to contribute to society. They are expected to build new
industries in communities, create new jobs, and bring in other economic benefits. Most of
their business, however, is based on achievements of cutting-edge research and
development at universities.
University ventures as such usually have much more difficulty in financing than ordinary
start-ups: (i) because there are few who have the sort of “keen eye” necessary to
understand and assess their business due to their advanced, state-of-art research and
development; (ii) because it generally takes longer to complete R&D for
commercialization as they try to put achievements of cutting-edge research to practical
use; and (iii) because, in part as a result of the disadvantages mentioned above, risks of
their business are more difficult to assess, which leads to fewer venture capitalists that are
willing invest in university ventures and to limited, smaller scale of investments for those
that do.
Some of the universities, which are expected to use the achievements of their research and
development for society, might offer financial support to ventures founded by their
researchers and students. Financial aid could be provided in a variety of forms. But
national universities are prohibited by the current National University Corporation Act
from making equity investments, except in approved technology licensing organizations
(TLOs). In order to provide national universities with more support options, it would be
advisable to consider whether they should also be allowed to have equity in such ventures.
To make such schemes more effective, it is also necessary to consider what arrangements
should be made to help universities examine a venture’s plan of business and assess its
value, manage types of risk, etc., to make a good judgment before making investment.
Considering this, the level of discretion and flexibility universities should retain in
management of their assets should also be taken into account as they have tended to
demand more discretion and flexibility since they were reorganized as independent
administrative institutions.
33
(2) Support provided for university-originated ventures by local governments, etc.
Growth of university-originated ventures helps create jobs in local communities and
develop industrial clusters. Local governments and other institutions are expected to
provide more support for university ventures, taking local needs into account.
(3) Support for university-originated ventures provided by universities and local institutions
in cooperation
Those involved hope that as part of the support provided for university-originated
ventures, which often face difficulty in financing at the initial stage, incubation facilities
equipped with functions such as open facilities and open laboratories should be built in or
around university premises so as to provide technical support by university teachers and
reduce their financial burden. Studies should be conducted on whether and/or how such
bases for industry-university cooperation should be developed jointly by businesses,
universities, local governments and other parties concerned.
In order to improve the quality of incubation, it is important to take measures to help
incubation managers, who work at incubation facilities used by university-originated
ventures to support them, and enhance their abilities as network constructors and
producers. It is also crucial for universities, local governments, and local businesses,
including financial institutions, to work together closely to provide university ventures
with “soft-support.”
34
Chapter 4: Human resource strategies of Start-ups
1. Present state
(1) People as a business resource of Start-ups
People are one of the most important business resources, as important as funding for
example, for start-ups to grow fast.
Types of human recourses are more unique and more diverse than financial recourses both
in terms of who and how many are needed and how or whether they can be employed. To
match demand and supply requires a great deal of time and effort. Start-ups, which pursue
rapid growth, might be held back by the time and effort they must spend for recruitment
when they strive to grow. Whether a venture can employ the people it needs at a specific
phase of growth just when they are needed is a major key to its growth.
Start-ups could be seen as a business started by the founder (or the group of founders) as
an individual (or a group of individuals) being transformed to one managed by a company,
that is to say, an organization. Compared with established, large corporations, many
ventures may need to employ people who are likely to feel more empathy with their
visions and ambitions and work more closely as a team. Once a person is employed, the
company is “obliged” to retain that person, who becomes difficult to fire if found not to
share its visions or ambitions or because that person becomes is harmful to the unity of the
team. From such a viewpoint who a company hires has great impact on its entire business.
It is often said that “a company needs to breathe in and out to grow.” Start-ups should also
acquire such types of people and develop the appropriate internal organization needed at
each stage of development. Some are afraid, however, that Japanese companies lack a
culture where people in management are replaced by those relevant at a specific phase of
growth.
(2) Difficulty in securing people in competition with large companies
Ventures, which in general have less stable business bases and poorer brand images than
large companies, have great difficulty in employing talented people.
Especially, as business confidence has been improving recently and large companies have
been hiring more people, start-ups have found it more difficult to acquire excellent people.
According to a questionnaires survey conducted by METI in 2007 of ventures which had
35
received investment from venture capitals, more than 71% of the respondents felt some
degree of dissatisfaction with the quality of the staff hired.
Figure 4-1 What do start-ups in Japan think about people they acquired?
Sufficient Insufficient DK
How start-ups, engaged in higher risk businesses, should propose returns that would
compensate for the risks to those whom they hope to hire is crucial. There would be some
cases where remuneration could be offered as stock options, a common tool for ventures.
But as start-ups in general have fewer financial resources at their discretion, most find it
difficult to offer prospective employees better terms and conditions only through
remuneration. As a result, an important element is what can offer in terms of non-financial
rewards, such as shared vision, opportunities they have for self-realization, and skills they
acquire useful for their later career. Some point out people only perceive a job at a venture
more risky than it really is but that they often fail to recognize a diversity of potentials it
brings to them on the career path (including those to start a business themselves or step up
to another job).
Others say, on the other hand, now a labor market for Start-ups is being formed mainly
among those which have grown to a certain scale, especially with IT service-related
start-ups, though not yet so large a market as in the United States, and that people are
becoming more mobile there.
Source: METI, “2007 Survey of Creation and Development of Start-ups” (December 2007)
36
2. Challenges
(1) Expansion of the labor market for start-ups
As start-ups need to quickly acquire people who can be immediately effective to achieve
rapid growth, higher mobility in Japan’s labor market would bring great opportunities.
After the burst of the economic bubble in Japan, when its financial institutions were in
crisis and firms were merged, reorganized, or restructured, some of the excellent people
who left the financial sector flew into start-ups. They are now drivers of growth of
ventures in the country. In Japan, however, most of the technological and managerial
talent is still concentrated in large enterprises. Some mechanism should be developed to
induce such talent to start-ups, along with corporate venturing by large companies, which
we will describe in Chapter 8.
(2) Efforts to develop human resources
Some say ventures are unwilling to develop human resources by themselves. Indeed some
start-ups were too hasty in recruiting people but poured too little energy in training their
people on their own. According to a survey conducted by METI in 2007 of ventures that
had received investment from venture capitals, in order to train their employees, 58% of
the companies provided in-house training, 42% asked contractors to provide a training
program, 68% had an OJT plan, and 11% said they had no scheme dedicated to training.
Figure 4-2 How to train employees
How employees are trained? (Multiple response) (n=446)
There is a certain limit, however, to the capacity ventures have to employ talent at the
ready, especially considering competition with large companies. They must work to foster
their own people while developing their business. The government is also expanding
support for small and medium enterprises in the field of human resource development. As
Source: METI, “2007 Survey of Creation and Development of Start-ups” (December 2007)
In-house training
Training program by contractors
OJT
No training scheme
Others
37
part of the 2008 amendment of the tax code, the government has decided to improve tax
schemes for the promotion of investment in human assets, so that they will be more
available for SMEs. Ventures are expected to make effective use of such programs and
establish better systems for human resource development.
(3) More jobs for women
To offer more opportunities to women is another important issue for start-ups that hope to
employ talented people. Many women leave their jobs when they are pregnant, have a
baby, or devote themselves to childcare, but most of them also hope to work again once
their children grow to a certain age. In Japan a lower percentage of highly-educated
women participate in the labor force than in other countries. It is desirable to design and
propose more diverse types of employment and provide talented women with job
opportunities.
Figure 4-3 Types of job housewives hope to have by age of youngest child
No intention to
have a job Responsible job,
with overtime
work
Full-time job,
with no overtime
work
Working at home
Short-time job
Age of 3 Age of 4 and older but Elementary Jr-high school
and younger before elementary school school student student and older
Note: Responses to questionnaires on the internet to housewife part-timers and full-time housewives
whose youngest child is three years old or younger
Source: AiDEM Inc., “Survey of Actual Situations of Part-timers” (2000)
38
(4) Actions to counteract our aging and shrinking population
The population of Japan is rapidly aging and shrinking. The conventional recruitment
strategy of start-ups, which generally employ a large number of younger people, mainly
children of baby boomers (baby-boom juniors), looks to be getting more difficult to
implement year by year.
Figure 4-4 Population composition of Japan
2005
Age
Male Female Male Female
Baby
Boomers
Baby-boom
juniors
Population (10,000 people) National Institute of Population and Social Security Research
This requires that ventures should place more emphasis on how they can absorb the
experience and skills of baby boomers when they leave a company, as well as how they
can make better use of the generation of baby-boom juniors when they get older. The
national and local governments are working hard to match the supply of senior workers
and the demand of businesses through the “Shin-Geneki Challenge Plan” (baby boomers
reemployment program) and other initiatives. Ventures should use such schemes in an
effective way.
Source: Reproduced from NIPSSR’s website
2020
Age
2005
Age
39
Figure 4-5 Shin-Geneki Challenge Plan
(5) Effective employment of foreigners
Nowadays more of the start-ups in Japan employ foreigners from Asian countries,
especially IT experts, who have advanced skills and entrepreneurship.
In the United States, an advanced venture-industry country, foreigners also play a great
part in creating and developing Start-ups. For instance, according to “On the Road to an
Entrepreneurial Economy: A Research and Policy Guide, ” Kauffman Foundation, 2007,
immigrants from India and China contributed to foundation of 24% of the technology
companies in Silicon Valley, a quarter of companies in which investments were made in
and after 1990 by members of the National Venture Capital Association (NVCA) were
established by immigrants, and 24% of the high-tech companies set up in the United
States between 1995 and 2005 were started by incomers.
With the view of developing a vibrant entrepreneur society in Japan with its faster aging
and shrinking population, it is essential to employ in a more effective way people from
foreign countries, especially Asians. Japanese Start-ups, not many of which have extended
operations into overseas markets, should also globalize their people in order to advance
into new global markets.
From now on policymakers should consider what foreigners could do for creation and
development of Japanese start-ups when they study programs for foreign workers and
students.
A coordinator asks the secretariat to introduce a
shin-geneki who can work to solve a problem she
found in the business.
Shin-geneki
(boomers to be
reemployed)
Partner
companies
Boomers who
left a company
Alumni associations
of universities and
technical colleges
NPOs
private
organizations
Boomers who left
or are leaving a
company
Registered
Target:
registration of
30,000
shin-genekis
National
secretariat
Local secretariats
(located in each prefecture)
Agents
200 agents designated
in each prefecture
To match needs of both sides
To provide advanced training
To give counseling and
manage registered people
Agriculture-Commerce-Manufacturing
Cooperation & Local Revitalization
Local-government-base model programs
(around 10 programs)
Effective Use of the Highly-skilled
Industry-association-base model programs
(around 10 programs)
Cordinators at
Community Power
Cooperation Bases
Needs for shin-geneki
Target: matching of
10,000 cases
SMEs
40
(6) Dissemination among start-ups of know-how of recruitment, human resource development,
organization building, etc.
There are many venture entrepreneurs who are too busy in, for instance, business
expansion, marketing, and financing to have enough time to think about recruitment,
human resource development and organization building. As described above, however,
there are really many cases where shortage of people hampers growth of ventures. It is
necessary, therefore, to encourage venture entrepreneurs to pay more attention to such
issues and help them learn more know-how and skills in these spheres.
41
Figure 4-6 An example of recruitment know-how manual (METI, “ICT Venture
Recruitment Guidelines”)
ICT Venture Recruitment Guidelines: Table of Contents
(i) Whether someone should be employed?
/What types of people should be employed?
(ii) How should recruitment be carried out?
(iii) What should be done to have them
work as expected after employed?
T
y
p
i
c
a
l
s
y
m
p
t
o
m
s
1. I need some of my work to be entrusted to someone, but …4
wonder what task should be transferred in what way:
- I wonder how to decide what the chief executive should
and should not handle;
- I wonder whether the chief executive should handle a task
(s)he founded the company should place more emphasis on;
- The chief executive is swamped with operational affairs;
- I have a task to be entrusted to someone, but cannot find
a suitable person in the company;
2. If any task should be entrusted to someone, I wonder what …6
I should ask them to do to have them work as expected;
- In terms of people entrusted with marketing/technological
affairs/business administration;
- I’m going to employ someone, but wonder what
experience, skills, or philosophy they should have;
- I wonder to what extent I should empower someone;
3. The company has achieved a certain level of growth, but I …13
feel the quality of business is declining and its speed slowing. For
instance, we receive more complaints from customers:
- Planned quality or deadlines cannot be achieved;
- Problems cannot be solved before founding members step in;
- Products/services cannot be improved to have new
features, or product/service lines cannot be expanded;
- The customer base cannot be expanded;
4. The shortage of manpower hampers growth of sales: …16
- The level of anticipated orders suggests shortage of
manpower that cannot be overcome with existing personnel;
- Sufficient products/ after-market service cannot be
manufactured/provided;
- Products/services cannot be improved to have new
features, or product/service lines cannot be expanded;
- The customer base cannot be expanded;
5. Instructions aren’t being fully obeyed by employees/
they act …17
too slowly/relations among them are not smooth;
- The background of an instruction, which employees
took in before told, is not recognized unless made clear;
- Not every instruction is carried out;
- More trouble/quarrels take place in the company;
6. The company intends to go public, but progress is slow …19
in expanding the organization, developing the system
and enhancing the governance for getting listed:
- No/few directors are replaced after foundation;
- No person is designated to make arrangements for listing;
- Preparations to go public are not completed;
7. I wonder how to look for employee candidates: …29
- I wonder what of the connections I have can be used
for recruitment;
- I wonder how to use resources of outsiders (headhunters,
staff agencies, classified ads, etc.)
8. I wonder what concrete approaches I should make to a …39
targeted candidate:
- I have difficulty in inviting a candidate to an interview;
- I wonder how to avoid any trouble to candidates when
approaching them;
9. I would like to employ the candidate, but have problems …43
in assessing him or her:
- I wonder how credible the candidate is;
- I (chief executive) wonder how to assess the candidate
in terms of skills out of my expertise;
10. Many candidates decline a job offer we made: …51
- We fail to explain our promising future to the candidate;
- Her family members make an objection:
- We cannot pay as much as wanted;
- We fail to resolve concerns about the company;
11. I wonder how to carry out procedures through the process …55
as described above:
- I wonder what document should be presented by
candidates for selection;
- I wonder how to present an offer letter;
- I wonder what document should be received when a
person is hired;
- I wonder what procedures are required by law to be
completed when a person is hired;
12. People we hired fail to achieve performance as expected: …60
- I wonder how to deal with them;
- Especially, I wonder whether I should take a severe
action, for instance, demotion or pay cut;
13. Aperson we hired turns out to have lower skills than …62
expected:
- I wonder whether to take a severe action or provide more
training;
- When decided to provide additional training, I wonder how;
14. A person we hired does have skills, but they are not …63
effectively used because there are some gaps between
what the management expect and what the staff hopes to do;
- The person is demoralized because of some gaps
between what was told during hiring and the realities;
- The staff works differently from what the
management expected;
15 A person we hired does have skills, but is discordant …64
with colleagues:
- Does not get along with colleagues, which hampers
performance of the team;
- Does not get on well with specific person(s), which affects
their work;
16. Many of the people we hired quit: …71
- Even when we succeeded in hiring an excellent person,
they quits over something they feel discontent with;
- Even when we succeeded in hiring a skillful person, they
quits because they were given no opportunity to demonstrate
the skills and felt demoralized;
- The fact that an excellent person quit has negative impact
on colleagues;
- We cannot tell why they quit, and the turnover stays high.
17. We did everything we could before hiring a person, but …73
thy do not seem to do well:
- Cases of regular/contract employees and executives;
- Performance is unexpectedly low, and there is an indisputable
mismatch.
List of supporting companies …75
Recommendations from supporting companies …76
42
Chapter 5 For expansion of the customer base and market
1. Present state
It is said that fewer of the start-ups in Japan grow to be major global enterprises than their
peers in the United States or Europe, and that their growth is generally slower.
Many mention as a factor behind this that an insufficient scale of resources, including
money and people, that can be raised for venture businesses or the too slow speed at
which they can raised. Others say, however, there is also large difference in the pace of
expansion of the customer base and market.
(1) Japanese market emphasizes proven records
First, Japanese market start-ups, which have no or little proven record, find it difficult to
have their products accepted just because they lack established performance.
People and companies in Japan, as well as the government, prefer higher-quality goods
and services. To put it the other way around, they avoid buying unproven goods or
services. They often think that goods or services with little proven record, if they were
used as part of their own products or services, would bring a larger risk to them in terms
of the quality strategy for their goods and services.
You could say, however, that companies, as purchasers that avoid buying unproven goods
or services that have in fact good performance and quality only because they have little
proven record would be weeded out one after another through competition among
purchasers because they are likely to be less competitive than those which have abilities to
assess by themselves the performance and quality of goods and services and buy anything
good even if the products concerned have little to show in terms of their past record. Some
think intensifying global competition in recent years is bringing about changes, though
gradual ones, in the purchasing behaviors of Japanese companies.
(2) Japanese ventures are unwilling to expand overseas
Second, it is said that fewer venture companies in Japan go into foreign markets than
start-ups based in other countries.
Some point out the fact that Japan is the second largest economy and that has more than
100 million consumers, a scale of market that gives Japanese ventures all the fewer
43
incentives to go abroad because they can secure a business base in the domestic market
before they take the trouble to move into a foreign country.
In addition, the level of English language skills of Japanese businesspersons is indeed one
of the factors that hinder Japanese companies from entering foreign markets, especially in
the service sector. (On the other hand the Japanese language could be regarded as a barrier
that protects Japanese service business market against foreign players.)
But the recent development of the internet and other IT technologies has made far easier
to do business in any part of the globe wherever a company is based and whether or not it
has a marketing foothold there.
The increasing sophistication, fractionalization and customization of products offer
Start-ups more opportunities the chance of success as a global niche company.
Some Japanese ventures, taking advantage of markets overseas, which are more willing to
accept good products and services whether or not they have proven record, put their goods
and services in a foreign market first to demonstrate their performance there, before they
try to spread them in the Japanese market.
It is difficult to say how many start-ups have gone abroad. According to a survey
conducted by METI in 2007 of ventures in which venture capitals had equity, more than
one-third of the respondents had done business in foreign markets (including exports).
Figure 5-1 Current status of overseas business of Japanese ventures
Doing business overseas
Not doing business overseas, but contemplating starting
Not doing business overseas, but did in the past
Not doing business overseas, and not contemplating for future/DK
Source: METI, “2007 Survey of Creation and Development of Start-ups” (December 2007)
44
2. Challenges
(1) Brand strategies, alliances with large companies, partnerships among ventures and SMEs,
use of technology assessment services, and other initiatives for strengthening marketing of
products and services
In order to sell more in the Japanese market, start-ups that don’t have track records should,
for instance, develop a brand strategy for exposing their products through exhibitions,
seminars, and mass media, arrange an alliance with a large enterprise for achieving more
confidence, form a partnership with other ventures and SMEs for offering more diverse
and/or sophisticated products, and use technology assessment services for demonstrating
the level of their technologies.
In terms of alliances with large firms, a survey by the Organization for Small & Medium
Enterprises and Regional Innovation, JAPAN (SMRJ) revealed only 27% of big
businesses had been in any alliance with SMEs or ventures in the previous three years.
They are expected to change their way of thinking. On the other hand, the greatest
proportion of large enterprises that had allied with an SME or a venture mentioned
“Business did not go as scheduled” as the major difficulty they had encountered. This
suggests ventures also have something to improve.
To encourage partnerships among ventures and SMEs, the government has prepared
support programs. They are expected to use such initiatives in an effective way to develop
cooperation among them.
Technology assessment still has something to be improved in terms of its cost efficiency
and objectivity. But now you can find a few assessment service institutions that perform
rather inexpensive and objective evaluations of technologies. Further development of such
services is desirable.
45
Figure 5-2 How do large enterprises see partnerships with start-ups?
(2) Effective use of public procurement and trial orders, etc
Start-ups that lack track records could develop business and realize growth by achieving
public procurement from national or local governments or other public institutions, using
this as a springboard to expand their business base into other customers and improve their
products and services. That would be one of their options.
A survey conducted by METI in 2007 of ventures which had received investment from
venture capitals showed how many of them had made sales efforts targeting public
institutions and what percentage of them had succeeded. Almost half of the respondents
tried to sell their products or services to public organizations, and 80% of the prospective
vendors succeeded in selling.
Source: Adapted from SMRJ, “2004 Small & Medium Enterprise Environment Survey: Challenges of
Partnership between SMEs/Ventures and Large Enterprises, and Support to be Provided”
(March 2005)
Answers from large enterprises that were asked, “What problem/difficulty did you have in partnership you had” with SMEs/ventures
(multiple-response)
Business did not go as scheduled.
Both companies had different cultures.
It took long to build a consensus in the company.
It took long to build a consensus in between the companies.
The partner lacked strength to develop business.
Arrangements/rules between the companies were unclear.
The partner lacked an established internal control system.
Products/services developed through the partnership had
trouble.
We had difficulty in finding a partner.
People in the company were not enthusiastic.
Technologies/products lost some competitiveness during the
period of partnership for commercialization, etc.
It took long for the partner to build a consensus in it.
Our know-how, “seeds”, or technologies were leaked.
The partner changed its business policies.
The partner was not enthusiastic.
Others
UK
46
Figure 5-3 Have you ever tried to sell your products or services to public institutions?
Yes No DK
Figure 5-4 As a result of the efforts, have you succeeded in selling?
Yes No
Under WTO Government Procurement Agreements, the government is obliged in
principle to adopt competitive bidding for procuremenr. Under such restrictions, it
endeavors to buy as much as possible from SMEs by, for instance, setting procurement
targets from SMEs according to the Act on Ensuring the Receipt of Orders from the
Government and Other Public Agencies by Small and Medium-sized Enterprises. In 2000,
the government also introduced special measures to offer SMEs that have a high level of
technology more opportunities to participate in bidding, and in 2004 it adopted measures
to expand its IT-related procurement from ventures. With other programs and initiatives,
the government is working hard to provide SMEs and ventures with as many opportunities
as possible to acquire orders from public institutions.
Source: METI, “2007 Survey of Creation and Development of Start-ups” (December 2007)
Source: METI, “2007 Survey of Creation and Development of Start-ups” (December 2007)
47
Local governments are also obliged in principle to adopt competitive bidding for
procurement by WTO Government Procurement Agreements and the Local Autonomy Act.
After the 2004 amendment of the Enforcement Ordinance of the Act, prefectural
governments are allowed to offer negotiated contracts to suppliers who the governor or
other authorized persons recognize as those who are producing a new products to enter a
new business segment when the prefecture buys such a product. According to the
amendment the “Trial Order” system has been introduced by 41 prefectures as of March
2008.
If, however, a government gave excessive favors to start-ups in its procurement,
lower-quality or over expensive goods or services might be supplied as a result.
Procurement of public institutions from start-ups should be implemented in light of its
purpose, compensation for their intrinsic lack of record, and the procurement system
should be made better to offer companies that have excellent technological capabilities
more opportunities to participate in bidding.
Figure 5-5 Special measures for offering SMEs with high-level technologies more
opportunities to participate in bidding
Figure 5-6 Measures to expand the government’s IT-related procurements from ventures
On Measures to Expand the Government’s IT-related Procurements from Ventures (extracts)
1. Opportunities for joint ventures to participate in bidding
? In terms of bidding for projects that are announced with specific technical requirements, such as assignments of
high-level IT experts, opportunities to participate in the competitive bidding for each of the projects should be given
to joint ventures that satisfy requirements for the project after reviewing, among others, their responsibility control
systems and ways to secure necessary services after the contract is implemented.
2. More flexible administration of qualifications of bidders
? The system of qualifications for participants in competitive bidding should be managed in a more flexible way after
Source: METI, “Study Group for Promotion of Public Procurement from Start-ups,” (Handout 2, first
meeting)
Outlines of special measures for SMEs with high-level technologies on
qualifications for participation in bidding
Introduction of special measures
In 2000, with the view of offering SMEs with excellent technological
capabilities more opportunities to participate in bidding, “On More
Opportunities to be given to SMEs and other Suppliers with High-Level
Technologies to Participate in Bidding” was adopted.
* Decided by the board of secretaries of the Liaison Committee of Ministries and
Agencies for Promotion of Computerization of Procedures for Government
Procurement (excluding public construction work)
Special measures
SMEs are allowed to participate in a higher grade of bidding by either:
? Receiving additional points to be given according to results of technical
evaluation conducted in grading bidding participants in terms of
qualification, which assesses their skills on the basis of 100 points (15 points
added to bidders that have three patents or more applicable to the project to be
bid); or
? Submitting a past record that demonstrates they have manufactured some
products according to an equivalent or higher level of specifications than
specs for those to be bid.
Additional measures for 2006
The special measures above had been applied exclusively to “manufacturing of
products” of precision machines and four other sectors. The application was
extended to “manufacturing of products,” “sale of products” and “provision of
services, etc.” in any sector.
Extended sectors for special measures
Sectors for procurement by the national government
Products (27 sectors in total) Services (15 sectors in total)
Manufacturing Sale of Provision of services,
of products products (*) etc.
Five sectors for
special measures
E
x
t
e
n
d
e
d
t
o
a
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l
s
e
c
t
o
r
s
Extended to
all sectors
Extended to
all sectors
Medical
equipment, etc.
Medical
equipment, etc.
Software
development, etc.
* Applied only to sale of
products manufactured by
the company itself
?Major sectors for procurement of productsmedical equipment, computers, other machinery
among which initial five sectors precision machinery, industrial machinery, electrical/
receive special treatment telecommunication equipment, nonferrous metals/metal products,
furniture/utensils
?Major sectors for procurement of services software development, information processing, etc.
48
reviewing applicants in terms of specific technical standards, including their past contracts with private organizations,
record of development of equivalent systems, high-level IT experts to be assigned to the project, and results of
improvement in software processes.
3. Review of order unit
? In terms of orders for IT systems, pilot procurements should be carried out by the Cabinet Office and other selected
ministries to find a way of procurement that would help adopt excellent technologies from as many companies as
possible and which could avoid impairing the economic efficiency of procurements with an aim to examine further in
what unit an order should be made.
4. Support for ventures in cash management
? Many ventures have difficulty with cash flow when they receive a contract from the government under the term of a
year-end payment. To alleviate the problem, simpler procedures should be introduced for payment by a rough estimate
to adopt such payments for more contracts, with care paid to progress management for projects;
? Ministries and agencies generally conclude with suppliers a contract with a proviso that prohibits them from
transferring their payables to anyone (nontransferable receivables clause). A decision has been made recently that
nontransferable receivables clauses should be repealed only if payables are transferred to a financial institution or a
credit guarantee corporation. Examination should also be made whether suppliers should be allowed to assign their
receivables to specific institutions.
Figure 5-7 Implementations of Trial Order
? July 2003
Inaugurated by Saga Prefecture
first in Japan
? April 2004
Adopted by Gunma and
Tokushima
? November 2004
The Local Autonomy Act amended
? FY 2005
Adopted by Toyama and 22 other
prefectures
? As of April 2008
in operation in 41 prefectures in Japan
(3) SBIR system
The Small Business Innovation Research (SBIR) system is a technological development
contract scheme that the national government has introduced to promote development of
technologies by start-ups and help them put the technologies to commercial use in the
private sector or receive procurement orders by public agencies and institutions.
In the United States, the federal government introduced a SBIR system in 1982, and now
11 federal agencies with R&D budgets over US $100 million participate. They are obliged
to assign SMEs 2.5% of the budget for R&D activities that they contract out to other
institutions, and SMEs are elected through competition. It is said that when a start-up
succeeds in receiving a contract through SBIR, the fact is considered a demonstration of
the SME’s technical strength and works to a degree as a certification or signal in obtaining
investment from venture capitals or helps bring its products to market afterward. At
agencies engaged in a great deal of procurement, such as the Department of Defense and
Source: “On Measures to Expand the Government’s IT-related Procurements from Ventures,” agreements of
the IT-related Liaison Committee of Ministries and Agencies
Source: adapted from the website of Saga
Pre Prefecture
As of October 2006
660 items are designated
(approved) in total.
49
the National Aeronautics and Space Administration (NASA), it is believed that adoption
for SBIR often leads to success in receiving an order for procurement. Institutions that
spend a lot in R&D, such as the National Institutes of Health (NIH), are said to often give
an R&D contract at the third phase.
Figure 5-8 SBIR system in the United States
? The scheme is applied to SMEs (which employ 500 people or less), and has the following characteristics:
? Public invitation to application (for projects)
? Selection through competition at three phases
?Phase 1: Stage of feasibility study (financial support of not more than $100,000)
?Phase 2: Stage of full-scale R&D/designing of prototype (financial support of not more than $750,000)
?Phase 3: Stage of putting to commercial use achievements of R&D by SBIR (aid for commercialization, no
financial support)
The Japanese government has also introduced its own version of SBIR to spend some of
the R&D budget on SMEs and support their R&D activities for commercialization.
Different from the US version, Japan’s system has no obligatory target for the R&D
budget that should be assigned to SMEs. In 2006, the government spent 41,100 million
yen on SMEs, about 3% of the science & technology promotion budget. In 2008, a new
model program of multi-phase competitive selection was introduced. In the program
technical assignments are set, based on procurement needs, and a feasibility study is
carried out to select the appropriate high-quality R&D activities. The scheme is more
similar to the US SBIR. The government should continue to offer sufficient support in
development of innovative technologies that could be put to practical and commercial use.
(4) Treatment of new products and services at approval and under regulations
When a start-up starts to manufacture, sell, and/or supply new products or services, it
often takes more time and effort than existing enterprises to complete procedures to
acquire permits and/or licenses necessary for the manufacturing, sale, and/or supply due to
combination of novelty of the goods and/or services and lack of a past record. There may
also be regulations that were established before the type of goods or services were
anticipated.
National and local governments should act as flexibly and quickly as possible even in
Procedures
taken by
SBIR
agencies
Flow of
activities of
Start-ups
R&D topics given
by each agency
(Technical Topics)
Examination
Procurement by the
government, or sale
in commercial market
Examination
Public
invitation
Application
Adoption
Application
Adoption
Requirements for
application
? With 500 employees or
less
? Based in U.S., for profit
Phase 1
? Feasibility study
? Implementation period
of 6 months
? Financial support of
$100,000 or less
Phase 2
? Stage of full-scale R&D/designing of
prototype
? Implementation period of 2 years
? Financial support of $750,000 or less
Phase 3
? Commercialization
? No financial support
? Government
procurement
50
cases for which no precedent can be found, though consideration should be paid to the
relevant permissions and regulations.
(5) Aggressive expansion of business overseas by ventures themselves
Expansion of business overseas is an inevitable stage of progress for start-ups to grow to a
certain level and play a role as true front runners that should lead innovation in the
economy of Japan. Ventures should not stay still in the Japanese market, but instead
should work aggressively to expand their business overseas for further growth and
development.
(6) Enhanced support for start-ups in overseas expansion
As a program to support Japanese ventures overseas, the Japan External Trade
Organization (JETRO) has in place, among others, incubation programs in the United
States and United Kingdom, and programs for venture entrepreneurs for research and
trading overseas. SMRJ also offers support by working in partnership with private-sector
venture capitals to finance funds which make investment mainly in companies that are
expanding business overseas, or by employing management consultants for ventures
under business counseling programs.
As stated above, there are still only a small number of Japanese ventures that extend
operations into overseas markets. Considering the present state of things, more support
from the government in this domain would be desirable.
In particular, more support should be given for expansion of business in Asia as the
market is gaining more and more importance for Japan’s economy.
Start-ups that are entering a foreign market face difficulties not only in setting up an office
and employing people there; many say it is also difficult to form connections and establish
close relationships with people in related industries and in networks of supporters for
Start-ups, and to perform effective public relations activities. From such a viewpoint,
supporting organizations should maintain themselves relationships with such networks in
the host country and provide comprehensive support services, to introduce start-ups that
plant to start business overseas to relevant people there who they can consult with; to offer
them opportunities to take part in on-the-training or hands-on training; to help them
improve business plans; and to back up their public relations activities for their products
and services.
51
Chapter 6 Enhancement of direct financing to start-ups
§1 What meaning does direct financing have for start-ups?
Many start-ups face difficulties in financing at the start-up and expansion stages.
Particularly, most ventures have only limited abilities to raise funds through indirect
financing mainly because they have few particular assets, meaning few properties to be
put up as collateral, because few of them make enough revenues from which loans and
interests can be paid, and because, even with good sales, they need as much of their
revenues as possible to be reserved for growth. It would be no exaggeration to say that
how much a start-up can raise through equity and other direct financing decides whether it
successfully grows at the earliest stage.
For start-ups that seek to raise risk money through direct financing, there are diverse types
of financing methods to choose according to the stage of development and the level of risk
in their business, such as raising funds from retail investors (angel investors), receiving
investment from venture capitals, and listing stocks on a emerging equity exchange. What
is crucial is to develop environments where they can find a financing method appropriate
to them at any stage of development.
In the following sections in this chapter, we examine the current state of angel investment,
venture capitals, and emerging equity exchanges to find their challenges, and discuss what
should be done to tackle them.
Figure 6-1 Financing of start-ups at each stage of development
B
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Funder’s family
and friends, etc.
Business angels
Venture capital
Public offering
External
capital
Equity capital
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/
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d
Starting-up
160,000 companies
(annual average
between 2001 and
2004)
Venture capitals
(total)
2,500 companies
(2006)
Emerging equity
exchanges (*)
IPOs
155 companies
(2006)
E
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p
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c
Venture’s stages of growth
* “Emerging equity exchanges” refers to Mothers,
Hercules, JASDAQ, Centrex, Ambitious, and Q-Board.
52
§2 Expansion of angel investors
1. Current state of angel investment
(1) Significance of angel investment
For start-ups angel investors not only play financial roles as suppliers of risk money,
which is difficult to obtain at the early stage of business start-up. Most angels also support
them in business operations. Engagement they have in their business and advice they give
as a shareholder work to transfer their business experience and expertise to the ventures
and help them with business administration.
Especially in Silicon Valley and other places where ventures have been created and grow
constantly for a long period of time, many venture founders, once achieving success,
invest money they earned in the business in enterprises of other new entrepreneurs and
offer them what they learned from their own experience to help them create a new
business. There has been an ecosystem, or eco-cycle, formed among venture
entrepreneurs.
Angels, however, are not limited to those who have a tremendous amount of income or
wealth, for instance successful business owners. Surveys in the United States and the
United Kingdom reveal that average angels had an annual income of 10 million yen or so
and net asset of 100 million yen or less, belonging to the upper middle-class. There are
also data that indicate that in the United States 230,000 angel investors supplied 3 trillion
yen to 50,000 ventures, and that in the United Kingdom 20,000 angels provided 100
billion yen for 3,500 start-ups. That suggests in those countries angels in a range of
income bands play a great role in creating and developing ventures.
In Japan there are probably cases of angel investment made by, among others, business
owners and executives who have themselves started a venture business. But we have no
data that show specifically how much has been invested. Many suppose enthusiasm for
such investment activities is lower than in the United States or United Kingdom.
(2) Angel networks
Some angel investors form angel networks, webs woven among investors to acquire and
exchange information about investment and best-practice know-how. In the United States
and Europe there are each more than 200 angel networks formed, and they are building
partnerships with each other and being organized.
53
Angel networks work to offer more opportunities of investment to individuals who lack
information or skills full-fledged angels should have, and help them acquire such
knowledge and techniques. They are believed to be quite useful to expand the angel
investor base. For retail investors with sufficient abilities, angel networks as a group of
people who have different business experience and expertise are also helpful as they can
find more easily experts who perform due diligence and provide consulting for diverse
types of companies they invest in, which would bring them a higher rate of success in
angel investment and a larger return on such investment.
In Japan there are more than ten or dozens of angel networks. Nippon Angels Forum is
one of them. Japan has more room left for growth of such activities than the United States
and Europe.
Figure 6-2 Numbers of angel networks in the U.S. and Europe
Numbers of angel networks in Europe Numbers of angel networks in the U.S.
Source: Europe eban (European business angel network) (2005)
U.S. Center for Venture Research and Kauffman Foundation (04-05 data)
(3) Angel tax
Japan and other countries, recognizing what important roles angel investors play in
creation and development of start-ups, have introduced angel taxation, tax treatment
designed to promote angel investment.
Since 1997 when it adopted an angel tax system, Japan has added a series of amendments.
In 2003, it introduced the three following measures:
(a) For a year when an investor makes angel investment, he or she can defer the amount
of the equity which does not exceed gains she realized in the year from sale of other
stocks to the point of time when it is sold;
(b) If he or she achieved any gain from sale of the equity, the taxable capital gains are
54
halved;
(c) If he or she sold the equity with loss, the loss is permitted to be carried forward three
years from the following year.
Angel taxation in Japan, however, is only used for a small amount of investment. In 2006,
the favorable tax treatment only applied to angel investments of a little less than 1,300
million yen. Even in 2005, when the all-time record was set, it failed to reach 2,500
million yen. Especially, recent records show investments the angel taxation appears to
fluctuate just in line with changes in prices in the stock market. The linkage is believed to
take place because the treatment of investment being deterred for the year when the
equities are purchased (mentioned above in (a)) is linked to gains realized in the year from
sale of stocks.
Against such a background, the government and the ruling coalition parties, recognizing
that more attractive incentives must be offered to increase angel investment, have decided
to introduced an “income exemption system” as part of the 2008 amendment of the tax
code. Under the system an angel who made an angel investment in a start-up established
within past three years which satisfies specific conditions is allowed to deduct from his or
her total income for the year of investment the amount of money substantially equivalent
to the investment (less 5,000 yen, with the upper limit of 10 million yen), and he or she
can choose either the new exemption system or the existing treatment, as stated above in
(a).
Introduction of the income exemption system should provide a greater incentive for
people who refrain from selling any stocks and, naturally, have no profits made in trading,
though such people have so far been refused tax advantages offered for the year of
investment. It is also supposed that people in parts of Japan who intend to support a
“company with something gleaming” in its foundation, including friends of the founders,
should be encouraged by the tax treatment in quite an effective way to make investment,
and that it should make great contribution to revitalization of local communities.
Several parts of the world – the United Kingdom, France, South Korea and Taiwan- have
already introduced a system designed to offer taxpayers a credit equivalent to a specified
percentage of investment they made (or to deduct it from their total revenues). The income
deduction system Japan is introducing should offer its taxpayers tax treatment not less
favorable than in such places.
Considering such circumstances, it is desirable that tax reform bills should get through the
55
Diet as early as possible to introduce the income deduction system (still under deliberation
at the Diet as of April 24, 2008).
Figure 6-3 Investments in Japan which the angel tax is applied to, and a tax price index
Million yen
Green Sheet
Designated funds
Direct investment
JASDAQ index (right-hand scale: 1 = March 1998)
FY1997 FY1998 FY1999 FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006
Figure 6-4 Outlines of the 2008 reform of the Angel tax system (introduction of the
income exemption system)
Existing system (angel tax) FY 2008 (income deduction system added)
Favorable Favorable treatment (Investors choose each of the favorable treatment A or B.)
treatment
* Figures for each year may be revised up as they are counted as of the date investment
was made. (Investment made in March 2007 may be reviewed in July 2007.)
Radical
expansion
(1) At time of investment made
The amount of investment is deducted from
gains made in the year from sale of stocks.
(2) At time of the equity sold (?1)
(i) When sold at a profit
Taxable gains from the sale is halved.
(ii) When sold with loss
The loss can be carried forward for
deduction three years from the
following year.
(1) At time of investment made
The amount of investment less ¥5,000 is deducted from the total
income made in the year.?
* The upper limit is (the total income ×0.4) or ¥10 million, whichever
is smaller.
(2) At time of the equity sold ((i) Preferable treatments for profits are
abolished.) (?2)
When sold at a loss, the loss can be carried forward for deduction
three years from the following year (maintained)
*2 The amount of money that was deducted from the total income is subtracted
from the acquisition cost for calculation.
(1) At time of investment made
The amount of investment is deducted from gains made in the year
from sale of stocks.
(maintained)
(2) At time of the equity sold ((i) Preferable treatments for profits are
abolished.) (?1)
When sold with loss, the loss can be carried forward for deduction
three years from the following year (maintained)
*1 The amount of investment that was deducted from stock sales gains
is subtracted from the acquisition cost for calculation.
The favorable tax treatment A is applicable to a case of investment by a company which a designated capital fund
has equity in or which is designated as Green Sheet Emerging when the case satisfies specified conditions.
56
Figure 6-5 Angel tax systems in countries
U.S. England France S. Korea Taiwan
A
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? Investments are
deducted from capital
gains (carried forward).
? 20% of the investments (up to
?400,000) are deducted from
the income tax.
? Investments are deducted from
capital gains from other stocks
(carried forward; the income tax
reduction above is applicable
together).
? 25% of the investments
(up to €20,000;
Doubled for a couple)
is deducted from the
income tax.
? 10% of the investments
is deducted from the
total income (up to
50% of the total
income).
? 10% of the investments made in
specific industries is deducted
from the income tax.
(deductible up to 50? of the
total income tax; the rest can be
carried forward four years from
the following year.)
? Tax exemption for half the
gains from stocks held for
5 years or more
? Tax exemption for gains
from stocks held for 3
years or more
? Tax exemption for gains
from stocks held for 8
years or more
? Tax exemption for gains
from stocks held for 5
years or more
? Losses from stocks sold can
be offset against other
incomes.
? Losses can be carried forward
indefinitely.
? Losses from stocks sold can
be offset against other
incomes.
? Losses can be carried forward
indefinitely.
? Losses from stocks sold can
be offset against other
incomes.
? Losses can be carried forward
5 years
? Total assets of $50 million or
less;
? Equities issued on and after
August 11, 1993;
? 80% or more of the assets are
used for designated industries
(sectors other than finance,
agriculture, hotels and
restaurants), etc.
? Total assets of ?70 million
or less, and less than ?80
million even after the
investment;
? Operating in the UK;
? Operating in designated
industries;
? Financing for operations in
designated industries;
? Applicable only to purchase
of newly issued common
stocks, etc.
? Unlisted companies
headquartered in EEAwhich
are subject to corporate tax;
? More than 75% of the equity
is owned by individuals or
specific family companies;
? With less than 250
employees;
? With annual sales of €50
million or less, or total
assets of €43 million or less
? SMEs that satisfy one of the
three requirements below:
? With 50 million won or
more invested and 10% or
more of the equity owned by
start-up investment
companies (SICs), etc.;
? With annual R&D expenses
of 50 million won or more
(5% or more of the sales),
and recognized as excellent
by the Small Business
Corporation, etc.;
? Companies guaranteed by
the Korea Technology Credit
Guarantee Fund (KOTEC),
or those with loans of 80
million won or more and
accounting for 5% or more
of the total assets from
KOTEC
? Companies founded under
the Taiwanese Corporate
Law for economic
development and industrial
sophistication;
? Applicable to more than 150
items in 7 manufacturing
and 12 technology service
sectors. Specifically,
information hardware,
telecommunication device,
consumer electronics,
precision electronic devices,
precision
machinery/equipment,
aerospace,
bio-medical/special-use
chemicals, and other
manufacturing sectors, and
internet software, internet
services, and other sectors.
57
2. Challenges
(1) Survey of realities of angel investors in Japan, and collection of cases of success / public
relations campaign
As mentioned above, there is no sufficient survey or data on the realities of the angel
investment situation in Japan. In the United States, everybody knows the success of
Google was supported by an angel investor, Andreas Bechtolsheim, the first person who
made an investment in the company. Such a positive perception of people about angel
investment helps motivate them to be angel investors themselves.
Japan should examine in more detail about the realities of angel investment in the country,
as well as collect cases of successful start-ups that achieved rapid growth and conduct
public relations campaigns to have them widely known as part of efforts to have angel
investment take root in the society and culture of Japan.
(2) More applicability of the angel tax system, and simpler procedures for the system
If the income deduction system as described above is introduced in 2008, the angel tax
system would work as a stronger incentive and boost angel investment. After the
introduction of the system, aggressive public relations efforts should be made to have the
taxation known by venture entrepreneurs, existing and potential angel investors, licensed
tax accountants and start-up supporters. In addition, consulting and other services should
be provided for those who intend to receive the favorable treatment to encourage more
people to use the system.
Under the current angel tax system, many people complain that complicated procedures
must be taken before a taxpayer receives a tax break. In order to encourage more angel
investors to use the system, studies should be conducted on how to make simpler as wide
a range of procedures as possible.
(3) Treatment of failed ventures
As start-ups in which angel investments are made are challenge businesses that face
higher risks, the majority of them fail. Few of the failed companies, especially smaller
ones, are liquidated through legal proceedings. Most of them, instead, are left as
“zombies.” In the United States, the tax code allows taxpayers to regard investment in
such companies as deductible expense in relatively simple ways, by, for instance,
declaring it on a tax return. Japan should consider whether and/or how to introduce some
58
measures to allow such equity to be deductible.
(4) Efforts to expand angel networks
In order to expand the angel investor base, more aggressive activities of angel networks
would be effective. Especially for Japan, where there are still only a limited number of
angel investors who have themselves founded a start-up, it is quite important to develop
environments where people with diverse types of backgrounds and experience can take
part in angel investment.
In order to make the activities of angel networks in Japan more energetic, it would be
effective to form partnerships between such networks based in parts of Japan and help
them share information about start-ups and best practices for angel network management.
It would also be helpful to encourage them to interact with angel networks in the United
States and other advanced angel networking countries and conduct surveys to learn their
advanced skills to manage networks and angel investment techniques, such as convertible
loan stock. Another effective way is to work to have angel investment activates
understood by SME owners and other people who may potentially have interest in angel
investment. Examination should be conducted on what the government should do to
support such efforts.
(5) Venture capitals of types to support angel investment
In order to make more energetic activities of angel networks in Japan, it would be
effective to form partnerships between such networks based in parts of Japan and help
them share information about start-ups and best practices for angel network management.
It would also be helpful to encourage them to interact with angel networks in the United
States and other advanced angel networking countries and conduct surveys to learn their
advanced skills to manage networks and angel investment techniques, such as convertible
loan stock. Another effective way is to work to have angel investment activates
understood by SME owners and other people who may potentially have interest in angel
investment. Examination should be conducted on what the government should do to
support such efforts.
In the United States and Europe, some angel networks own venture capital funds, referred
to as sidecar or affiliate funds, as a tool for making angel investments, and such funds are
now becoming more common. In Japan, Nippon Angels Forum, an angel network, has a
sidecar fund. On the other hand, some of the venture capital funds there which raise
59
money mainly from retail investors provide services similar to those of angel networks.
Such convergences of angel networks and venture capital may help angel investors learn
the expertise venture capital funds have on venture investment, and in turn allow venture
capitals to use the business experience people in angel networks have and knowledge and
know-how experts there possess when they perform diligence or provide business
advisory services.
In order to encourage more aggressive use of the scheme of venture capital in angel
investment activities, an examination should be conducted on what the government should
do to support efforts in this sphere. For instance, MSRJ’s program of investment in funds
should be used in an effective way to provide support for angel investment.
§3 Increase of financing through venture capitals
1. Present state of venture capitals
(1) Amount of venture capital investment
Venture capital funds in Japan have investments of 1 trillion yen on an outstanding basis.
Compared with the scale of venture capital investment in the United States or Europe,
which amount to more than tens of trillions yens, the gap remains very large. The ratio of
such investments to GDP has also stayed at quite a low level among advanced countries.
In terms of ratio to GDP, there is great room for more investment to be made.
Figure 6-6 Venture capital investments outstanding: comparison between Japan, the U.S.
and Europe
US Europe Japan
Source: Venture Enterprise Center, “Survey on Current Status of Investment of Venture Capitals and Other Funds”; NVCA Yearbook
2007; EVCA Yearbook 2007;
Translated as: $1=¥119; €1=¥158
For the United States, investments made by VCs exclusively in the country, and for Europe, investments including those by
private equities and those made overseas.
For Japan, investments including those made by turn-around buy-out funds for 2003 and before, and investments excluding
those made by such funds for 2004 and after (including investments overseas for all the years). Data of investments
outstanding in Japan are as of March 31 each year.
60
Figure 6-7 Ratios to GDP of annual totals of investments by venture capitals in developed
countries
(2) Structure of the industry
Many venture capitals in Japan are subsidiaries of securities companies, banks, or other
financial institutions or industrial corporations. In the United States, by contrast, most
venture capitals are independent, operated by a capitalist as an individual.
The composition of financiers of venture capitals in Japan also shows most of their funds
are raised from financial institutions or industrial companies, their parents, and that other
financiers, such as pension funds, major investors in the United States and Europe, have
only marginal shares.
Percentage
of
GDP
Israel (1)
United States
Iceland
Canada
OECD19 (2)
OECD23 (4)
Korea (3)
Sweden
United Kingdom
Netherlands
Finland
European Union
Europe
Australia (5)
Norway
Spain
Denmark
France
Belgium
Ireland
Euro area
Germany
New Zealand (5)
Italy
Portugal
Switzerland
Czech Republic
Austria
Poland
Greece
Hungary
Japan (5)
Slovak Republic
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8
2000??2003???????
??????????
Notes? (1) 2000-2002; (2) Europe, Canada and United States; (3)
1998-2001; (4) Europe, Czech Republic, Hungary, Poland,
Slovak Republic, Canada, and United States; (5) 1998-
2001.
Percentage
of
GDP
Israel (1)
United States
Iceland
Canada
OECD19 (2)
OECD23 (4)
Korea (3)
Sweden
United Kingdom
Netherlands
Finland
European Union
Europe
Australia (5)
Norway
Spain
Denmark
France
Belgium
Ireland
Euro area
Germany
New Zealand (5)
Italy
Portugal
Switzerland
Czech Republic
Austria
Poland
Greece
Hungary
Japan (5)
Slovak Republic
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8
Israel (1)
United States
Iceland
Canada
OECD19 (2)
OECD23 (4)
Korea (3)
Sweden
United Kingdom
Netherlands
Finland
European Union
Europe
Australia (5)
Norway
Spain
Denmark
France
Belgium
Ireland
Euro area
Germany
New Zealand (5)
Italy
Portugal
Switzerland
Czech Republic
Austria
Poland
Greece
Hungary
Japan (5)
Slovak Republic
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8
2000??2003???????
??????????
Notes? (1) 2000-2002; (2) Europe, Canada and United States; (3)
1998-2001; (4) Europe, Czech Republic, Hungary, Poland,
Slovak Republic, Canada, and United States; (5) 1998-
2001.
Source?OECD, “The SME Financing Gap” (2006)
Ratio to GDP of average
investments between 2000 and 2003
61
Figure 6-8 Structural proportion of venture capitals in Japan and the United States by
attribute
Breakdown
Attribute Share
Government-affiliated
Others
Others
Independent
Industrial Financial institution-affiliated
corporation-affiliated
Breakdown
Attribute Share
Bank-affiliated
Securities-affiliated
Insurance-affiliated
Figure 6-9 Structural proportion of financiers of venture capitals in Japan, the United States,
and Europe
(3) Current status of investment of venture capital firms
Many venture capital firms in Japan make small amount of investments in a large number
of companies. Their investment in a company averages less than 100 million yen, less
than one-tenth of that in the United States and one-fifth of that in Europe. Shares of
companies they invest in by stage of development in terms of money invested show a
higher proportion of investments are made in companies at an early stage after starting-up
than in Europe and the United States.
Note: Structural proportion of investments outstanding by
attribute (as of March 31, 2007)
Source: Counts by METI, adapted from “2006 Survey of
Venture Capitals” Nikkei Financial Daily, July 3, 2007
Note: Structural proportion of investments outstanding by
attribute (as of end of 2006)
Source: NVCA Yearbook 2007
Source: NVCA Yearbook 2004 Source: EVCA Yearbook 2007 Source: Venture Enterprise Center, “2006 Survey on
Current Status of Investment of Venture Capitals
and Other Funds” (December 2006)
Industrial
corporation-affiliated
Others
Financial
institution-affiliated
Independent
Industrial Corporation
2%
Individual
10%
University
foundation/ Pension
endowment fund
21% 42%
Financial
institution/insurance
25%
December 2003
U.S.
(Dollar term)
$10.96
Billion
December 2006
Europe
(Euro term)
€112.3
Billion
December 2005
Japan
(Yen term)
€112.3
2,305 ??
Others
16? Pension fund
26%
Gov-affiliated
institutions
8%
Individual
9%
Fund of Financial
funds institution/
17% insurance
24%
Pension fund
5%
Others (other
VCs, foreigners,
etc.)
22% Financial
institution
(bank/
securities)
31%
GP
18%
Individual
4%
Industrial corporation Foundation/
19% endowment
1%
230.5 billion
62
Figure 6-10 Average investment in a company by venture capitals in Japan, the United
States and Europe
US Europe Japan
Figure 6-11 Shares of companies in which investments are made by stage of development
in terms of money invested
Japan U.S.
Jun 00 Sep 01 Sep 02 Sep 03 Mar 04 Mar 05 Mar 06
Investment Starting-up - 4th year 5th - 9th year
for starting-up
10th - 14th year 15th year and after
Europe
Source: Venture Enterprise Center, “2006 Survey on Current Status of Investment of Venture Capitals and Other
Funds” (December 2006); NVCA, Yearbook 2007; EVCA, press release (June, 2007).
For Japan, data are as of FY 2005; for the U.S. and Europe, as of 2006.
Calculated by dividing annual investments by the number of companies in which they are made.
Translated as $1=¥116.25, and €1=145.46 (average rate in 2006).
Source: Venture Enterprise Center, “2006 Survey on Current Status
of Investment of Venture Capitals and Other Funds”
(December 2006); NVCA, Yearbook 2007; EVCA, press
release (June, 2007).
m
i
l
l
i
o
n
y
e
n
63
(4) Return on investment
Returns on investment of venture capital firms vary greatly year to year due in part to
fluctuations in the stock market. That makes a general description difficult, but the level of
returns Japanese venture capitals earn from their investment remains lower than that of
their peers in Europe or the United States.
As a cause of the lower return some point out lower risk appetite of people and institutions
in Japan that invest in venture capitals. It is also attributed to the fact that the only way for
venture capitals to realize profits from their investments is to list the stock on an exchange
for start-ups. Others point out that as most of Japanese venture capitals are set up by
financial institutions or other corporations as subsidiaries, they accept a large number of
people from the parents, transferred temporarily or permanently to work as venture
capitalists, not all of whom, however, have received a sufficient level of education needed
to successful or skillful venture capitalists.
Figure 6-12 Return on investment of venture capitals in Japan, the United States and
Europe
US (VC) Europe (VC) Japan (VC)
1 year 3 years 5 years 10 years 20 years
Years of management
Source: Venture Enterprise Center, “2006 Survey on Current Status of Investment of Venture Capitals and
Other Funds” (December 2006); NVCA, Yearbook 2007; EVCA, press release (June, 2007).
* ROIs are the average of IRRs (internal rate of return) weighted by the amount of investment.
Note: For the U.S., data are between October 2005 and September 2006, for Europe, as of 2006, and for
Japan, as of 2005.
64
(5) Venture capital policies
The history of venture capital in Japan started with small and medium business investment
and consultation companies founded by the government in 1963 (Tokyo, Osaka and
Nagoya SBICs). Since 1972, when private sector venture capitals started to grow, the
industry has been expanding with development of legal and regulatory arrangements, such
as the amendment of the Antitrust Act in its treatment of venture capitals (their relation to
the clause prohibiting holding companies, etc.), and introduction of the system of limited
liability partnership (LLP) for investment. SMRJ and the Development Bank of Japan
(BDJ), together with private sector investors, are working aggressively for projects to
form venture funds under the scheme of investment LLPs. They are working, you could
say, to prime the pump to enable money to be injected from the private sector, and help
more venture funds to be formed in Japan.
65
2. Challenges
(1) Diversification of suppliers of capital
Venture capitals in Japan still have a shortage of funds to invest. (In other words, with
more money supplied to them, they could invest more in start-ups.)
Measures should be taken to attract more diverse types of suppliers of capital to the
venture capital industry and have them invest more in venture capitals, so that more
investment will be made in Start-ups.
Figure 6-13 Balance of venture capitals between money supplied and companies to invest
in
Others
8.0%
With more money supplied,
wish to invest more
48.0%
Money supplied and investments
made are in balance.
36.0%
Enough money supplied, but insufficient
companies to invest in
8.0%
(i) Capital from pension funds
In Japan, pension funds, a major category of suppliers of money to venture capitals in
Europe and the United States, have the potential to invest more.
At present, there are only a limited number of pension funds in Japan which invest in
Japanese venture capital firms. In particular, public pension funds are prohibited from
investing in venture capital, a type of investment in unlisted stocks, by the Government
Pension Investment Fund (GPIF) as part of its management policy.
Nowadays, on the other hand, with the view to investing in more diverse asset classes and
diversifying risks, an increasing number of pension funds are investing in alternative
forms of assets. Some data suggest that in 2007 three quarters of the pension funds were
engaged in alternative investment. Most of their investments, however, were made in
hedge funds, and only a fraction of the money came to venture capital firms.
N=25
Source: Questionnaires by METI to JVCA members (September 2007)
66
* Alternative investment: refers to investments in financial instruments other than stocks,
bonds and other conventional assets that are traded mainly on
exchanges, which are highly liquid as a result, and have long
histories as investment vehicles. They are put in a portfolio in
the hope of diversifying risks. Some of the typical alternatives
are venture capital firms and private equities, such as buy-out
funds, real estate funds, and hedge funds.
67
Figure 6-14 Alternative investment by corporate pension funds
Share of corporate pension funds investing in alternative assets
No plan of such investment
Under
consideration
Investing in alternative assets
Types of alternative assets they invest in
Types of private equities they invest in
For venture capitals to raise more money from pension funds, further efforts should be
made to make them more attractive as an investment vehicle when compared with hedge
funds, which offer a relatively steady return in a rather short lock-up period, or stocks in
emerging economies, which have been realizing high yields in recent years.
Source: Daiwa Fund Consulting, “Pension Newsletter: featuring Alternative Investment” (October 2007)
Hedge fund
Domestic/overseas REIT
Real estate funds
Emerging stock
Private equity
CDO
Inflation-indexed bond
Others
Domestic venture capital
Oversea venture capital
Domestic buy-out
Overseas buy-out
Domestic fund of funds
Overseas fund of funds
Others
68
There are also many challenges in terms of the disclosure of information and public
relations, such as the absence of benchmarks for venture capital investment, insufficient
information about investment tools, and the lack of transparency of the information
disclosed.
In terms of public pension funds, a recommendation has been made recently that they
should be allowed more discretion in management of their reserves and be authorized to
invest in alternative assets, so that they are managed in a way suitable for one of the
largest pension funds in the world with the view to keeping pension financing in a sound
condition, as well as granting more to future pensioners and reducing the burdens of
present contributors (“For Reform of Management of Public Pension Funds,” Second
Report of the Working Group on Financial and Capital Markets, Expert Committee on
Reforms Addressing Globalization, Council on Economic and Fiscal Policy, April 2008).
Present obstacles that outright prohibit pension funds from investing in venture capitals
should be removed soon.
(ii) Capital from investors overseas
Investments from overseas in Japanese venture capitals account for only 3% of the total
capital they have received. According to the current tax code of Japan, a venture capital
formed under a Japanese partnership scheme which a foreigner (non-resident) has invested
in is regarded as the permanent establishment of the foreigner (referred to as Item-1 PE),
and profits from the fund are taxed by Japanese tax authorities. Furthermore, in order to
secure the taxation, they started in 2005 to impose a 20% withholding of income tax on
the distribution to foreigners of business profits from such partnership agreements. Some
point out such measures as major factors that have kept foreign investors away from
investment in venture capitals in Japan. Foreigners would invest more in Japan and the
money could be used effectively to promote innovation of Japan’s economy and revitalize
it only when they recognize new businesses in Japan to be finally attractive. Policies and
programs to realize this situation should be introduced.
(2) Collection and provision of information about venture capitals
(i) Why is collection and provision of information about venture capitals necessary?
In the United States and Europe, there are databases, such as VentureOne and Thomson
Financial that store information, including records of return on profit of start-ups and
investments in them. Their services are commonly used by venture capitals when they
69
make decisions on investment in start-ups and by institutional investors in making
investment decisions in venture capitals. They are an important part of the infrastructure
that circulates money from institutional investors to venture capitals, and from venture
capitals to start-ups.
In Japan records of return on investment in the venture capital industry should also play
an important role to encourage institutional investors, especially pension funds, to
increase investment in the sector. Databases of such records would help venture capitals
use their limited resources in an efficient way to make decisions on investment and
achieve high performance in their investment. In addition, venture capital data bases
would be needed for the industry as a whole to train excellent venture capitalists. To
obtain promising venture capitalists, it is essential to prepare environments that help them
set up their own venture capital in future.
(ii) Mechanisms to be prepared for the collection and provision of more information about
venture capital investment
In Japan, since 1985 the Venture Enterprise Center (VEC) has been conducting
questionnaire surveys on venture capitals to examine the current status of VC investment
and offer compiled data.
The Japan Venture Capital Association (JVCA) has also been carrying out research on its
members to survey their investment activities.
Recently the Japan Venture Research (JVR), an incorporated NPO established by
researchers studying start-ups and people involved in the sector, has started to build a
database of information about capital policies of companies venture capitals made
investments in from their foundation through listing, based on prospectuses for issuing
securities.
The Organization for Small & Medium Enterprises and Regional Innovation, the Japan
(SMRJ), an independent administrative institution which implements programs of
investment in venture capitals to secure smoother supply of capital to start-ups, collects
information about investments made by venture capitals it financed and reviews their
performance as part of its policy assessment.
In order to collect and provide information on venture capital investment in a more
effective way, people and organizations as mentioned above that have been supplying
such services in Japan, among others, should work to establish mechanisms to collect and
70
provide such information in a desirable manner.
(3) Further investment in companies at the early stage of business start-up
Some point out that in the United States, among others, while the amount of money
venture capitals manage has increased mainly due to the growing inflow of capital from
pension funds, fewer of these are engaged in hands-on support, one of features they
originally had, and that they make fewer investments in start-ups at the early stage of
business start-up, which has made it more difficult for the start-ups to raise money.
In Japan, venture capitals make a higher proportion of investment in start-ups at the early
stage of business start-up than their peers in the United States and Europe. Granted that
the total amount of investment of the industry itself is much smaller, but it is expected to
grow. However, investment in start-ups at the early stage of business start-up might
decline as it has in the United States and other countries. With the view to providing them
with the capital they need, further policies and programs should be introduced to
encourage investment in such companies.
SMRJ finances hands-on venture funds, which invest mainly in start-ups at the early stage
of business start-up. The independent administrative institution is expected to increase
such investment.
(4) Development of human resources of capitalists for more hands-on support
For venture capitals to raise the level of potential that start-ups have for growth and, as a
result, to provide investors greater returns on investment, hands-on support (or support
that venture capitals provide directly for start-ups in terms of their business management)
is be essential.
In part because such services have been offered to start-ups by banks, venture capitals
have not provided sufficient hands-on support. In order to attract investors in competition
with other financial vehicles, venture capitals should give more hands-on support to
ventures and achieve better performance in management of funds.
For venture capitals that provide hands-on support, it is critical to secure venture
capitalists, people who work for them for investment in venture capitals.
Venture capitals should endeavor to enhance their system of inner incentives for the
purpose of calling in people with experience and skills, such as those who have
71
themselves founded a start-up. They should also work to train their own people to be
capitalists.
JVCA also works to develop human resources. For instance, it sponsors training seminars
and certification examinations for venture capitalists. The association is expected to
continue such initiatives. Graduate schools offering MBA and MOT degrees are
introducing courses of education designed for venture capitalists to strengthen their
comprehensive competence.
MSRJ conducts programs of investment in capital funds (see above (3)) to primarily
supply capital to those independent venture capitals and emerging venture capitals with
little past record of investment that the organization recognizes as having great ability to
foster growth. The programs play a part in developing a pool of capitalists. It is desirable
to maintain such a point of view in making investments. In addition, it might be necessary
to consider some policies and programs to back up training or other educational activities
carried out to produce more capitalists.
(5) Challenges in legal and accounting systems
(i) Ways to apply accounting standards to venture capital investment
Financial Accounting Standards should be applied in such a way as venture capital
investment is treated in an appropriate manner. Reviews must be conducted on accounting
practices to clarify points of issue, and arrangements should be made to introduce
necessary legal, regulatory, and institutional systems.
For instance, when a venture capital assesses the fair value of unlisted shares issued by a
company in which it has invested, if the investor has acquired a position which allows it to
see in detail how the business is operated because, for instance, it has sent someone to the
company as a director, or because it has been providing hands-on support for the company,
the investor may be able to judge whether fair value of the stocks could recover, because
the venture capital can obtain medium- and long-term business plans and anything
necessary from the company just as a case where it would have invested in a company
founded for a specific project. Seen from such a viewpoint, even under the current system,
when the fair value of shares issued by a company in which a venture capital invested in
has declined to less than 50% of the acquisition costs, it may not always need to recognize
the difference as a loss. That is, the reporting of the difference as a loss might not be
needed when the investor reasonably anticipates that losses the company has accumulated
since its foundation could be resolved in a certain period of time, and that its subsequent
72
financial performance could avoid falling far below the level that was estimated in the
business plan, for example.
The current system, on the other hand, requires listed venture capitals to consolidate
accounts of investment partnerships in which they are a general partner (GP) into their
own financial statements. Some point out problems that take place when venture capitals
are obliged to consolidate investment partnerships only because they are GPs, such as (a)
that the accounting treatment may make financial conditions and earnings of the listed
venture capitals less transparent because fees and interests paid and received between the
investment partners and venture capitals are internalized; and (b) that consolidated assets
of venture capitals that serve as GPs in a small number of investment partnerships may
fluctuate widely every time a partnership is founded or dissolved, which would not
correctly represent the realities of their business. For the time being, to cope with such
problems, venture capitals consolidate accounts of investment partnerships in which they
serve as GPs into their financial statements according to accounting standards, with their
unconsolidated statements added for reference. In the medium and long term, studies
should be conducted on standards that decide, among others, in what case they should be
consolidated and in what case they should not, so that accounting disclosure can better
represent realities of their business.
(ii) Regulations of venture capitals
Regulations of venture capitals are being tightened. For instance, with the Financial
Products Trading Act, venture capitals are also required to be registered or reported
according to the Act. When regulations are introduced, it is important to pay due attention
both to the benefits they bring, such as protection of investors, and to compliance costs
which those regulated would bear and restrictions imposed on their acts, and maintain an
appropriate balance between them, so that the regulations will not exceed a necessary
level. For instance, when a venture capital forms a fund with money raised from outside
investors (the main fund), it may prepare another fund (a parallel fund) which offers
membership exclusively to its venture capitalists (executives of the venture capital) and
make investments in the same companies which the main fund invests in, so that it will
provide incentives for venture capitalists and attract talent. But such executive funds
usually do not include “professionals,” and they are not eligible for exceptional operations
permitted only to qualified institutional investors, so they must be registered. Obviously
this represents excessive regulation. An executive fund that is managed by general
partners of the main fund or their executives and offers membership exclusively to
executives of the GPs should be exempted from registration.
73
§4 Ways to increase participants in emerging equity markets and revitalize them
1. Current state of emerging equity markets
(1) Increased numbers of emerging equity markets
In Japan, there have been a total of seven emerging equity markets founded: the Mothers
(Tokyo Stock Exchange) and Centrex (Nagoya Stock Exchange) exchanges, the two first
emerging equity exchanges opened in 1999; JASDAQ (reorganized from the OTC
market); NEO (opened in 2007) Hercules (Osaka Securities Exchange, opened in 2000);
Ambitious (Sapporo Securities Exchange, opened in 2000); and Q-Board (Fukuoka Stock
Exchange, opened in 2000).
Since 2000, more than 1,000 stocks have been listed on the seven exchanges, with 100 to
150 new listings each year after 2000. The number of companies listed has come quite
close to those on similar exchanges in the United States and Europe. They deserve credit
for, over the decade, having rapidly improved the environment for start-ups in financing in
the stock market.
On the other hand, some point out problems, for instance, that the rapid increase of
emerging equity exchanges has made them less distinctive or less unique; and that
excessive competition among them has led some to too-lax listing examinations.
Figure 6-15 List of emerging equity exchanges in Japan
Emerging equity exchanges in Japan (in no particular order)
Exchange Listed stocks Opened in Exchange Market capitalization Trading value Turnover
per stock per stock ration of
(¥1 million) (¥1 million) trading (%)
Mothers (TSE) November 1999 Mothers (TSE)
Hercules (OSE) May 2000 Hercules (OSE)
Centrex (NSE) October 1999 Centrex (NSE)
Q-Board May 2000 Q-Board
Ambitious April 2000 Ambitious
JASDAQ February 1963 JASDAQ
NEO August 2007 NEO
(Ref.) TSE 1 May 1878 (Ref.) TSE 1
(Ref.) TSE 2 October 1961 (Ref.) TSE 2
Emerging equity exchanges overseas
Exchange Listed stocks Opened in Exchange Market capitalization Trading value Turnover
per stock per stock ration of
(¥1 million) (¥1 million) trading (%)
NASDAQ (US) February 1971 NASDAQ (US)
AIM (UK) 1995 AIM (UK)
GEM (Hong Kong) November 1999 GEM (Hong Kong)
* Adapted from statistics carried on websites of the exchanges and NOMURA CAPITAL MARKET REVIEW, Nomura Institute
of Capital Market Research.
* Trading values are monthly figures for March 2007. (For foreign exchanges, monthly averages between January and March
2007.)
* Market capitalizations and listed stocks are as of March 31, 2007.
* Market capitalizations and trading values are translated at the exchange rate as of March 31, 2007.
74
(2) Increasing cases of companies delisted due to breaches of the law, etc.
Recently several cases occurred where companies listed on emerging equity exchanges
were accused of, or delisted due to, for instance, misstatements, window dressing, or links
to antisocial organizations. Such problems are not necessary unique to emerging equity
exchanges, but tend to come up more often than in major exchanges. In emerging equity
exchanges, it is pointed out, such troubles arise due mainly to excessive competition
among the exchanges, premature listing of companies before they acquire adequate
business bases, or lack of a fully developed management awareness, and substandard
examination and auditing systems at some securities underwriters and auditing firms.
Figure 6-16 Companies delisted due to breach of the law, etc.
A. Companies listed on the major exchanges
Companies delisted from the major exchanges
a. Companies delisted for reasons above
b. Proportion to the listed companies
B. Companies listed on the emerging equity exchanges
Companies delisted from the emerging equity exchanges
a. Companies delisted for reasons above
b. Proportion to the listed companies
Adopted by METI from the website of kabu.com Securities and those of the exchanges
(3) Retail investors support emerging equity exchanges
Most of the transactions on the emerging equity exchanges are conducted by retail
investors, and only a limited number of institutional investors take part in the trading. This
is attributed to their smaller market capitalization and lower liquidity, which hinders them
from meeting the needs of institutional investors in terms of money management. The
phenomenon brings the contrast between the emerging equity exchanges in Japan and
those in the United States and Europe, such as NASDAQ in the United States, and AIM in
the United Kingdom, where institutional investors play a major role in transactions.
The central role retail investors play in emerging equity exchanges in the country is also
mentioned as one of the causes of wild fluctuation of stock prices there. Especially, with
the recent spread of stock trading on the internet, the number of “day traders,” individuals
who continually buy and sell in a short period of time, is increasing. Some believe they
are another factor that makes share prices volatile.
Proportions to the companies delisted of those due to disclaimer of audit opinion, misstatement, protection of public
interests/investors, and breaches of listing agreements
75
Figure 6-17 Compared shares of transactions by type of investor (trading value basis,
2007)
Unit: %
TSE 1 TSE 2 Mothers JASDAQ Hercules
Financial institutions
Investment trusts
Business companies
Others companies
Securities firms
Individuals
Foreigners
Total
Source: websites of the exchanges
Note: The shares are calculated only with payments made by buyers through brokers.
(4) Volatile / depressed stock prices at present
With some companies having been delisted due to breaches of the law or for other reasons,
and others having lowered earnings estimates immediately after being listed, emerging
equity exchanges are losing the confidence of investors. In addition, general conditions of
the market are deteriorating due mainly to problems with the subprime loan market. As a
result, stock prices at the emerging equity exchanges are still depressed, having peaked
out at the end of 2005 before falling down to just over 20% of the record high in April
2008.
76
Figure 6-18 Stock prices at the emerging equity exchanges
Stock prices at exchanges (monthly basis)
JASDAQ(right-hand)
TOPIX
Hercules
Mothers
1997/Jan 1998/ Jan. 1999/ Jan. 2000/ Jan. 2001/ Jan. 2002/ Jan. 2003/ Jan. 2004/ Jan. 2005/ Jan. 2006/ Jan. 2007/ Jan. 2008/ Jan.
Index: closing Mothers Index: Hercules index Index: closing TOPIX Index: JASDAQ index
index (all listed stocks) (right-hand)
Source: Statistics carried on websites of Bloomberg, AMSUS and the exchanges
(5) More rigorous examination for listing
With an increasing number of listed companies accused or having been delisted due to, for
instance, misstatements, window dressing, or links to antisocial organizations, the
emerging equity exchange are examining listings more carefully, and securities
underwriters and auditing firms are becoming more cautious. Some start-ups, among
others, claim that listing examinations are becoming more rigorous. No change has been
made in anything about formalities stipulated in the criteria for listing (rather, some of the
standards are relaxed), but parts relating to examinations of substantiality (viewpoints
such as appropriate disclosure of conditions of the company and information of its risks,
soundness of the business, and public interests / investor protection) are getting stricter.
Especially among venture capitals and start-ups, a majority say listing that examination
has gotten much tougher than a few years ago.
Issues that have gotten tougher include the internal control system checks, links for to
antisocial organizations, and scrutiny of business plans. All these are important, but
checking for relationships to antisocial groups is pointed out as an increasingly urgent
problem and JASDAQ mentions it explicitly as one of its delisting criteria, and other
exchanges are also putting forth more efforts to tackle the problem. Some say, on the other
77
hand, there are cases where start-ups are required to develop a internal control system they
are unable to put in effect, where an unclear definition or range of antisocial organizations
to be examined, puts them to trouble in deciding specifically what they must do, or where
an exchange that demands excessive feasibility in business plans refuses even a
reasonable degree of future uncertainties about growth when such uncertainties are present
for start-ups, by their very nature.
Figure 6-19 Changes in listing examinations by exchanges in the start-up stock market
Venture capitals perceive as:
Others
Same as before 4.0%
0.0%
More rigorous than
a few years ago
96.0%
Source: Questionnaires by METI to JVCA members (September 2007)
N=25
78
Start-ups perceive as:
Others
2%
DK
32%
More rigorous
than a few
years ago
64%
Same as
before
2%
Source: Questionnaires by METI to Japan Venture Conference (October 2007)
(6) Difficult assignment of auditing firms
Furthermore, with cases of misstatements and window-dressing having occurred in the
start-up stock markets, auditing firms are becoming more cautious as to whether to
undertake the auditing of a start-up immediately before or after its listing. An increasing
number of start-ups feel it is getting more difficult to find an auditing firm that accepts
them. Fees auditing firms require from start-ups are also rising compared to a few years
ago.
Figure 6-20 Changes in attitudes of auditing firms to private companies
Venture capitals perceive as:
Others
Same as before
Auditing fees have risen
More often refused auditing
than a few years ago
Source: Questionnaires by METI to Japan Venture Conference (October 2007)
N=57
N=24
79
(7) Introduction of the internal control reporting system
In addition, the internal control reporting system has been introduced according to the
Financial Products Trading Act, which applies to listed companies from the first business
year that begins on and after April 1, 2008. There are worries that the system might drive
listing costs up further, or that it might make it more difficult to secure an auditing firm.
(8) Deteriorating listing conditions for start-ups
With more rigorous examination for listing pointed out, as described above, along with
falling or depressed stock prices at present, the increasingly difficult assignment of
auditing firms, the introduction of the internal control reporting system, and other
difficulties, the conditions for start-ups attempting to list are significantly deteriorating.
The situation has gotten much tougher than a few years ago for start-ups that endeavor to
raise money at a start-up stock exchange.
Figure 6-21 Numbers of public offerings on start-up stock exchanges
Q-Board
Offerings Ambitious
Centrex
Hercules
Mothers
NEO
JASDAQ
-31.6% from
a year ago
1999 2000 2001 2002 2003 2004 2005 2006 2007
Adapted by METI from data released by the exchanges
(9) Concerns about a slump in investment in start-ups in general
As conditions are thus getting tougher in a variety of aspects for start-ups that intend to go
public on a emerging equity exchange, there are concerns emerging not only that start-ups
might have more difficulty in raising money from an emerging equity exchange, but also
that the impact might extend to venture capitals and angels, which at present make profits
from capital gains they earn mainly by taking start-ups public on a emerging equity
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exchange. In particular, when venture capitals commit themselves to earning a certain
percentage of profits on their investments, a depressed offering price leads to a diminution
of the money venture capitals can afford to invest. Greater impacts of such shrinking
investments are felt, it is said, especially by start-ups in the biotechnology sector. With
such difficulties left unsolved, the impact on direct facing may become severe.
2. Challenges
(1) Enhanced self-discipline and governance by start-ups themselves
The recent loss of confidence in emerging equity exchanges, and depressed trading
volumes and prices have resulted mainly from window-dressing, misstatements and links
to antisocial organizations by start-ups listed there. They should, keeping these lessons in
mind, work to secure the sound functioning of emerging equity exchanges, which
represent their most important tool for gaining capital and achieving credibility. For
instance, start-ups and their management should develop their own awareness of
compliance issues, disclose information of the company from the viewpoint of investors
about anything at any time, and have independent directors appointed who should monitor
management as outsiders. They should recognize that it is critical for them to develop
adequate management control systems.
In the first place, no capital could be raised in a stock exchange without participation in it
of buyers of stocks, or investors. Start-ups that finance in the stock market should
maintain good communication with investors and offer them sufficient information.
(2) How should listing procedures be from now on?
(i) Listing procedures that strike a balance between the growth of start-ups and the protection
of investors
It is indeed important to conduct listing examinations from the viewpoint of appropriate
disclosure about conditions and risks, financial soundness, and the public interest and
investor protection. But excessive, unnecessarily rigorous listing examination might
impose too heavy a burden on start-ups that intend to go public.
There is disagreement, about whether listing examinations are actually getting more
rigorous nowadays or they are merely adhering to the same criteria but becoming
“deeper.” If, however, an exchange’s stance on implementation of listing examinations
were largely swayed by several cases of breaches of the law or the mood prevailing in the
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market, this would not be desirable to promote growth of start-ups in the sense that it
would ruin predictability about listing. Larger swings or unpredictability with
implementation policies would ultimately hamper venture capitals from supplying capital
to start-ups, which might impact the whole venture capitals financing system.
In terms of financial and capital market regulation, it is important, needless to say, to pay
due attention both to fairness and transparency in the market and the protection of
investors, as well as to compliance costs market participants pay and restrictions imposed
on their behavior, and strike an appropriate balance between all of these.
If such balance is lost in emerging equity exchanges in Japan, there would be a rapidly
increasing number of Japan-based start-ups that will raise capital from an emerging equity
exchange overseas or move their headquarters abroad. Such movements would be a great
problem for Japan in securing competitiveness in the global financial and capital market
and from the viewpoint of revitalizing our economy as a whole.
In view of this, exchanges are keenly expected to conduct listing examinations in a way
that balances the need to grow start-ups while protecting investors.
For instance, some say that there are cases where, in terms of internal control systems,
relations with anti-social organizations, or inaccurate business plans, start-ups are required
to develop unworkable internal control structures where an unclear definition or range of
antisocial organizations to be examined puts them to trouble in deciding specifically what
they must do, or where an exchange that demands excessive feasibility in business plans
refuses even a reasonable degree of future uncertainty in terms of growth. Exchanges are
expected to take measures to solve such problems.
Exchanges are also developing mechanisms to tackle antisocial groups. They are expected
to work together with related parties and make further efforts to support companies in
preparing internal systems that protect them from harm.
When the statutory annual securities report a company attaches to the application for
listing carries a note of significant doubt, there is little chance, it is believed, that the
listing will be approved. Some claim that whenever a significant doubt related to financial
conditions exists, such as difficulties in raising new capital, if it is judged that the doubt
would be removed by the listing, once it is approved, the application should be treated at
the listing examination as if the note of doubt about its going concern had not been made.
The Financial Service Agency (FSA) should not supervise or inspect exchanges, securities
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firms or auditing firms in a way people concerned are held accountable in an
unnecessarily harsh way for cases of a listed company that was accused or delisted due to,
for instance, a breach of the law. Instead, the Agency should adopt a risk-based approach,
which makes clear what areas and items have greater impacts on users and markets for
focused supervision and inspection.
(ii) Exchange of information about listing examination procedures for better understanding of
the procedures
It is necessary to promote better communication between parties related to the start-up
stock market and eliminate poor public relations and avoidable misunderstandings among
them. For instance, exchanges should play a central role in providing parties related to the
start-up stock market, such as start-ups that raise capital from exchanges, and securities
firms, auditing firms and attorneys that support them in listing procedures, with
opportunities to exchange opinions regularly.
It is also important for exchanges to explain, in what cases listings would be rejected
through listing examination at explanatory meetings and other occasions for applicants for
listing, on listing manuals and guidelines, and in FAQs and the like, with as many
examples as possible given.
(iii)Necessary actions to solve issues with auditing firms
In view of the responsibility of auditing firms and accountants, it is reasonable to a certain
degree for the firms and accountants as individuals to select clients on the basis of their
level of audit risk. On the other hand, in view of the statutory requirements clients must
satisfy when listed with the assignment of auditor, the auditing firms and accountants as a
group have social responsibility to the economy as socio-economic infrastructure and
public institutions to provide companies that hope to go public with the services they need.
The auditing firm and accountant community should take action to deal with difficulties
which at present many of the companies hoping to go public encounter when assigning an
auditor. Especially, it seems necessary to promote and develop auditing firms specialized
in services for start-ups.
The concern is that the tightened compulsory rotation of auditors might lead to a smaller
number of auditing firms and accountants that undertake audits of start-ups. Considering
the characteristics of ventures, most of which are yet to have a full-fledged corporate
structure, it might be necessary to examine whether the regulation for obligatory auditor
rotation should be relaxed in terms of companies that are preparing for an initial public
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offering.
(3) Shift of focus from listing examination to post-listing actions
(i) Necessary recognition as ex post facto supervision system
Cases of companies that were delisted because they turned out, once listed, to have failed
to satisfy listing standards should be recognized as demonstrating a shift to an ex post
facto supervision system. Anyway, cases of failure to meet listing criteria should not be a
reason for the hasty introduction of stronger and stricter listing examinations before
contemplating other measures.
(ii) Study of Japanese Nomad (system for support for disclosure after listing)
With the view to supporting listed companies in terms of maintaining their capacities for
disclosure after going public, instead of excessively tightening examination for listing,
Japan might as well examine whether it should also introduce a system under which third
parties (advisors) help companies with disclosure, something like the Nominated Adviser
(Nomad) of AIM in the United Kingdom, the OTCQX system made by Pink Sheets in the
United States, and the GEM system in Hong Kong.
A Japanese Nomad system, however, should be designed as an addition to be made to the
existing system, where listing examination and other procedures are implemented in a
strict way, or as mere rigid regulation. It should, instead, be constructed as a voluntary
scheme that offers start-ups another option along with the existing mechanism and which
gives them incentives. Another issue is how they should be offered benefits that offset the
increased costs of the introduction of a Nomad system.
The proposed amendment of the Financial Products Trading Act, now before the Diet, is
to introduce a system similar to Nomad into “professional exchanges” (see (4) (v)), a
category of bourse to be founded under the amended Law. While monitoring how the
system is operated in “professional exchanges,” examination should be conducted whether
and/or how a mechanism of third parties (advisors) offering support for disclosure should
be used in other exchanges.
(iii)Voluntary efforts by securities firms and exchanges
Whether a Japanese Nomad is introduced or not, securities firms, which sponsor ventures
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and other companies for listing, should more willingly provide them with support and
advice for their disclosure after they are listed.
The Tokyo Stock Exchange obliges companies listed on Mothers to hold more than two
explanatory meetings per year three years after listing. In April 2004, JASDAQ also
introduced a system that requires all its listed companies to have two IR meetings a year
(four meetings per year for companies listed on the NEO, established in 2007), and, along
with the system, it set up a special unit to provide the companies with necessary services.
The free services for all the listed companies, “JQ IR Support Service,” include lectures
by IR experts, seminars where IR practitioners offer their experiences as a lesson for
others, and a “website dedicated to IR,” which provides investors and the companies with
opportunities to communicate. It also has a system of annual commendation to have
examples that should be guides to IR activities that should be made widely known and
that should promote more aggressive efforts, so that its listed companies will offer more
and better IR services and, as a result, that the JASDAQ itself will function better. With
such initiatives in mind, exchanges should provide companies listed on them with more
support in disclosure activities they perform for investors, such as IR meetings held for
them.
(iv) Examination of effective use of intellectual property reports and intellectual assets
management reports
JASDAQ already has a free analysis service provided for companies listed on the
exchange to evaluate their intangible value that are not expressed on financial statements,
such as “know-how,” “R&D capacity,” and “royalty of employees.” Now examination
should be conducted in a positive manner on how intellectual properties reports and
intellectual assets management reports can be used effectively as disclosed information
that demonstrates the potential of a company for growth based on its technologies.
(v) Observation of and action to outcomes of the internal control reporting systems introduced
In Japan an internal control reporting system comes into operation this year according to
the Financial Products Trading Act. In the United States, the introduction of a similar
system under the Sarbanes-Oxley Act led to increased costs companies subject to the law
must bear to cope with the new system and which has postponed application of the Act to
SMEs. We should carefully observe how things go after the reporting system comes to
effect, especially how it is enforced in terms of companies listed on emerging equity
exchanges.
An increasing number of people are concerned whether the introduction of the internal
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control reporting system to companies listed on emerging equity exchanges might cost
them a lot. Examination should also be conducted on whether and/or how start-ups should
cope with the system as relevant to their needs.
If the internal control reporting system should turn out to place too heavy a burden on
companies listed on emerging equity exchanges, it might be necessary to review whether
it should be applied in a uniform manner.
(vi) Examination of potential growth after listing
Emerging equity exchanges should decide whether a company should be listed not on the
basis of its performance at the time of listing but rather in view of its potential and
prospects, and indeed they have been conducting examinations in such a manner. It would
make sense, accordingly, if reviews are conducted in a certain period of time after a
company is listed to see how fast it grows after the listing and to compare its outlook
given when listed with its actual performance.
However, if, for instance, formalistic standards are applied in a strict manner to assess the
growth of a company in a certain period of time after it is listed and if the results are used
to decide, say, whether it should be delisted, that might lead to an unhelpful focus
revenues and/or profits, resulting in more cases of window-dressing, unreasonable
mergers, and the like. To avoid this, careful examination should be conducted on what
criteria should be laid down for review of growth after listing, how the review should be
conducted, and in what manner its results should be dealt with.
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(4) Efforts to increase participation of institutional investors
(i) Enhanced efficiency and further globalization of exchanges to make them more attractive
In the United States and Europe, arguments are emerging about global competition among
emerging equity exchanges. To encourage more institutional investors to take part in
emerging equity exchanges in Japan and also to boost their brand image, they should
invite foreign companies with large market capitalizations to list their stocks there. For
that purpose, they need to accept disclosure according to the International Accounting
Standards (IASs) and United States Generally Accepted Accounting Principles
(US-GAAP), provide disclosure documents in English, and take measures to complete
listing examination in a shorter period of time. The acceptance of IASs and US-GAAP is
especially important. At present, foreign companies that intend to list their stocks on a
Japanese exchange before being listed on any other bourse must have their financial
statements audited every two years according to Japanese accounting standards, so in
substance it takes at least two years to complete preparations for listing there. Admission
of the foreign standards resolves the problem. As efforts are being made to harmonize
Japanese standards themselves more closely with IASs by 2011, there would be little
necessity left to adhere to the current indigenous standards.
If more foreign Start-ups, especially Asian ones, are listed on emerging equity exchanges
in Japan, it is expected that more capital from overseas institutional investors will flow
into Japan’s emerging equity exchanges for Asian ventures, and that trading volumes will
grow with a larger number and greater variety of investors.
Some point out that Japan’s emerging equity exchanges are smaller than their overseas
peers, and that there are too many of them. It is necessary to reexamine what roles they
each should play from the viewpoint of their scale, global competitiveness and efficiency.
Local exchanges, on the other hand, might be given a more ambitious position with the
view of working to revitalize local communities. When examination is conducted on how
Japan’s emerging equity exchanges should be, such points of view must be considered in a
comprehensive manner.
(ii) Examination of an analyst introduction system
As part of efforts to increase investment in small and medium cap stocks, NASDAQ
founded the Independent Research Network (IRN) in September 2005 as a joint-venture
with Reuters. IRN acts as an intermediary for small and medium cap companies listed on
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the exchange that are not covered by analysts to look for and ask one to write a report on
such companies.
Introduction of such a scheme into Japan’s emerging equity exchanges might help
encourage institutional investors to invest more.
As there are some concerns that the engagement of exchanges in such businesses might be
inconsistent with the scope of business stipulated in the Financial Products Trading Act
(Article 87-2), some measures should be taken to make it clear that exchanges are legally
allowed to provide such services.
From the viewpoint of economies of scale and efficiency, it might be a better option if
several emerging equity exchanges form a partnership for such a business.
(iii)Development of an index of the emerging equity exchanges
At present institutional investors, including public pension funds, have investments in
small and medium caps. But the benchmark, typical index, for small and medium cap
investment, Russell/Nomura Small Cap Index, is dominated by stocks listed on the TSE
1st Section. That is part of the background that hinders investment trust managers, who
are assessed by institutional investors in terms of their management performance, from
aggressive expansion of investment in companies listed on emerging equity exchanges,
even though they are also classified into small and medium cap.
With the view to addressing the problem, the emerging equity exchanges might be able to
jointly develop a unified stock market index.
In November 2007, Standard & Poor's started to release the S&P Japan Emerging Stock
100 Index, index consisting of the top 100 companies among those listed on a Japanese
emerging equity exchange in terms of market capitalization after floating stock
adjustments which maintain a certain level of market liquidity. In March 2008, Nikko
Asset Management listed an ETF that tracks the index on TSE.
The release and effective use of such indexes is expected to be helpful to encourage public
pension funds other institutional investors with large capital to expand investment in
stocks on emerging equity exchanges.
(iv) Liquidity provider program
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With the view of inviting more institutional investors, it is important to provide more
liquidity to emerging equity exchanges. On April 1, 2008, JASDAQ started the Liquidity
Provider Program, a mechanism to offer secures firms trading fee discounts as an
incentive to supply liquidity. A wide range of study should be further conducted on new
schemes to make exchanges more liquid.
(v) Development of venture stock exchanges for professionals
Development of exchanges exclusively for professionals is effective to supply long-term
stable capital to Start-ups and relax listing examination and disclosure procedures,
because such exchanges have no need to consider the protection of ordinary investors. On
such exchanges you could expect more reasonable stock pricing because professional
investors assess share prices.
In the Plan for Strengthening the Competitiveness of Japan’s Financial and Capital
Markets, announced by the FSA in December 2007, the Agency declared that it would
develop a framework of exchanges based on new rules that should expand the range of
market participant to designated investors (or “professional exchanges”). Amendments to
the Financial Products Trading Act necessary to set up such exchanges are now under
deliberation before the Diet. The amended Law, once the bill passes the Diet, is to allow
exchanges to be designed in a way their features as a professional market can be exploited
effectively: stocks listed there are exempted from the internal control reporting system;
quarterly reporting can be replaced by annual disclosure; and disclosure documents
written in English can be accepted.
TSE plans to set up sometime in 2008 a new start-ups exchange based on the framework
together with the London Stock Exchange.
In developing structures of professional exchanges, formalistic standards for listing
examination should be significantly relaxed and they should exempted from the internal
reporting system, quarterly reporting, and other obligations laid by the Financial Products
Trading Act especially with the view of making clear advantages they offer as professional
market. In addition, they should also provide obvious benefits in terms of the length of
time for procedures. For instance, they should enable companies to raise capital in not
more than three months after their listing examination started.
Institutional investors based in Japan are more averse to risks than retail investors, and
their presence is marginal in the emerging equity market. In developing professional
exchanges, therefore, it is crucial to attract professional investors overseas. For that
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purpose, in developing venture stock exchanges for professionals, they should accept
disclosure according to the IASs and US-GAAP and disclosure documents written in
English.
Study should be conducted on, among others, whether and/or how some policy incentives
should be given to stocks listed on professional exchanges in order to encourage
investment in them.
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Chapter 7 Capital ties with existing companies
1. Present State
(1) Sale of Start-up stocks from venture capital funds to existing companies
In Japan, venture capital funds rely mainly on public offerings as a way to recover
investments (“exit”), and they rarely sell equity directly to other companies with profits.
Usually stocks are sold to other companies to “stop loss.”
In the United States, in contrast, venture capital funds sell more often and more in value
directly to other companies than through public offerings, and there is little difference
between public offerings and sales to other companies in terms of proceeds per case. In
almost 70% of the cases where stocks of a company were sold to other companies, the
proportion of proceeds to investments exceeded 1. These facts demonstrate that sale to
other companies is considered as one of the desirable “exits” for venture capital funds.
Figure 7-1 Venture capital funds’ ways to recover investments (“exits”)
Profit/loss Companies Share in the total Profit/loss per company
(¥1 million) (¥1 million)
Public offering
Bankruptcy/liquidation/depreciation
Resale to owners, etc.
Sale to secondary funds, etc.
Sale to other third parties
Others
Note: Some of the companies are counted twice or more.
Source: Venture Enterprise Center, “Survey on Current Status of Investment of Venture Capitals and
Other Funds” (December 2007)
Unit in value: $1 million
2006
Public offering Public offering
companies average in companies average in companies average in companies average in
value value value value
1st quarter
2nd quarter
3rd quarter
4th quarter
annual total
In many cases of M&A, proceedings are not disclosed. The averages in value are calculated by
dividing the total proceedings in disclosed cases by the number of companies.
Source: NVCA, THOMSON Venture Economics
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Figure 7-2 VC’s proportions of proceeds from sale of Start-up stocks to other companies
to the investments
Year smaller from 1 to 4 from 4 to 10 10 times of
than TVI times of TVI times of TVI or larger
Source: NVCA, THOMSON, “National Venture Capital Association Yearbook 2007” (April 2007)
In the United States, however, it was in the 1990’s when sale to other companies started to
grow fast, and it has not been long since it became a major way to recover investments. In
Japan, many venture capital funds were formed around 2000, the days of the IT bubble.
Now that many of them are reaching maturity they need to take some actions to liquidate
stocks of companies they invested in. It is anticipated, therefore, that more of the stocks
will be sold to other companies.
However, according to a survey conducted in 2007 by METI, which asked Start-ups
whether they considered sale of their stocks to other companies as part of strategies or
business plans for future growth, only 3.8% replied that they did. This suggests most of
the Start-ups regard sale of their shares from venture capitals to other companies as
undesirable.
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Figure 7-3 Cases of sale of stocks of companies venture capitals have investments in, and
their average proceeds (time series) in the United States
0
50
100
150
200
250
300
350
400
1980 1985 1990 1995 2000 2005
(year)
Price?Average?
(? Millions?
Total Number
Figure 7-4 Start-ups’ view of sale of their shares from venture capitals to other companies
Strategies/business plans for future strategy (n=442)
Considering IPO
Considering sale to other
companies
Considering acquisition of other
companies
No specific plan
Others
Source: METI, “Questionnaires Survey on Creation and Development of Start-ups,” (December
2007)
(2) Repurchase provisions in investment contracts with venture capitals
Some point out that repurchase provisions in investment contracts with venture capital
funds lead to an unhelpful obsession with public offerings, narrowing options of “exiting”
of venture capital investment other than placing the equity in the market.
A repurchase provision refers to a stipulation in an investment contract concluded between
a venture capital fund and a company it invests in that if, among others, it fails to have its
Source: NVCA, THOMSON, “National Venture Capital Association Yearbook 2007” (April, 2007)
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stocks listed, the company or its management shall buy back the shares the fund owns.
In the United States, it is not very common that an investment contract with a venture
capital fund contains a clause requiring redemption of shares, and usually such a contract
has no stipulation that individuals in the management shall buy them back. The type of
causes is believed to be unique to Japan.
According to a poll to general partners (GPs) of venture capital funds SMRJ has financed,
around 70% of the respondents placed a repurchase provision in their investment contracts,
and 7% of them had exercised the claim for repurchase.
Depending on requirements for exercising a repurchasing claim and ways to set a
repurchase price, a repurchase provision allows a venture capital to secure upside benefits
without assuming any downside risk. From the viewpoint of Start-ups, some argue that
such clauses are undesirable in terms of appropriate sharing of business risks between
Start-ups and venture capitals.
On the other hand, seeing the issue from the side of venture capitals, many claim that
repurchase provisions are necessary for the purpose of encouraging Start-ups to work hard
to go public and securing liquidity of shares a fund owns when it is about to reach the
maturity date.
(3) Moves of corporate venture capitals
Nowadays in the United States, and also in Japan, an increasing number of business
corporations, especially large companies, form a corporate venture capital, venture capital
fund they found exclusively for themselves.
In the background of such moves lies the fact that large companies are compelled mainly
by increasingly fierce global competition and shortening product life cycles to
discriminate their contents of R&D more clearly and produce achievements in R&D more
quickly, while they struggle to select business segments and concentrate their resources on
them to cut down on R&D expenses. Large enterprises make investments through
corporate venture capitals with the view of selecting, among new technologies which are
being developed by Start-ups they have investment in, those which have reached a certain
level of maturity and should satisfy their needs to acquire them.
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Figure 7-5 Numbers of corporate venture capitals based in the U.S. by year of foundation
Source: adapted from a study by NIST/ATP & MIT Sloan
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2. Challenges
(1) Development of secondary markets for shares of unlisted Start-ups
In Japan, as described above, venture capitals depend largely on public offerings as
“exits” of investments they have in Start-ups. Seeing from the side of Start-ups, some say
that this compels them, without careful consideration placed on what phase of
development they are at, to go public on an emerging equity exchange before the maturity
date of the venture capital fund, and that as a result they may fail to achieve full growths.
From the viewpoint of venture capital funds, their performance is largely influenced by a
climate for listing in the emerging equity market, which might lead to diminished
attractiveness of venture capital investment for institutional investors.
From now on it is necessary to diversify “exits” of venture capital investment other than
public offering by, for instance, taking advantage of moves of large enterprises setting up
corporate venture capitals, and to offer venture capitals more routes to successful
investment.
Especially, as many of the venture capitals formed around 2000, during the IT babble
years, come to maturity in coming years, it is an urgent task to form secondary funds for
liquidation of their assets. The government should also examine what policies and
programs it should offer to encourage such moves.
(2) Improvements in repurchase provisions in investment contracts with venture capital funds
The repurchase provision seen in investment contracts with venture capital funds was
invented in the days when their ways to recover investments (“exits”) were limited almost
exclusively to public offerings. Some improvements must be made in it to give the act of
selling shares to other companies the position as another desirable “exit.”
In the first place, what side effects a repurchase prevision causes depends largely on what
specific content the stipulation has. Especially important elements are requirements for
invoking the repurchase clause and ways to set a repurchase price.
According to interviews with major venture capitals, repurchase clauses can be classified
into several types in terms of their exercise terms and conditions, as stated below.
Most repurchase provisions specify as requirements for exercising a claim for buyback
two cases:
(1) Where the Start-up breached the law or the investment contract; and
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(2) Where it fails to go public; and some also include the case:
(3) Where the fund is about to reach the maturity date.
Repurchase provisions that fall under the requirement (2) are further divided into:
(i) “short-of-effort type,” where the repurchase clause is invoked when the Start-up
avoids going public though its profits, financial position, and other conditions of its
business satisfy requirements for listing; and
(ii) “formalistic-standards type,” where the clause automatically comes into effect unless
the company gets listed before a specific date.
Most venture capitals adopt the former, “short-of-effort.”
Figure 7-6 “Short-of-effort type” and “formalistic-standards type”
(i) Short-of-effort type
Case 1: Where the Start-up avoids going public though its profits, financial position, and other
conditions of its business satisfy requirements for listing;
Case 2: Where the Start-up gives up going public for a business strategy reason though its
profits and financial position satisfy requirements for listing at a specific point of time;
Case 3: Where although the Start-up’s profits and financial position satisfy formalistic
conditions for listing, and the venture capital fund concludes that it should be able to
start or continue preparations for listing on the basis of assessment of the managing
underwriter and past examples of listing, the company avoids starting preparations or
procedures necessary for going public, refusing to make reasonable efforts to achieve its
listing;
(ii) Formalistic-standards type
Case 1: Where the Start-up fails to go public by a specific point of time;
Case 2: Where the venture capital fund has reached the conclusion that performance of the
Start-up, conditions of the stock market or any other issue present the company
significant difficulty in going public by a specific point of time;
Among them, Type (1) is excluded from the analyses below because it represents
exceptional cases, such as where a company totally fails to perform a contract. In the
following paragraphs, we examine how repurchase prices are set in cases of Type (2) and
(3).
In most cases of (2)-(i) “short-of-effort type,” a repurchase price is set at the acquisition
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cost the venture capital fund paid (or the cost plus accrued interests) or one of assessed
stock prices that are calculated by a variety of methods at the time of buyback claim,
whichever is the highest.
Figure 7-7 Repurchase price in the “short-of-effort type”
Company A Company B Company C Company D Company E Company F Company G Company H Company I Company J Company K
Highest among the prices below:
(i) Acquisition cost the VCF paid
(?: plus accrued interests)
(ii) [Acquisition cost the VCF paid]×1.2
(iii) Price calculated by the method used by
the VCF when it acquired the equity
(iv) Net assets per share
(v) Price calculated by the comparable
business sector method
(vi) Nearest transaction price
(vii) Price assessed by a third party designated by VCF
(viii) Price assessed by a third party
* Most-favored-nation treatment * * * *
In no case of (2)-(ii) “formalistic-standards type” a repurchase price is set at the
acquisition cost the venture capital fund paid (or the cost plus accrued interests). In most
cases a buyback price is settled at one of assessed stock prices that are calculated by a
variety of methods at the time of buyback claim, whichever is the highest.
Figure 7-8 Repurchase price in the “formalistic-standards type”
Company L Company M
Highest among the prices below:
(i) Acquisition cost the VCF paid
(?: plus accrued interests)
(ii) [Acquisition cost the VCF paid]×1.2
(iii) Price calculated by the method used by
the VCF when it acquired the equity
(iv) Net assets per share
(v) Price calculated by the comparable
business sector method
(vi) Nearest transaction price
(vii) Price assessed by a third party designated by VCF
(viii) price assessed by a third party
*Most-favored-nation treatment
In Type (3), where funds are about to reach the maturity date, though the number of
samples is limited in the first place, a repurchase price is set, in a case, at the acquisition
cost the venture capital fund paid (or the cost plus accrued interests) or one of assessed
stock prices that are calculated by a variety of methods at the time of buyback claim,
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98
whichever the venture capital fund chooses after talks with the Start-up.
Figure 7-9 A case where the fund is about to reach the maturity date (one sample only)
A price the venture capital fund choose among those below:
(i) Acquisition cost the VCF paid
(?: plus accrued interests)
(ii) [Acquisition cost the VCF paid]×1.2
(iii) Price calculated by the method used by
the VCF when it acquired the equity
(iv) Net assets per share
(v) Price calculated by the comparable
business sector method
(vii) Nearest transaction price
(vii) Price assessed by a third party designated by VCF
(viii) Price assessed by a third party
Realities of pricing for each type of repurchase as described above suggest attention
should be given to the following issues.
First, in cases of (ii) of Type (2), where Start-ups fail to go public, and those of Type (3),
where funds are about to reach the maturity date, a repurchase price is set at the
acquisition cost the venture capital fund paid (or the cost plus accrued interests) or one of
assessed stock prices that are calculated by a variety of methods at the time of buyback
claim, whichever is the highest (or a price the venture capital settles). The practice might
be unfair in the sense that although a repurchase provision is invoked as a result of
external environments regardless of efforts the Start-up itself made, all the consequent
downside risks are passed onto the venture.
Second, in cases of Type (2) ((i) short-of-effort type and (ii) formalistic-standards type),
where Start-ups fail to go public, and those of Type (3), where funds are about to reach the
maturity date, when a repurchase price is set at one of assessed stock prices that are
calculated by a variety of methods at the time of buyback claim, whichever is the highest
(or a price the venture capital settles), that might consequently make it difficult for the
venture capital fund to sell the shares to other companies as a way to recall its investments
(“exit”).
That is, even when the shares can be sold to other companies at a higher price than one
which would have been realized had the company be listed, it rarely exceeds the highest
price among assessed prices that are calculated by a variety of methods stipulated in the
repurchase provision. (It would be more likely, instead, that the price falls somewhere
99
near the median or the mean.) Under the contract, investors in the venture capital could
recover more of their investments by requiring the Start-up or the management to buy
back the shares than selling them to other companies.
The two issues we have discussed above suggest that in cases of (ii) of Type (2), where
Start-ups fail to go public, and those of Type (3), where funds are about to reach the
maturity date, it might be more appropriate if Start-ups and venture capital funds, using
assessed stock prices calculated by a variety of methods at the time of repurchase claim as
bases, talk to decide a price at which the shares should be bought back (or a fair price at
the time). In cases of (i) “short-of effort-type” of (2), where Start-ups fail to go public, it
might be more desirable if the shares are bought back at a price which the Start-up and
venture capital fund set through talks between them, using assessed stock prices calculated
by a variety of methods at the time of repurchase claim as bases, or the acquisition cost
the venture capital paid (or the cost plus accrued interests), whichever is higher.
100
Chapter 8 Viewpoints of existing companies on ventures
1. Present state
(1) Expectations for corporate ventures
While innovation is expected to play a role in creating new industries, private sector
companies have their own focus and often lack the resources to develop new business.
Inevitably they are required to convert their business management systems into those
which exploit aggressively external resources for growth by, for instance, fusing their own
knowledge with that in different fields or making effective use of funds raised from
outside sources. But some private sector companies, in their R&D and commercialization,
adhere to the principle of technological or operational self-help, keep research results idle
inside the company, or place emphasis only on the current profitability with the result that
they reduce investment in new business. Such a phenomenon, often called “big company
disease,” has been pointed out as a limiting factor.
Figure 8-1 How are R&D achievements dealt with when not used for business? (All
sectors)
Often licensed for a fee
Often the R&D continued below the surface (for future use)
Often made public and, if required, licensed to other companies
Often the R&D discontinued, without any results left
Source: Japan Research Industries Association
101
Figure 8-2 Factors hindering R&D achievements from being used for business
Yes No
Inclination to give priority over
existing business segments
Understanding of the leadership
Funds secured to commercialize
the achievements
Worries about risks (e.g. risky due
to few precedents)
Source: Japan Research Industries Association
To solve such problems, industry has cooperated with academia and formed strategic
alliances to create innovation. An influential management method that is now attracting
attention is corporate venturing, where large companies exploit external organizations
such as ventures in a strategic way, to develop, for instance, new businesses.
The areas of manufacturing techniques and advanced technologies are characterized
especially by: (1) that they require a stock of technologies, and large-size research
equipment as a prerequisite; and (2) that it takes longer to put them to commercial use.
Large enterprises own a great amount of such technology assets and equipment. Ventures
have roles to play in creating new, next-generation industries. Building cooperation
between a large company and a venture as a base for steady growth of the small company
would be quite effective in creating such industries. Much hope is placed on corporate
venturing.
In addition, corporate venturing works to revitalize existing companies, helps independent
entrepreneurs develop their skills and expertise, and incubates Start-ups.
102
Figure 8-3 Cooperation between large companies and ventures
Policies for university-originated ventures and TLOs
Technological seeds Development Business
University/Public Venture Emerging company
labo
Existing company’s Existing corporate Existing corporate
research dpt. development dpt. new business
Large-enterprise-originated venture
Technological seeds Development Business
University/Public Venture Emerging company
labo
Existing company’s Existing company’s Existing company’s
research dpt. development dpt. new business
(2) Current state of large companies in the use of ventures
An increasing number of private-sector companies recognize how important effective use
of academic institutions, such as industry-academics cooperation, and open innovation is,
while few have actually participated in corporate venturing. Some companies have made
minor investments in Start-ups based in Japan or overseas to collect information. But
strategic venturing, or spinning off part of a company’s own resources to tackle new
business with risks, has just made a beginning.
Figure 8-4 Support for external ventures
Supporting now Not supporting
Source: Adapted from data produced by the Japan Techno-Economics Society
Listing/Growth
Absorbed
Cooperation
Technical
transferring
spin-out
Industry-academics
cooperation
103
Figure 8-5 Whether large enterprises have a system to support spin-offs (spin-outs)
Yes No
Source: Japan Research Industries Association
(3) Background to the current situation
(i) Challenges concerning the awareness of large enterprises and their governance
The management method of corporate venturing, where external ventures are effectively
used in a strategic way, poses risks, but also brings about a diversity of benefits as
mentioned below. Large enterprises overseas, especially in the United States, have
adopted the strategic use of ventures as part of their business management. In Japan,
companies that have introduced advanced management of technology (MOT) are trying
the method mainly by bringing in external ventures.
? Effect of fusing knowledge and people from different fields to induce innovation;
? Enhancement of profitability (focusing on core segments for higher efficiency of
business, and putting unused in-house resources to profitable activities);
? Quicker decision-making in the management;
? Use of external resources for reducing investment risks and costs;
? Spinning-off for slashing fixed costs;
? Effective use of in-house human resources (baby boomers, etc) (prevention of
unintended outflow of engineers);
104
? Reform of corporate culture, and improvement of corporate image (more diverse
career paths)
Yet, for all these benefits, Japan has only a relatively small number of large enterprises
taking advantage of ventures. A factor pointed out as lying behind the current state of
things is that while more people are recognizing how critical the open innovation is and
some companies have indeed made attempts, such as acquiring technologies from other
companies or selling theirs to others, ventures are yet commonplace and enterprises have
accumulated only a small amount of know-how in management of corporate venturing.
Some point out that corporate governance works as another factor. Large enterprises could
set up a venture (large-enterprise-originated venture), to aggressively spin off some of
their technologies they couldn’t fully exploit because of lack of resources in the company
to obtain external resources to put the technologies to commercial use more quickly. But
technology assets (patents, etc) they have themselves are left off the balance sheet in the
first place, so they are less visible. As a result, there are few positive attitudes towards
attempts to spin off technology assets and set up ventures by management, and the
disadvantages by not doing this are hardly recognized explicitly either.
(ii) The problem of risks people have to assume when leaving a large enterprise and setting up
a new business
Some point out that it is easier for people in the the U.S. and other countries to leave a
company set up a venture because the environments there offer more opportunities to take
on another challenge should they fail. In the U.S. talent, including engineers, are quite
mobile in general, and angels willing to support start-ups can be found. In Japan, the
general perception is that if people fail in a business they started after leaving a company,
they are exposed to great risks. When an engineer who has been working in a big
company that guarantees a stable means of living leaves the company to set up a
large-enterprise-originated venture, the engineer is assumed to lose a significant part of
the stability of his or her life after going independent. To encourage people to pull out
from big companies and create ventures, systems should be designed in a way that
features of such ventures, such as partnerships with a large company, can be taken
advantage of, as well as improving the general social environment toward risk-takers.
Especially, large companies should examine how their personnel systems could be
redesigned to allow, for instance, people who have departed from them and set up a
large-enterprise-originated venture to continue to work for them. A factor lying behind the
rapid increase of university-originated ventures to 1,590 as of the end of the March 2007
is that universities permit their teachers who set up a venture to keep on working for them,
105
which helps them secure more economic stability.
(iii)Challenges in social systems concerning corporate venturing
Large companies usually have their own rules to manage their technologies and people.
For technologies, they specify rules for employee inventions, confidentiality agreements
with ex-employees or others, and patent licenses. For people, personnel management
policies, rules for employees holding another job and those loaned to another company,
and agreements with ex-employees to prohibit them competing with the company are
established. Such rules and agreements have worked effectively to protect resources. But
in some cases they rather work to hinder companies from proactively spinning out some
of the resources, especially setting out a venture.
Figure 8-6 Barriers reducing mobility of technologies and people
Source: NEDO, “Report of the Large-Enterprise-Originated Venture Study Group” (March 2008)
In the dynamic venture culture of the U.S., venture capitals and technology consultants
make effective use of their ample know-how to work as an intermediary between large
enterprises and ventures, producing business environments where corporate business
resources can be easily matched to those sought. In Japan, however, while venture capitals
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106
for start-ups in general are growing, there are still a small number of venture capitals
dedicated to corporate venturing undertaking partnerships between large enterprises and
Start-ups, by, for instance, an existing company spinning off a venture or an established
company taking in a start-up. At present private sector companies are unable to work
actively to match their demand and supply of external resources. To make “technologies”
more mobile, NineSigma, InnoCentive, Big Idea Group, yet2.com, the Innovations
Exchange, and other platform providers are working as as intermediaries to provide
themselves opportunities for open innovation. Companies committed to open innovation
not only use their own researchers to solve problems in their R&D, but also exploit such
platform providers to take advantage of opportunities to work with other companies,
inventors, and ventures that propose an excellent solution.
2. Challenges
Just as with parents and children, a large enterprise (parent) that works hard to bring up a
group of Start-ups (children) would be well supported by their offspring in future. To
develop a socio-economy which realizes the win-win growth of large companies and
ventures is a policy challenge that must be addressed by society as a whole. For
large-enterprise-originated ventures to be created to develop autonomously, it is necessary
to develop a mechanism which guarantees that efforts made each by companies, people,
and the government receive positive recognition from society as a whole, or a
social-economic system friendly to corporate venturing (an eco-system).
(1) Reformed awareness and management for corporate venturing
(i) Making visible how effectively a company uses its own technology assets (setting an
indicator of the return on technology assets)
To encourage management to take risks such as spinning off technology assets to start a
new business, that is, setting up a large-enterprise-originated venture, it is effective to
“make visible” technology assets that have been left off the balance sheet and invisible,
making an inventory in terms of both quantity and quality, and assessing how potentially
valuable they are for business. The visualization helps the company pay positive
recognition to taking risks and to assess how much they would lose potentially if they
refrain from such attempts. In addition, external assessments, if introduced, are expected
to work as pressure on the management to make more effective use of technology and
other assets.
Some of the progressive companies which commit themselves to MOT have been taking
107
stock of technologies they own, producing intellectual properties reports, and making
other efforts to have their own intellectual properties reflected in investor relations, and
more of such companies are engaging themselves in such activities. What will be
important is for an increasing number of companies to introduce something that should
help “make visible” their technologies and intellectual properties, something objective and
easy to see even for outsiders just like the return on assets (ROA).
For that purpose it would be effective, for the government and the private sector to work
together and examine, for instance, how publicly available data of patents can be used in
an effective way to quantify the level of quality and quantity of patents a company owns
and calculate a new, transparent indicator. An example is the rate of return on total
technology assets (computed by dividing net profits from total technology assets by the
assets (patents)). The issue is also important part of effort to strengthen MOT in Japan,
which, as pointed out, lags behind the United States and Europe.
Figure 8-7 Examination of an indicator that expresses potential value for business of
technology assets a company owns
(Making visible the level of its technology assets being used in an effective way)
Examination on an indicator that expresses potential value for business of technology assets a
company owns (Making visible the level of its technology assets being used in an effective way)
Example: Rate of return on Net profits from technology assets
technology assets
Technology assets Value for business
R&D expenses Technology assets
(The way technologies (R&D management) (Business model)
are used for business)
(ii) Collecting and sharing best practices
For corporate venturing (strategic use by large enterprises of ventures), there are some
best practices which make both large enterprises and ventures more likely to succeed, or
achieve win-win success, in terms of: how license conditions, including those for patents,
should be; what equity position a parent company should have; how a parent company
should be involved; development of marketing channels and support for back-office
operations, such as labor management and legal affairs; how individual employees should
be given an incentive to start-up a new business through, for instance, allowing them to
continue to work for the parent company or granting rewards for success; and how IPOs
and/or repurchase terms and other “exits” for venture capitals should be designed. As
Japan has only a short history of corporate venturing, its government and private sector
Technology assets
108
should work together to collect know-how of the management method, cases of success
and failure, and other information about, what technologies and/or business segments are
suitable for corporate venturing, and have them widely shared by private-sector
companies.
109
Figure 8-8 Imaginary issues of best practice of large enterprises and ventures
Technology/Business Management/Operation Intellectual property Equity investment Human resources Eco-system
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;
(iii) More and better “arenas (platforms)” for VCs and others to work as an intermediary and
match business resources between companies
Arenas (platforms) are needed for venture capitals and technology consultants to work as
a moderator or an intermediary on behalf of a large enterprise, a venture, universities or
others, and match needs with business resources, including its own assets, for example,
technologies, or those which someone outside the organization owns with the view to
helping it create new business. In the United States, the Department of Commerce plays a
central role, working in cooperation with the Massachusetts Institute of Technology (MIT)
and others, in promoting corporate venture capitals. In Japan, where corporate venturing
has only a short history, the government and private sector should work together to offer
more and better areas (platforms) for business resources to be matched in and between
companies. Specifically, forums should be set up to promote corporate venturing, and
programs should be introduced to encourage companies to employ traders of technologies,
who support open innovation. Such arenas are expected to be used to encourage
private-sector companies to apply in an effective way achievements of publicly-funded
research programs to solve challenges they encounter in their R&D activities.
110
Figure 8-9 Imaginary creation of arenas for moderators and intermediaries to work
Venture
SMEs companies Universities
Large Publicly-funded
enterprises research institutions
Corporate venturing
WIN-WIN Forum (tentative name)
Functions as a market to Venture capitals To share best practices
trade technologies, products Consultants through such “arenas”
and services. is also useful.
(iv) Creation of open places for Start-ups to meet large enterprises
Not a few start-ups, however, hope to talk directly with large enterprises, especially
without any intermediary between them, for fear that their unique technologies or ideas
might be revealed or leaked to a third party.
But most of such ventures have no channel or opportunity to contact a large enterprise
“they have in mind.” (And not a few large companies have points of contact publicly
available to such ventures.) Some point out that is one of the factors that hinder corporate
venturing from developing as expected.
In the Kansai region, such a state of things led to the creation of Digital Concept Partners
(DCP), which came into operation in 2006. As part of the Industrial Cluster Project, the
open matching system works to support major companies and ventures in corporate
venturing in the home information appliance sector. It has produced results, attracting
entries from ventures overseas, as well as those in Japan. (As of March 2008, 180
proposals from Japanese companies, including ventures, and 60 plans from foreign
companies, or 240 offers in total, were received.)
To spread similar mechanisms to other sectors is necessary as part of measures to promote
corporate venturing in Japan.
111
Figure 8-10 Digital Concept Partners
To complement the mechanism above, regular meetings are held to release and exchange information about technologies
and business plans.
The meetings are attended by Risona Bank, the Kyoto Shinkin Bank, Hanwa, Japan Venture Capital Association, and
other supporting companies that offer financial and marketing aid.
(2) Reforms to reduce risks employees assume when leaving a large enterprise to set up a new
business
When engineers and other employees leave a large company to start up a new business,
they assume a variety of risks. Some measures are needed to reduce such risks. On the one
hand, large companies should take some voluntary actions. For example, they should offer
such employees a guarantee of living, or a parallel means, for a certain period of time;
they could be loaned by the large company to the start-up, or allowed to continue to work
for the big enterprise. Other examples could be large enterprises’ effective use of in-house
training programs, or introduction of a system for in-house quasi-venturing. On the other
hand, more diverse career paths should be offered. For instance, graduate schools for
businesspersons should be enhanced. In this respect, the national government and other
institutions could give more support to graduate schools that teach businesspersons
management of technology (MOT) useful to corporate venturing.
(3) Reforms of systems of the national government for corporate venturing, etc.
(i) Study of incentives for venture investment in R&D
In this age of global innovation, we should examine, referring to cases overseas, what
systems will be appropriate to Japan for investments to be made more smoothly in
ventures set up for research and development, with a view to preventing the country from
being avoided by those who conduct large-scale R&D with higher risks and to exploiting
the mechanism of corporate venturing to use innovations and set up new businesses in
Japan more quickly.
To find
opportunities to
do business or
form a
partnership with
large enterprises,
and raise their
level of abilities
and awareness
Companies offering a
proposal
SMEs
and
ventures
in Japan
and
overseas
(2) Filtering
(1) Consult
(3) The
idea is
polished
up.
DCP secretariat
(In charge of
domestic
businesses)
Kansai Institute
of Information
System &
Industrial
Renovation
(KIIS)
(In charge of
foreign
businesses)
Osaka Chamber
of Commerce and
Industry (OCCI)
Group of experts on
technology, IP, market, etc.
(4) Offer a proposal
(5) Have an interview or
business talks (When the
proposal is turned down, a
report is sent to explain
why and give advice, etc.)
Companies receiving a
proposal
Sanyo, Sharo, Matsushita
Electric Industrial, Icom,
Espec, NTT DoCoMo Kansai,
Osaka Gas, Omron, Kyocera,
silex, Sumitomo Electronic,
Dainippon Screen MFG, Pixela,
Hitachi, Funai Electronic,
Murata Manufacturing
To explore
excellent
suppliers, partners
and business seeds
in Japan and
overseas
112
(ii) Increase of funds that deal with corporate venturing
As corporate venturing has just a short history in Japan and there is only a little record of
investment in the field, some measures should be taken to further increase funds that deal
with corporate venturing, by effective use of public support programs.
(iii)Enhanced support programs for corporate venturing
Some of the current programs of support for SMEs and venture start-ups are also useful
for corporate venturing. But they are unfamiliar especially to people working for large
companies. For programs available for corporate venturing to be used by more people and
companies, they should be bundled into a package. In addition, separate reviews should be
conducted on measures that would be especially effective to corporate venturing. For
instance, as it would be socioeconomically quite inefficient for companies to work
individually to enhance their in-house incubation mechanisms, some programs that can be
jointly used by anyone, such as the Venture Creation Support Program by the National
Institute of Advanced Industrial Science and Technology (AIST), should be developed or
enhanced, so that they will function as a common incubator. In addition, with a view to
encouraging companies to adopt more products and services ventures supply, studies
should be conducted on mechanisms to support public institutions in assessing such
products and services when they take the lead in adopting them for their service.
Corporate venturing should be promoted by such enhanced support programs and policies.
(iv) Reviews of implementation of R&D programs by the government, etc.
Just as technologies that private sector companies keep idle and leave unused should be
spun out to be used in a more positive and effective way for development of the economy
and society of Japan, so should achievements of R&D programs financed with the
national government budget be used in a more efficient manner. At present, the Japanese
Bayh-Dole clause of the Industrial Technology Enhancement Act allows achievements of
research a private-sector company conducted under a contract with the national
government with funds from the government to belong to the contractor, mainly in the
form of patents. But if, for instance, such patents are hoarded by contractors only to keep
them unavailable to others, not to use the achievements themselves, such an action would
not necessarily suit the purpose of the grant. Therefore, some mechanisms are needed to
return the achievements to society and the economy. Studies should be conducted on what
systems should be prepared to allow the government or other institutions to monitor
properly how such patents are used by the contactors they belong to, and, when finding a
patent left unused without any specific reason, to have it licensed under appropriate terms
113
and conditions to a third party who hopes to use it.
When you take an inventory of technology assets private-sector companies and other
organizations own or survey how they are used, providers of patent and technology
information services and other external institutions are useful. Effective use of such
service providers by the national government and other institutions in designing and
planning R&D policies or monitoring of how technology assets assessment is conducted
by private-sector companies and other organizations which hope to join their R&D
projects would be helpful to encourage companies in Japan to use their technology assets
in a effective way.
114
(Reference) Course of deliberations
2007
First Meeting Date: September 28 (Fri.) 14:00 - 16:00;
Place: 1st Special Meeting Room, 17th Floor-West 7, METI Main
Building;
Theme: On Angel Investment;
Second Meeting Date: October 15 (Mon.) 16:00 - 18:00;
Place: Common Meeting Room 526, 5th Floor, METI Annex;
Theme: Issues on Emerging Equity Exchanges;
Third Meeting Date: October 25 (Thu.) 15:00 - 17:00;
Place: Meeting Room G, 6th Floor, Shoko Kaikan;
Theme: Supply of funds through Venture Capitals;
Fourth Meeting Date: November 22 (Wed.) 15:00 - 17:00;
Place Common Meeting Room 526, 5th Floor, METI Annex;
Theme: Discussion on the Draft Interim Report on Financing of Start-ups;
2008
Fifth Meeting Date: January 30 (Thu.) 15:00 - 17:00
Place: 1st Special Meeting Room, 17th Floor-West 7, METI Main
Building;
Theme: Exploration and Development of Human Resources for Venture
Start-ups;
Sixth Meeting Date: February 27 (Wed.) 16:00 - 18:00;
Place: Meeting Room G, 6th Floor, Shoko Kaikan;
Theme: Growth of Start-ups;
Seventh Meeting Date: March 18 (Tue.) 15:00 - 17:00;
Place: 1st Special Meeting Room, 17th Floor-West 7, METI Main
Building;
Theme: Start-ups and Existing Enterprises;
Eighth Meeting Date: April 24 (Thu.) 14:00 - 16:00
Place: 1st Special Meeting Room, 17th Floor-West 7, METI Main
Building;
Theme: Discussion on the (Draft) Final Report of the Study Group for
Creation and Development of Start-ups;
115
Study Group for Creation and Development of Start-ups
Members
Chairperson Shuichi Matsuda Professor, Waseda Business School;
Tetsuya Iizuka President, THine Electronics, Inc.;
Yukio Iura President, Nippon Angels Forum;
Sadakazu Osaki Senior Consultant Center for Knowledge & Creation, Nomura
Research Institute Ltd.;
Hiroyuki Ozaki Professor, Dean of Entrepreneurship Program Graduate School of
Business, Tokyo University of Technology;
Tatsuaki Kitachi Certified Public Accountant Partner/Practice Development Life
Sciences Group Senior Advisor, TMT Group Senior Advisor,
Tohmatsu;
Masatoshi Go Representative Director, President, TSUNAMI Network Partners
Corporation;
Hideki Kono Director , Listing Department, Tokyo Stock Exchange, Inc.
Tsutomu Shida Chairman, SHiDax Corp.;
Hajime Tanahashi Partner, Attorney at Law, Mori Hamada & Matsumoto;
Masayuki Tsukawaki President & CEO, Japan Wind Development Co., Ltd.;
Kahoko Tsunezawa Representative Director, Trenders, Inc.;
Kazuhiko Tokita Chairman, Japan Venture Capital Association/President,
Mitsubishi UFJ Capital Co., Ltd.
Nobuhiro Tokuhara Senior Executive Officer and General Manager, Stakeholders
Unit, Jasdaq Securities Exchange, Inc.
Michio Naruto Chair, Planning Working Group, Committee on New Business,
Nippon Keidanren/Advisor, FUJITSU;
Koichi Nomura former Advisor, ANA Strategic Research Institute Co., Ltd.;
Takamichi Hamada Chairperson, Venture Enterprise Center;
Allen Miner Chairman & CEO, SunBridge Corp.;
Noboru Maeda Professor, Aoyama Gakuin University;
Noriaki Miyano Senior Managing Director, (IPO Division), Nomura Securities
Co., Ltd.;
Taro Yamada President & CEO, Nextech Corporation;
[Observer]
Yoshikazu Goto Director, Organization for Small & Medium Enterprises and
Regional Innovation, Japan;
[Special Member, First Meeting]
Kakutaro Kitashiro Senior Advisor, IBM Japan, Ltd.;
[Special Member, Second Meeting]
Ryuta Kitagawa Executive Officer, Osaka Securities Exchange;
[Special Member, Third Meeting]
Masashi Toshino Senior Researcher, Business Planning Division, Daiwa Fund
Consulting Co. Ltd.;
[Special Member, Sixth Meeting]
Takao Shimizu Director-General, Industry and Technology Department Japan
External Trade Organization (JETRO);
[Special Member, Seventh Meeting]
Satoshi Kabasawa Team Leader, Corporate R&D Strategy Office, Matsushita
Electric Industrial Co., Ltd.;
doc_755677439.pdf
During in this such a criteria concerning study group for the creation and development of start ups final report.
0
Study Group for the Creation and Development of
Start-ups
Final Report
- Creation and Development of Start-ups for Innovation in the Japanese
Economy -
April 30, 2008
Study Group for the Creation and Development of Start-ups
1
Contents
Introduction .............................................................................................................................. 6
Chapter 1 Importance of the creation and development of ventures, and present
conditions .................................................................................................................................. 7
§1 Present state of start-up creation .............................................................................. 7
§2 Importance of the creation and development of ventures ...................................... 10
1. Roles ventures play in innovation in the Japanese economy ................................. 10
2. Roles ventures play in the economic growth of Japan and job creation .............. 11
3. The roles venture start-ups play in turning the potential of individual
entrepreneurs into reality ........................................................................................ 13
Chapter 2 Expansion and enhancement of entrepreneurship education .......................... 14
§1 Importance of entrepreneurship education ............................................................. 14
§2 Entrepreneurship education at elementary, junior-high and high schools .............. 16
1. Present state ............................................................................................................ 16
2. Challenges .............................................................................................................. 18
§3 Entrepreneurship education at universities and graduate schools .......................... 19
1. Present state ............................................................................................................ 19
2. Challenges .............................................................................................................. 21
(1) More opportunities to take courses on entrepreneurship education ....................... 21
(2) Development of more practical education that should help venture start-ups in the
real world ................................................................................................................ 22
§4 Education and support for entrepreneurs at the stage of considering a business
start-up 23
1. Present state ............................................................................................................ 23
2. Challenges .............................................................................................................. 24
(1) More and better entrepreneurship education for venture start-up .......................... 24
(2) Cooperation between start-ups and entrepreneurs and effective use of private
education and support organizations for entrepreneurs .......................................... 24
(3) Enhanced support by incubators for entrepreneurs other than just offering facilities
25
Chapter 3 University-originated ventures ........................................................................... 26
1. Present status .......................................................................................................... 26
(1) Present status of university-originated ventures ..................................................... 26
(2) Challenges university-originated ventures face ..................................................... 28
(i) Challenges in terms of people............................................................................. 29
(ii) Challenges in terms of financing ........................................................................ 29
(iii) Challenges in terms of marketing channels ........................................................ 30
(3) Viewpoints to be considered in supporting university-originated ventures ........... 30
2
2. Challenges .............................................................................................................. 31
(1) Support of universities for university-originated ventures ..................................... 31
(i) Effective use of universities’ resources for support ............................................ 31
(ii) Use of universities’ names .................................................................................. 31
(iii) Actions to deal with challenges in financing (investment in university ventures,
etc.) ..................................................................................................................... 32
(2) Support provided for university-originated ventures by local governments, etc. .. 33
(3) Support for university-originated ventures provided by universities and local
institutions in cooperation ...................................................................................... 33
Chapter 4: Human resource strategies of Start-ups ........................................................... 34
1. Present state ............................................................................................................ 34
(1) People as a business resource of Start-ups ............................................................. 34
(2) Difficulty in securing people in competition with large companies ...................... 34
2. Challenges .............................................................................................................. 36
(1) Expansion of the labor market for start-ups ........................................................... 36
(2) Efforts to develop human resources ....................................................................... 36
(3) More jobs for women ............................................................................................. 37
(4) Actions to counteract our aging and shrinking population .................................... 38
(5) Effective employment of foreigners ....................................................................... 39
(6) Dissemination among start-ups of know-how of recruitment, human resource
development, organization building, etc. ............................................................... 40
Chapter 5 For expansion of the customer base and market .............................................. 42
1. Present state ............................................................................................................ 42
(1) Japanese market emphasizes proven records ......................................................... 42
(2) Japanese ventures are unwilling to expand overseas ............................................. 42
2. Challenges .............................................................................................................. 44
(1) Brand strategies, alliances with large companies, partnerships among ventures and
SMEs, use of technology assessment services, and other initiatives for
strengthening marketing of products and services ................................................. 44
(2) Effective use of public procurement and trial orders, etc....................................... 45
(3) SBIR system ........................................................................................................... 48
(4) Treatment of new products and services at approval and under regulations .......... 49
(5) Aggressive expansion of business overseas by ventures themselves ..................... 50
(6) Enhanced support for start-ups in overseas expansion ........................................... 50
Chapter 6 Enhancement of direct financing to start-ups ................................................... 51
§1 What meaning does direct financing have for start-ups? ....................................... 51
§2 Expansion of angel investors .................................................................................. 52
1. Current state of angel investment ........................................................................... 52
(1) Significance of angel investment ........................................................................... 52
3
(2) Angel networks ...................................................................................................... 52
(3) Angel tax ................................................................................................................ 53
2. Challenges .............................................................................................................. 57
(1) Survey of realities of angel investors in Japan, and collection of cases of success /
public relations campaign ....................................................................................... 57
(2) More applicability of the angel tax system, and simpler procedures for the system
57
(3) Treatment of failed ventures ................................................................................... 57
(4) Efforts to expand angel networks ........................................................................... 58
(5) Venture capitals of types to support angel investment ........................................... 58
§3 Increase of financing through venture capitals ...................................................... 59
1. Present state of venture capitals ............................................................................. 59
(1) Amount of venture capital investment ................................................................... 59
(2) Structure of the industry ......................................................................................... 60
(3) Current status of investment of venture capital firms ............................................ 61
(4) Return on investment ............................................................................................. 63
(5) Venture capital policies .......................................................................................... 64
2. Challenges .............................................................................................................. 65
(1) Diversification of suppliers of capital .................................................................... 65
(i) Capital from pension funds ................................................................................. 65
(ii) Capital from investors overseas .......................................................................... 68
(2) Collection and provision of information about venture capitals ............................ 68
(i) Why is collection and provision of information about venture capitals
necessary? ........................................................................................................... 68
(ii) Mechanisms to be prepared for the collection and provision of more information
about venture capital investment ........................................................................ 69
(3) Further investment in companies at the early stage of business start-up ............... 70
(4) Development of human resources of capitalists for more hands-on support ......... 70
(5) Challenges in legal and accounting systems .......................................................... 71
(i) Ways to apply accounting standards to venture capital investment.................... 71
(ii) Regulations of venture capitals ........................................................................... 72
§4 Ways to increase participants in emerging equity markets and revitalize them ..... 73
1. Current state of emerging equity markets .............................................................. 73
(1) Increased numbers of emerging equity markets ..................................................... 73
(2) Increasing cases of companies delisted due to breaches of the law, etc. ................ 74
(3) Retail investors support emerging equity exchanges ............................................. 74
(4) Volatile / depressed stock prices at present ............................................................ 75
(5) More rigorous examination for listing ................................................................... 76
(6) Difficult assignment of auditing firms ................................................................... 78
4
(7) Introduction of the internal control reporting system ............................................. 79
(8) Deteriorating listing conditions for start-ups ......................................................... 79
(9) Concerns about a slump in investment in start-ups in general ............................... 79
2. Challenges .............................................................................................................. 80
(1) Enhanced self-discipline and governance by start-ups themselves ........................ 80
(2) How should listing procedures be from now on? ................................................... 80
(i) Listing procedures that strike a balance between the growth of start-ups and the
protection of investors ........................................................................................ 80
(ii) Exchange of information about listing examination procedures for better
understanding of the procedures ......................................................................... 82
(iii) Necessary actions to solve issues with auditing firms ........................................ 82
(3) Shift of focus from listing examination to post-listing actions .............................. 83
(i) Necessary recognition as ex post facto supervision system ............................... 83
(ii) Study of Japanese Nomad (system for support for disclosure after listing) ....... 83
(iii) Voluntary efforts by securities firms and exchanges .......................................... 83
(iv) Examination of effective use of intellectual property reports and intellectual
assets management reports ................................................................................. 84
(v) Observation of and action to outcomes of the internal control reporting systems
introduced ........................................................................................................... 84
(vi) Examination of potential growth after listing ..................................................... 85
(4) Efforts to increase participation of institutional investors...................................... 86
(i) Enhanced efficiency and further globalization of exchanges to make them more
attractive ............................................................................................................. 86
(ii) Examination of an analyst introduction system .................................................. 86
(iii) Development of an index of the emerging equity exchanges ............................. 87
(iv) Liquidity provider program ................................................................................ 87
(v) Development of venture stock exchanges for professionals............................... 88
Chapter 7 Capital ties with existing companies ....................................................................... 90
1. Present State ........................................................................................................... 90
(1) Sale of Start-up stocks from venture capital funds to existing companies ............. 90
(2) Repurchase provisions in investment contracts with venture capitals ................... 92
(3) Moves of corporate venture capitals ...................................................................... 93
2. Challenges .............................................................................................................. 95
(1) Development of secondary markets for shares of unlisted Start-ups ..................... 95
(2) Improvements in repurchase provisions in investment contracts with venture
capital funds ........................................................................................................... 95
Chapter 8 Viewpoints of existing companies on ventures ..................................................... 100
1. Present state .......................................................................................................... 100
(1) Expectations for corporate ventures ..................................................................... 100
5
(2) Current state of large companies in the use of ventures ....................................... 102
(3) Background to the current situation ..................................................................... 103
(i) Challenges concerning the awareness of large enterprises and their governance
103
(ii) The problem of risks people have to assume when leaving a large enterprise and
setting up a new business .................................................................................. 104
(iii) Challenges in social systems concerning corporate venturing ......................... 105
2. Challenges ............................................................................................................ 106
(1) Reformed awareness and management for corporate venturing .......................... 106
(i) Making visible how effectively a company uses its own technology assets
(setting an indicator of the return on technology assets) .................................. 106
(ii) Collecting and sharing best practices ............................................................... 107
(iii) More and better “arenas (platforms)” for VCs and others to work as an
intermediary and match business resources between companies ..................... 109
(2) Reforms to reduce risks employees assume when leaving a large enterprise to set
up a new business ................................................................................................. 111
(3) Reforms of systems of the national government for corporate venturing, etc. .... 111
(i) Study of incentives for venture investment in R&D ........................................ 111
(ii) Increase of funds that deal with corporate venturing........................................ 112
(iii) Enhanced support programs for corporate venturing ....................................... 112
(iv) Reviews of implementation of R&D programs by the government, etc. ......... 112
6
Introduction
The creation and development of ventures, which often use and promote new technologies
and/or business models and take on greater risks to tackle the challenge of new business, is
essential to promote innovations in Japan’s industry and encourage growth and revitalization
of the whole economy of Japan.
Over this decade, Japan has rapidly developed institutional and social frameworks for
ventures, such as promoting the expansion of entrepreneurship education, the development of
incubators, the growth of a labor market for start-ups, the abolition of minimum capital
requirements, the growth of venture capitals, and the opening of emerging equity exchanges.
In this sense, it could be said that dramatic improvements have been made in Japan for the
creation and development of ventures.
However, compared with countries where ventures play a great role in the growth of their
national economies and promote innovation, such as in the United States, Japan should create
more room for the growth and development of start-ups.
At present, the rate of new business openings and total entrepreneurial activities are slowly
rising, although there are some areas of concern, including the deteriorating conditions
concerning listing on stock exchanges for start-ups.
To examine and consider such circumstances, the Study Group for the Creation and
Development of Ventures was established. We have reviewed what conditions ventures are
now placed under and discussed what policies should be introduced.
This report, the final conclusion of the Study Group, describes the challenges ventures are
facing and suggests what should be done to deal with them.
7
Chapter 1 Importance of the creation and development of ventures, and present
conditions
§1 Present state of start-up creation
Over the past decade, systems and institutions for ventures have been greatly developed.
For instance, emerging equity exchanges were opened, minimum capital requirements for
joint-stock companies were abolished, and systems for financing without the need for
collateral or a guarantor were introduced. During the global IT boom around 2000, many
IT service-related start-ups also came into the spotlight in Japan. In the country as a whole,
however, the opening rate of establishments (the proportion of start-ups among existing
businesses) stood at 5.1% (2004 - 2006), smaller than the closing rate (the proportion of
discontinued companies among existing businesses) of 6.2%. This has also stayed at a
lower level than that in the United States (10.2%), the United Kingdom (10.0%), and
France (12.1%). (The year of reference is 2004 for all three countries).
The 2007 Global Entrepreneurship Monitor Report revealed that, in terms of Total
Entrepreneurial Activity (TEA: the ratio of people involved in setting up a new business
among those between the ages of 18 and 64 (those who are preparing a new business and
those who started one within the past 42 months) Japan ranked eighth from the bottom
(4.3%).
The trend in the last few years, however, shows that the opening rate and TEA are both
improving slowly. This fact seems to demonstrate that the efforts Japan has made to
promote ventures and start-ups are gradually bearing fruit.
Figure 1-1 Opening and closing rates of businesses (excluding primary industry)
Opening rate
Closing rate
(year)
8
The Establishment and Enterprise Census, the primary set of statistics used to calculate
opening and closing rates in Japan, is conducted once every few years. It would be
desirable to publish annual statistics of start-ups in order to see how the constantly
changing conditions affect the opening of businesses.
Figure 1-2 International comparison of opening rates
Japan United States United Kingdom France
Figure 1-3 Total Entrepreneurial Activity (TEA) in countries
Source: Small and Medium Enterprise Agency, “2008 White Paper on Small and Medium Enterprises in Japan”
Note: Average of 2004 - 2006 for Japan; 2004 for the others.
Sources: “2008 White Paper on Small and Medium Enterprises in Japan” for Japan, and
“2007 White Paper on Small and Medium Enterprises in Japan” for the others
Source: Global Entrepreneurship Monitor 2007 (GEM)
Note: TEA = Total Entrepreneurial Activity: ratio of people involved in setting up a new business among
those between the ages of 18 and 64 (those who are preparing a new business and those who started
one within the past 42 months)
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Figure 1-4 Changes in Total Entrepreneurial Activity (TEA)
US
UK
Germany
France
Japan
A series of recent cases where some ventures (or former ventures) window-dressed
accounts or violated the law also weakened expectations for start-ups and hurt their
reputation, temporarily, but the situation seems to be recovering. Global Entrepreneurship
Monitor surveys showed the percentage of people in Japan who respected successful
entrepreneurs rose to 56% in 2004 from 8% in 1999 before falling to 45% in 2006, and
that the figure slightly recovered to 48% in 2007.
Figure 1-5 Evaluation of social status of entrepreneurs (percentage of people who respect
successful entrepreneurs)
(%)
(Year)
Source: Global Entrepreneurship Monitor 2007 (GEM)
Source: Global Entrepreneurship Monitor 2007 (GEM)
Note: TEA = Total Entrepreneurial Activity: ratio of people involved in setting up a new business
among those between the ages of 18 and 64 (those who are preparing a new business and those
who started one within the past 42 months)
Japan US UK
10
§2 Importance of the creation and development of ventures
1. Roles ventures play in innovation in the Japanese economy
Ventures (start-up companies that launch a new business based on new business models as
their core in pursuit of rapid growth) are one of the important sources of innovation of the
entire economy of Japan, as they are a driver that creates innovative technologies and
stimulates creative business models.
In particular, ventures bring with them or create possibilities to stimulate great changes or
transformations in technologies and/or business models that existing companies are not
able to realize, because they take greater risks than established companies and take on the
challenge of a new business with novel technologies and/or business models as their
weapons.
In the service industry, ventures may also contribute to the higher productivity of the
whole sector as they introduce new business models and up-to-date technologies,
including IT, and promote innovation in the industry.
In the United States, it is said, research laboratories of major companies used to play a
central role in innovation, but since the 1980s, when the US economy’s industrial
structure started to change, universities and start-ups have played an important part in
innovation. In the ranking of the “World's Most Innovative Companies” published by
BusinessWeek, the group of top 25 innovators includes 18 US-based enterprises, among
which as many as nine were established in and after 1970. That suggests that innovation in
the US economy owes much to ventures.
Figure 1-6 BusinessWeek, “The World’s Most Innovative Companies”
Among the 18 US-based companies, nine were young enterprises established in or after 1970. There
are no such new companies among the three companies based in Japan.
Rank Company Country Established in Rank Company Country Established in
United States United States
United States
United States
United States
United States
United States
United States
United States
United States
Japan
Finland
Japan
Japan
United States
United States
United States
United States
United States
United States
United States
United States
Germany
Korea
United Kingdom
11
Source:
2. Roles ventures play in the economic growth of Japan and job creation
Start-ups, which bring about novel technologies and new business models and, as a result,
create new markets, make a great contribution to the growth and revitalization of the
whole economy.
The relationship in OECD members between opening rates of establishments and GDP
growth shows that, in general, economies with more start-ups launched often grow faster.
According to a survey in 2007 by the Global Entrepreneurship Monitor, countries with a
higher GDP per capita than Japan generally have a higher level of Total Entrepreneurial
Activity (TEA: ratio of people involved in setting up a new business among those between
the ages of 18 and 64 (those who are preparing a new business and who started one within
the past 42 months)).
Ventures are also important as a source of job creation. Most of the new jobs in Japan are
created by newly opened establishments. According to the National Venture Capital
Association (NVCA), in the United States companies financed by venture capitals
employed more than ten million people, 9.0% of those working in the private sector as a
whole, in 2005.
Figure 1-7 GDP growth and start-ups
??1?3 ????????????????2007 ??????
Source: OECD “Science, Technology and Industry Outlook: Drivers of Growth: Information
Technology, Innovation and Entrepreneurship, 2001 Edition”
12
Figure 1-8 Relation between TEA and GDP per capita
GDP per capita (US$): PPP, 2006
Figure 1-9 Effects on job creation of establishments opened and closed (10 years)
10 thousand jobs Jobs created Jobs lost
Establishments Establishments Establishments
ongoing opened closed
Note: Establishments opened refer to those that did not exist as of the 1994 survey but did as
of the 2004 survey.
Source: Small and Medium Enterprise Agency “2007 White Paper on Small and Medium
Enterprises in Japan”
Source: Global Entrepreneurship Monitor 2007 (GEM)
US
Japan
T
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A
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2
0
0
7
13
3. The roles venture start-ups play in turning the potential of individual entrepreneurs into
reality
The creation and development of ventures play an important role in turning the potential
of entrepreneurs into reality; they help entrepreneurs realize their own dreams, fulfill their
ambitions, put their philosophies into practice, build their own way of life, and work for
communities, for instance.
In 2007 the Ministry of Economy, Trade and Industry (METI) sent questionnaires to
entrepreneurs who had received investments from venture capitals, and asked whether
they were happy to have started a business themselves. Among the respondents, 97%
answered “Yes.”
Figure 1-10 Do venture founders feel “happy to have started a business?”
Yes No
Source: METI, “2007 Survey of Creation and Development of Start-ups” (December 2007)
14
Chapter 2 Expansion and enhancement of entrepreneurship education
§1 Importance of entrepreneurship education
No start-ups could be created without entrepreneurs. Especially at the early stage of the
entrepreneurial process, a start-up is inseparable from the founders themselves. The
person of founder is the most important key to the subsequent birth and development of
the company.
As stated in Chapter 1, in terms of the number of entrepreneurs, Japan’s level of
entrepreneurial activity remains relatively low in the world.
As for the skills of entrepreneurs, a survey in 2007 by the Global Entrepreneurship
Monitor also showed that in Japan a far smaller proportion of the people between the ages
of 18 and 64 thought they had the necessary entrepreneurial skills.
Figure 2-1 Proportion of people between the ages of 18 and 64 who think they have
entrepreneurial skills
Russia Japan Taiwan Korea Hong Kong France China Germany U.S. UK
For Japan to overcome this shortage of entrepreneurial people, entrepreneurship education
has a really important role to play. Entrepreneurship education of course helps people
acquire the mindset and skills entrepreneurs need and increases the number of
entrepreneurial people. In addition, in Japan, where the way of life as an entrepreneur is
not familiar to everyone and not everybody fully understands what benefits they might
receive and what risks they should assume if they choose to live as an entrepreneur, this
Source: Global Entrepreneurship Monitor 2007 (GEM)
15
type of education is also important to help as many people as possible realize they also
have a real choice of living an entrepreneurial way of life.
The qualifications entrepreneurs should have (i.e., entrepreneurship and entrepreneurial
skills) are necessary, even if you refrain from choosing a career path to becoming an
entrepreneur, to start creative and novel businesses and activities as a member of various
types of economic/social organizations. Entrepreneurship education, therefore, has the
benefit not only of giving birth to entrepreneurs but also of making the society and
economy of Japan as a whole more creative and more vibrant.
Ventures are rapidly developing, and they have the potential to be a driving force of
Japan’s economy. Before funding a venture, however, prospective entrepreneurs must
acquire a rather high level of skills and have a clear sense of purpose. To help them obtain
such skills and realize their mission, it is necessary to offer them a high level of expert
education based on a high standard of professionalism, as well as general expertise on
how to start a business.
Figure 2-2 Qualifications entrepreneurs should have
Entrepreneurship
Vision/Ambition
Spirit of challenge
Creativity
Decisiveness (quick
decision-making)
Tolerance of risk
Leadership
Dedication to teamwork
Entrepreneurial skills
Communication skills
Planning skills
Risk-management skills
Skills to form alliances
Knowledge of legal, accounting
and financial affairs needed to
create/develop a venture
Linguistic skills
16
§2 Entrepreneurship education at elementary, junior-high and high schools
1. Present state
The spirit of challenge, creativity and other elements of entrepreneurship have much to do
with the awareness/values and behavioral principles of people. To fully develop such
personalities, it is crucial to encourage children to learn entrepreneurship at the stage of
elementary and secondary education.
From such a point of view, METI has provided assistance since 1999 to: (a) develop and
try out educational materials and programs for elementary, junior-high and high school
students and manuals for teachers; (b) invite business owners or people engaged in
start-ups to elementary and secondary schools, and send teachers to start-ups for research
and training; (c) implement model programs for participation/experience-style learning of
entrepreneurship; and (d) commend organizations and individuals that have worked for
entrepreneurship education.
Thanks to such initiatives, entrepreneurship education is spreading among elementary and
secondary schools to a certain extent. For instance, model programs for
participation/experience-style learning of entrepreneurship, as mentioned above in (c),
were carried out between 2002 and 2006 at 833 schools for 68,923 students in total. The
Keizai Doyukai (Japan Association of Corporate Executives) and local New Business
Conferences have been regularly sending lecturers to schools.
Entrepreneurship education, however, has yet to have become prevalent among a wide
range of ordinary elementary and secondary schools. For instance, among the local
governments that have implemented model programs as stated above, only half continue
to provide entrepreneurship education. Most of the municipalities that discontinued such
education say they gave up because of a “shortage of budget” or a “shortage of teaching
hours.”
17
Figure 2-3 Why was entrepreneurship education discontinued after model programs ended?
In terms of a “shortage of teaching hours,” many pointed out duplication or redundancy
between entrepreneurship and career education. Career education is provided to help
young people find their own abilities, aptitudes, and ambitions and develop awareness as a
worker, professional or business person. This type of education has been introduced as a
result of recent concerns about an increasing number of youngsters who work part-time
(Freeta) or those called NEETs (Not in Education, Employment or Training). Comparison
between entrepreneurship and career education shows they share many objectives because
they are both intended to support students in acquiring knowledge to collect and search for
information, the ability to carry out their plans, the expertise to find solutions, and skills
for communication.
Career education is rapidly prevailing among schools mainly because related issues have
been incorporated into the Guidelines for the Course of Study of the Ministry of
Education, Culture, Sports, Science and Technology (MEXT), and because MEXT and
three other ministries have jointly completed a promotion plan. For instance, in 2006,
94.1% of public junior high schools (9,528 among 10,124 schools) provided job
experience programs for students, and 62.0% of public high schools (2,914 among 4,699
schools) offered opportunities for internships.
Source: METI, “Survey of Entrepreneurship Education” (December 2007)
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18
Figure 2-4 Comparison between entrepreneurship and career education
Entrepreneurship education Career education
Skills and abilities entrepreneurship education is Skills and abilities for career development (examples)
expected to develop (examples)
2. Challenges
Entrepreneurship education at elementary, junior-high and high schools should now
advance from the stage of model programs to the phase of penetration.
Challenges that lie in the way in spreading entrepreneurship education among schools are
the shortage of teaching hours and budget. Teaching hours might be secured by offering
entrepreneurship education as a part of career education, which has been introduced to
more primary and secondary schools in parts of Japan and has a lot in common with
entrepreneurship education.
To secure a budget, it is necessary to pursue entrepreneurship education that can be
provided with limited financial resources by ordinary teachers. For instance, studies
should be made on whether and/or how help desks for entrepreneurship education should
be set up and programs should be prepared to send entrepreneurs to schools to give
lectures. Opportunities for entrepreneurs to visit primary and secondary schools and talk
directly with students are important, especially to show them how exciting it is to start a
business and to get them interested in and attracted to entrepreneurial activities.
Sources of descriptions of career education: MEXT, “Manual for Promotion of Career Education at Elementary,
Junior-high and High Schools - Support for Every One of the Students in
Developing Awareness of How They Should work and What Job They
Should Take”
Entrepreneurship education refers to education provided to train
people to develop “entrepreneurship” and “entrepreneurial skills”
and to be able to “find their own mission, discover themselves
what to do with it, and carry it out themselves.”
Career education refers to “education provided, based on the
“concept of careers,” for students to support each of them in
developing their careers and help them acquire the motivation
and attitudes necessary to build the careers they deserve.” In
short, it is education to have “every one of the students develop
an awareness of how they should work and what job they
should take.”
Entrepreneurship
Spirit of challenge: a forwar-looking attitude to try something new and
address the challenges that emerge
Ambition: motivations and causes
Passion: zeal
Courage: willingness to expose themselves to certain risk
Entrepreneurial skills
Ability to dream: imagination, creativity, problem-finding, positive
attitudes, optimism, etc;
Ability to explain a dream: communication skills, logical thinking,
presentation skills, personality and honesty, etc;
Ability to realize a dream: skills to collect information, problem-solving,
ability to make plans, vitality,
judgment/decisiveness, patience, etc.
To
develop
human
relations
Ability to
make
effective
use of
informa-
tion
Ability to
design
the future
Ability to
make
decisions
Skills/Abilities Description
Ability of students to understand themselves and others
Ability to have deeper understanding of themselves and others, to appreciate the diversity of
personalities of people, and to act with respect for each other
Communication skills
Ability of students to develop communication with members of a diversity of groups and
organizations and establish rich human relations with them to attain their own growth
Ability to collect and search for information
Ability of students to collect and search for a variety of information about careers and jobs, to
select and use the necessary information, and to consider what career they should choose and
how they should live
Ability to understand jobs
Ability of students to understand the relation between what they are learning at school and
what they will do in society and at a workplace, and to find what they should do now
Ability to understand/recognize roles
Ability of students to understand what roles people play in private and professional life, what
they are performed for, and how they are related to each other, and to gain a deeper
understanding of what roles they themselves should play
Ability to implement plans
Ability of students to consider objectives in how they will live and what career they should
build, to prepare a career plan to achieve them, and to carry it out in, for instance, choosing
something in practice
Ability to make appropriate choices
Ability of students to compare and examine alternatives, to settle conflicts between them, and
to exercise independent judgment in order to make choices and decisions appropriate for
themselves
Ability to solve problems
Ability of students to assume the responsibility that accompanies decision-making, and to
adapt to what results from their own choices, as well as to find what they should do to realize
the career they hope for and to solve the challenges involved
19
§3 Entrepreneurship education at universities and graduate schools
1. Present state
One of the factors that hold back the business start-up rate in Japan might be insufficient
entrepreneurship education at universities and graduate schools. According to a survey
conducted in 2000 by the Japan Small Business Corporation, in Japan only 1.6% of adults
(people between the ages of 18 and 65) had attended an entrepreneur training course at a
university or a graduate school.
This figure is much smaller than those in the United States, United Kingdom and France,
where between 14% and 21% said they had taken such a course. Another survey,
conducted by the European Commission (as of 2007), showed that in Europe 34% of
full-time students had received entrepreneurship education and that in the United States
13% had done so.
Comparison among countries of the proportion of people who received entrepreneurship
education at a university or a graduate school and the business start-up rate reveals that
countries with a higher percentage of people who experienced such education often have a
higher rate of business opening.s
Figure 2-5 Percentages in major countries of people who attended entrepreneurship
education courses at universities/graduate schools, and business start-up rates
Business start-up rate in major countries Proportion of people who attended entrepreneurship
education courses at universities/graduate schools
Results of telephone survey of random sample of people between the ages of
18 and 65 in each of the countries
Japan U.S. UK France Japan U.S. UK France
Note: For Japan, the average between 2004 and 2006,
and for the others, figures as of 2004.
Source: For Japan, the Small and Medium Enterprise
Agency’s “2008 White Paper on Small and
Medium Enterprises in Japan,” and for the others
the “2007 White Paper on Small and Medium
Enterprises in Japan.”
Source: Japan Small Business Corporation, “Survey
Report: Comparison between Major Countries in
Entrepreneurship and between Prefectures in
Power of Entrepreneurs,” (January 2001)
20
As seen above, entrepreneurship education at universities and graduate schools in Japan
has still to reach the level of prevalence in the United States or the EU. But a steadily
increasing number of universities are introducing courses for entrepreneurship education.
According to a survey by the University of Tsukuba, in 2003 almost 40% of the more than
700 universities in Japan offered courses for entrepreneurship education. A survey
conducted in 2007 by Daiwa Institute of Research, which covered 22 universities in Japan,
found that two-thirds of the courses for entrepreneurship education were offered by
graduate schools mainly for MBA (Master of Business Administration) and MOT
(Management of Technology) degrees.
Figure 2-6 Numbers of universities in Japan that have courses for entrepreneurship
education
FY 2000 FY 2001 FY 2002 FY 2003
Source: Daiwa Institute of Research, “Growing Entrepreneurship Education at Universities” (2006
spring), University of Tsukuba, “Research on Challenges for University-originated Ventures
and Actions for Their Development” (March 2004)
Note 1: Different populations are used for years. The populations for 2000 to 2002 are from surveys by MEXT, and
that for 2003 is from a research by the University of Tsukuba.
Note 2: In Japan there were 87 national, 89 prefectural/municipal and 568 private universities as of May 2006,
while there were 100 national, 76 prefectural/municipal and 526 private universities as of May 2003.
(MEXT, School Basic Survey)
Private
Prefectural/
Municipal
National
21
Figure 2-7 Number of courses on entrepreneurship education at 22 universities in Japan
Number of courses on entrepreneurship training/venture theory (survey in 2007) Surveyed in
2006
Surveyed in
2005
Does it have
online
syllabuses that
can be
searched by
outsiders?
Courses for
undergraduates
Courses for
MBA
Courses for
MOT
Other courses
at graduate
schools
Total
(excluding
overlaps)
Total
(excluding
overlaps)
Total
(excluding
overlaps)
Ritsumeikan yes 23 3 4 1 29 22 8
Waseda yes 5 6 7 2 13 13 9
Keio Shonan
Fujisawa
Campus
6 3 0 3 13 12 8
Nihon some depts. 7 5 0 1 13 10 6
Doshisha yes 2 5 0 3 11 10 5
Chuo yes 2 2 0 4 9 7 3
Kyoto some depts. 2 6 2 1 9 4 2
Meiji yes 6 1 0 0 7 8 3
Hosei no 1 5 0 0 6 6 2
Rikkyo yes 2 4 0 0 6 6 3
Tohoku yes 2 0 0 4 6 4 0
Tokyo Univ. of
Science
yes 1 0 4 0 5 3 1
Kyushu yes 2 1 0 3 4 3 3
Hitotsubashi some depts. 0 3 0 0 3 6 4
Tokyo some depts. 3 0 0 0 3 3 1
Osaka some depts. 2 0 1 1 3 4 2
Tokyo Tech some depts. 1 0 0 2 3 3 3
Nagoya some depts. 0 1 0 1 2 2 2
Tsukuba some depts. 0 1 0 2 2 2 2
Kobe some depts. 0 2 0 0 2 1 1
Aoyama Gakuin no 0 1 0 0 1 1 2
Hokkaido yes 0 0 0 1 1 1 1
Total (including overlaps) 67 49 18 29 151 131 71
2. Challenges
(1) More opportunities to take courses on entrepreneurship education
As described above, only a limited number of students in universities and graduate
schools attend entrepreneurship education courses, and this type of education is provided
mainly by graduate schools. Environments should be developed to allow more students to
take such courses. Especially, more courses should be offered to undergraduates.
As for entrepreneurship education courses at graduate schools, given that there is a great
need for such courses for those seriously considering starting a business, studies should be
started on whether and/or how graduate schools should be allowed to offer, in addition to
entrepreneurship education classes for those working to attain a master’s or doctor’s
degree, more several-- or six-month courses that people can attend at night on weekdays
or on days off, even if they have no intention of obtaining a degree.
Source: Daiwa Institute of Research, “Growing Entrepreneurship Education at Universities: Follow-up
2007” (2007 summer)
22
(2) Development of more practical education that should help venture start-ups in the real
world
Entrepreneurship education should be provided at more universities and graduate schools,
and more courses should be offered. But it just as important to improve the quality of
entrepreneurship education as it is to expand it. Currently, many universities offer a
diversity of courses: some offer practical courses intended to support actual business
start-ups; others offer courses in which venture theories are studied. With a view to
helping more people start new ventures, in particular, it is desirable to increase and/or
enhance practical courses where students, for instance, develop specific business plans
and learn the skills necessary to set up a company in the real world.
From such a viewpoint, it is also important to invite more businesspersons, including
those who have started a venture themselves, to work as lecturers in entrepreneurship
education courses. This is also an effective method of practical education to give students
internship opportunities, for example, at venture firms.
It is as important to offer more opportunities to attend courses to businesspersons who
have already started a new business or are considering how to start one. The participation
of such people would benefit other students as they could learn from those with the
experience of business how practical skills work and how a real business operates. The
attendance of both types of students in such courses could help them learn from each other
and might encourage them to develop more sophisticated plans for real business.
When individual universities are facing difficulties in collecting a sufficient number of
students or lecturers by themselves, alliances could be formed to establish joint courses.
In order to spread and disseminate higher-quality entrepreneurship education among
universities and graduate schools in Japan, information about teaching techniques and
materials should be exchanged between schools all over the country, and expertise in
entrepreneurship education should be shared and accumulated nationwide.
From this viewpoint, model programs for high-quality entrepreneurship education should
be conducted, and studies should be made especially to find what programs should be
developed to encourage people engaged in entrepreneurship education at universities and
graduate schools in Japan to exchange information and share teaching skills.
23
§4 Education and support for entrepreneurs at the stage of considering a business start-up
1. Present state
Education and support for entrepreneurs at the stage of considering business start-ups is
provided by private institutions, national and local governments, and other organizations
in various forms of projects.
Since 1999, hundreds of “sogyo-juku” (Venture Schools), providing short-term intensive
training courses mainly on business planning for business start-ups, have been held at
commerce and industry associations and chambers of commerce all over Japan with the
financial support from the national government. They have been attended by more than
90,000 prospective entrepreneurs in total, and probably more than 30% of those who
completed the courses have launched a new business.
Since 2003 the government has also been conducting programs for providing
consultations through the internet on procedures for setting up a company and tax, legal
and accounting issues, and those for developing and supporting prospective entrepreneurs
by offering internship opportunities to work closely with experienced entrepreneurs (the
“Dream Gate” program). In addition, the government has been providing information and
receiving requests for consultations through symposiums, seminars, SNS (social
networking services), e-mail newsletters, websites, and other media.
Private sector companies are also engaged in many projects; they give a variety of lectures
to teach skills necessary to launch a new business, issue magazines to provide information
concerning business set-up, and hold business plan contests.
In Japan, incubation institutions have been developed all around the country since 1999,
when the Act for Promotion of New Business Start-ups came into effect. There are 190
institutions that satisfy specific conditions, including support being provided by an
incubation manager. When institutions that rent rooms are included, the number has
reached 323. Many private sector firms employ prospective entrepreneurs and support
them in starting new businesses. They function, in effect, as incubators.
24
Figure 2-8 Present status of incubators in Japan
2. Challenges
(1) More and better entrepreneurship education for venture start-up
Venture start-up and other ordinary types of business set-ups have some features in
common, of course, but they are, however, different in many aspects. Among others, they
differ in terms of speed of growth, scale, and the employment of new or novel
technologies and/or business models. As a result, they need different types of information,
skills, and management. As described above, the government has given attention to
business start-ups in general in terms of entrepreneurship education for people considering
starting a new business because the government’s main purpose has been to expand the
base of prospective entrepreneurs. The government, however, should now place more
emphasis on education and support for venture start-ups that aim for rapid growth.
(2) Cooperation between start-ups and entrepreneurs and effective use of private education
and support organizations for entrepreneurs
For those who are considering whether and/or how to start a new business, it is quite
useful to see veteran entrepreneurs who have launched a venture firm and gotten through a
period of growth and to ask about their experience and know-how. What is important is to
offer such new entrepreneurs opportunities to consult with experienced entrepreneurs and
those who have worked to support venture start-ups. Occasions for people in different
Types of institutions/
their current services
Support
institutions that
rent offices
(with no supporter
stationed)
42 (13%)
Support
institutions that
rent offices
(with supporter
stationed)
91 (28%)
323
institutions
in total
Narrowly-defin
ed BI
institutions
190 (59%)
(Note) satisfying the four definitions of BI
Four definitions of business incubation (BI) institutions
(1) Have offices and other facilities that can be offered to
entrepreneurs;
(2) Provide support by incubation managers or someone in charge of
giving assistance for starting a new business and developing it;
(3) Have specific restrictions for tenants; and
(4) Make distinctions between companies that leave the institution as
“graduates” and “others.”
Total of companies that entered: 6,352
Total of companies that graduated: 2,449
Among which went public (IPO) 16
(Note) Compiled data of 180 institutions that made
valid responses among the 190 narrowly-defined BIs.
Numbers of incubation institutions
by year of starting service
I
n
s
t
i
t
u
t
i
o
n
s
and before
I
n
s
t
i
t
u
t
i
o
n
s
:
c
u
m
u
l
a
t
i
v
e
Japan Association of New Business Incubation Organizations (JANBO), “Report: 2006 Survey of Business
Incubators” (March 2007)
Cumulative
total
25
industries to exchange information would also allow prospective entrepreneurs to receive
advice relevant to specific sectors and have people and/or outlets in industries introduced
to them. The government and related parties should work together to afford such
opportunities for information exchange.
Governments, national or local, and other public organizations that intend to provide
appropriate services to meet the needs of entrepreneurs should not only offer them their
own advice from an independent, neutral position but also make effective use of programs
prepared for education and support services for entrepreneurs by private-sector
organizations that, for instance, finance part of the initial capital and give hands-on
support as a joint-owner of the business.
(3) Enhanced support by incubators for entrepreneurs other than just offering facilities
The number of incubators has increased, but they have still been slow to provide support
other than their facilities and equipment (often referred to as “soft-support”) for start-ups
they accommodate. It is important especially for both the national and local governments
to help incubation managers and other people in charge provide more and better support
for entrepreneurs by developing more practical training for the people working for
incubators, linkages with MBA and MOT education, and networks between them.
26
Chapter 3 University-originated ventures
1. Present status
(1) Present status of university-originated ventures
Universities, which are supposed to be a base to create knowledge and innovation, are also
expected to work for entrepreneurship education and put their knowledge into practical
and commercial use to return what they have obtained to communities. Most of them also
function as a hub, or center, of research institutions in a community, so they are expected
to work as a member of an academy-industry alliance there or as catalyst to create a new
industry in the region. That is why great expectations are placed on university-originated
ventures, new businesses founded by universities to use their knowledge for practical and
commercial purposes.
Universities, industry, and governments have made great efforts together to encourage
university-originated ventures, including the “1,000 University-Originated Ventures Plan,”
announced in May 2001, (also known as “Hiranuma Plan” after the name of the then
minister of METI). As a result, the number of such start-ups increased to 1,590 in March
2007, or grew almost threefold (up 170%) during the five years from 2001.
Figure 3-1 Numbers of university-originated ventures (cumulative total)
Total
among which core ventures
Core ventures: “ventures founded on results of researches achieved by universities” + “student
ventures in close relation with a university”
Source: METI, “2006 Basic Survey of University-Originated Ventures”
F
Y
1
9
9
9
a
n
d
b
e
f
o
r
e
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
27
The chart below shows the numbers of university-originated ventures founded in “urban
areas” and other “rural areas” separately. In 2001 the number of ventures that had been
established in the “urban areas” (339) was larger than that of those in the “rural areas”
(259). Many ventures were then set up in “rural areas,” and as of March 2007 the number
of start-ups there (819) surpassed that of peers in “urban areas” (771). In other words,
ventures operating in “rural areas” increased more than threefold (up 220%) during the
five years between 2001 and 2006.
Figure 3-2 Comparison of university-originated ventures in urban and rural areas (unit:
company)
more than
tripled (up 220%)
more than doubled
(up 130%)
March 2002 March 2007
Urban Rural
Different university-originated ventures go in different directions of growth. Some intend
to go public (IPO). Others aim at growing in such a steady manner as to make a certain
level of profits and create jobs in a community, which would contribute to the local
economy. They pursue growth in a variety of ways for a range of purposes.
Note: Urban districts: Prefectures of Tokyo, Saitama, Chiba, Kanagawa, Osaka, Kyoto and Hyogo
Rural districts: Other prefectures
Source: METI, “2006 Basic Survey of University-Originated Ventures”
28
Figure 3-3 Diverse directions of growth among university-originated ventures
Sales (¥ million)
(2) Challenges university-originated ventures face
In the process of their growth, from foundation through research and development to
commercialization, university-originated ventures encounter three major challenges:
acquisition and development of people, financing, and development of marketing
channels.
They have such difficulties because they are characteristically burdened with “weakness
resulting from people” (as their management is often composed of university teachers,
who in general have little experience of business management) and “weakness resulting
from technologies” (as most of them intend to put into commercial use achievements of
quite novel research that has not been much more than a “seed.” Such projects often
require a longer lead time, which raises technological risks, and also have higher
commercialization risks because new markets must be developed.)
Note: Results of cluster analysis of 212 university-originated ventures, which answered all of the 14
questions that characterize university ventures, including “years after foundation,” “capital,”
“target market,” “status of financing,” “location of headquarters.”
Group of ventures that have
grown large and are going
ahead of others
Leading
type
2 ventures
High Potential Firms
Put innovative technologies into
commercial use to develop new vast
markets, and rapidly expand business
scale
Rapid-growth
type Group of ventures that receive
support from VCs and pursue
fast growth
49
ventures
Foundation Firms
Put newtechnologies into commercial
use and acquired a certain scale of
market and business scale
Steady-growth-in-existing
-market type
Small-scale
new-entrant type
Stagnant type
Group of ventures that pursue
a modest but steady growth in
existing markets
Group of small but steady
ventures that nevertheless aimat
entering new markets
Group of ventures that are in
serous shortage of finds whose
business is stagnant
62 ventures
62 ventures 37 ventures
Lifestyle Firms
Put newtechnologies into use but
are satisfied with a level of family
business
Others
3.9 4.7 5.4 6.5
Years
1,145
132
58
34
Description
Leading type: Having already gone public (IPO) or
are about to go, and having been in business for
relatively long period; mainly bio-tech startups with a
larger scale of business.
Rapid-growth type: Supported by VCs to conduct
applied research. Targeting new, developing markets.
On a solid growth track.
Stagnant type: Many located in rural areas. In part
because they are beneath the radar of VCs, They may
have a serious shortage of funds. Many are
stagnating..
Steady-growth-in-existing-market type: Operating in
a modest way and targeting existing markets, few
intend to go public (IPO), so out of VCs’ support
parameters in the first place. Obtaining funds they
need mainly in the form of loans.
Small-scale new-entrant type: Working aggressively
to create new markets. But because few are intending
to go public (IPO) or because they too young, they
face difficulty in obtaining funds from VCs or
receiving loans.
Source: Prepared by METI in reference to comments of Kanetaka Maki, assistant professor, Keio SIV
Entrepreneur Laboratory
A
B
?
D
?
?
E
C
?
?
29
Figure 3-4 Challenges of university-originated ventures
1st 2nd 3rd
The two weaknesses that are attributed to university ventures seem to be the very factors
that bring about the three challenges.
(i) Challenges in terms of people
At most university-originated ventures, the management is composed of teachers and
students of the university. As most of them have little experience of business management,
often the company is not administered well enough. Even when the venture succeeds in
growing to a certain level, the management is slow to be replaced by people who can
handle the business at this stage. “Right-hand persons” who should assist the management
can be found rather easily in the field of R&D and they can be employed to supplement
R&D abilities of the company. But university-orginated ventures often have difficulty in
finding and employing “right hands” who should support them in business administration
and financing.
(ii) Challenges in terms of financing
Many university-originated ventures face difficulties in financing at the R&D stage and
the initial stage (phase of foundation including just before and after the event). The
business of most university ventures is based on achievements that are themselves based
on pure research. In part because they must go through a longer lead time before they are
commercialized, such ventures assume higher business and technological risks. As a result,
Source: METI, “2006 Basic Survey of University-Originated Ventures”
Difficulty in acquiring and developing people (2006)
(2005)
(2004)
Difficulty in financing (2006)
(2005)
(2004)
Difficulty in developing marketing chalets and customers (2006)
(2005)
(2004)
Difficulty in securing offices/laboratories (2006)
(2005)
(2004)
Slower pace of R&D than expected (2006)
(2005)
(2004)
Sour relationship with the university (2006)
(2005)
(2004)
N = 325 (2006)
319 (2005)
371 (2004)
30
it is not easy for them to raise funds from venture capitals.
(iii)Challenges in terms of marketing channels
Many university-originated ventures explore “new markets” with achievements of
“research and development no other has ever undertaken.” They often try to develop new
markets and distribution channels through people they meet and connections they built
mainly in the process of R&D, and/or through companies they worked with for R&D. But
the task is not easy for university ventures because few of them have sufficient resources
to establish marketing channels. Most of their products are for business use, but Japanese
customers often place more importance on past record and established reputation, which
makes it all the more difficult for new firms to secure outlets.
(3) Viewpoints to be considered in supporting university-originated ventures
To help university-originated ventures solve challenges presented by their own
characteristics, it is critical for universities and local governments and communities to
give support to the ventures, taking into consideration viewpoints as stated below.
University-originated ventures are a “front runners” that offer novel products, or new
value, to the economy. Because one of the roles national universities should play is their
part in contributing to the society by putting their achievements to commercial/business
use, it is important for them to develop environments where university-originated ventures
can operate smoothly.
Many university ventures operate in rural areas. They are expected to revitalize local
economies because their growth may encourage innovation in a community and create
more R&D jobs for those who have received sophisticated education. A cluster in a
community of university ventures established to put to commercial use achievements of
research at a university may attract another cluster of industries, which might add value.
That would also contribute to its development.
31
2. Challenges
(1) Support of universities for university-originated ventures
(i) Effective use of universities’ resources for support
Many universities use their alumni resources for advice on business management,
personnel loans, and aid in commercializing their research, as well as in R&D activities. It
is important, to make effective use of such resources, for universities to develop stronger
management functions and build closer cooperation with other universities, companies
and local governments.
(ii) Use of universities’ names
Most of the markets university-originated ventures target are “newly created markets.” To
explore such markets and develop marketing channels, they should work to build up the
reputation of their products among customers and in markets.
Some university ventures use the name of the university for their products with the
expectation that it helps them enhance credibility among customers and in markets, and do
enjoy certain reputation in markets. On the other hand, there are only a limited number of
universities that are very willing to allow their affiliated ventures to use their names.
As the name of a university has a certain level of established market value in the form of a
trademark or trademarks or a proven reputation, its use by a university-originated ventures
for its products may be effective in lowering barriers that may be encountered in
developing markets and outlets. Permission to use the name is expected to create a ripple
effect on the university itself because it may bring revenues to the school.
One of the reasons few universities are willing to allow university ventures to use their
names is the fear of being held responsible for defective products by customers, a situation
that the universities may be ill-equipped to deal with. Against such circumstances, it
would be desirable to examine risks that should be anticipated when university-originated
ventures sell their products under the name of the university and study whether and/or
how guidelines should be prepared so that universities and affiliated ventures will both
manage such risks in an appropriate way.
32
(iii)Actions to deal with challenges in financing (investment in university ventures, etc.)
University-originated ventures play an important role in making use of knowledge
universities have acquired to contribute to society. They are expected to build new
industries in communities, create new jobs, and bring in other economic benefits. Most of
their business, however, is based on achievements of cutting-edge research and
development at universities.
University ventures as such usually have much more difficulty in financing than ordinary
start-ups: (i) because there are few who have the sort of “keen eye” necessary to
understand and assess their business due to their advanced, state-of-art research and
development; (ii) because it generally takes longer to complete R&D for
commercialization as they try to put achievements of cutting-edge research to practical
use; and (iii) because, in part as a result of the disadvantages mentioned above, risks of
their business are more difficult to assess, which leads to fewer venture capitalists that are
willing invest in university ventures and to limited, smaller scale of investments for those
that do.
Some of the universities, which are expected to use the achievements of their research and
development for society, might offer financial support to ventures founded by their
researchers and students. Financial aid could be provided in a variety of forms. But
national universities are prohibited by the current National University Corporation Act
from making equity investments, except in approved technology licensing organizations
(TLOs). In order to provide national universities with more support options, it would be
advisable to consider whether they should also be allowed to have equity in such ventures.
To make such schemes more effective, it is also necessary to consider what arrangements
should be made to help universities examine a venture’s plan of business and assess its
value, manage types of risk, etc., to make a good judgment before making investment.
Considering this, the level of discretion and flexibility universities should retain in
management of their assets should also be taken into account as they have tended to
demand more discretion and flexibility since they were reorganized as independent
administrative institutions.
33
(2) Support provided for university-originated ventures by local governments, etc.
Growth of university-originated ventures helps create jobs in local communities and
develop industrial clusters. Local governments and other institutions are expected to
provide more support for university ventures, taking local needs into account.
(3) Support for university-originated ventures provided by universities and local institutions
in cooperation
Those involved hope that as part of the support provided for university-originated
ventures, which often face difficulty in financing at the initial stage, incubation facilities
equipped with functions such as open facilities and open laboratories should be built in or
around university premises so as to provide technical support by university teachers and
reduce their financial burden. Studies should be conducted on whether and/or how such
bases for industry-university cooperation should be developed jointly by businesses,
universities, local governments and other parties concerned.
In order to improve the quality of incubation, it is important to take measures to help
incubation managers, who work at incubation facilities used by university-originated
ventures to support them, and enhance their abilities as network constructors and
producers. It is also crucial for universities, local governments, and local businesses,
including financial institutions, to work together closely to provide university ventures
with “soft-support.”
34
Chapter 4: Human resource strategies of Start-ups
1. Present state
(1) People as a business resource of Start-ups
People are one of the most important business resources, as important as funding for
example, for start-ups to grow fast.
Types of human recourses are more unique and more diverse than financial recourses both
in terms of who and how many are needed and how or whether they can be employed. To
match demand and supply requires a great deal of time and effort. Start-ups, which pursue
rapid growth, might be held back by the time and effort they must spend for recruitment
when they strive to grow. Whether a venture can employ the people it needs at a specific
phase of growth just when they are needed is a major key to its growth.
Start-ups could be seen as a business started by the founder (or the group of founders) as
an individual (or a group of individuals) being transformed to one managed by a company,
that is to say, an organization. Compared with established, large corporations, many
ventures may need to employ people who are likely to feel more empathy with their
visions and ambitions and work more closely as a team. Once a person is employed, the
company is “obliged” to retain that person, who becomes difficult to fire if found not to
share its visions or ambitions or because that person becomes is harmful to the unity of the
team. From such a viewpoint who a company hires has great impact on its entire business.
It is often said that “a company needs to breathe in and out to grow.” Start-ups should also
acquire such types of people and develop the appropriate internal organization needed at
each stage of development. Some are afraid, however, that Japanese companies lack a
culture where people in management are replaced by those relevant at a specific phase of
growth.
(2) Difficulty in securing people in competition with large companies
Ventures, which in general have less stable business bases and poorer brand images than
large companies, have great difficulty in employing talented people.
Especially, as business confidence has been improving recently and large companies have
been hiring more people, start-ups have found it more difficult to acquire excellent people.
According to a questionnaires survey conducted by METI in 2007 of ventures which had
35
received investment from venture capitals, more than 71% of the respondents felt some
degree of dissatisfaction with the quality of the staff hired.
Figure 4-1 What do start-ups in Japan think about people they acquired?
Sufficient Insufficient DK
How start-ups, engaged in higher risk businesses, should propose returns that would
compensate for the risks to those whom they hope to hire is crucial. There would be some
cases where remuneration could be offered as stock options, a common tool for ventures.
But as start-ups in general have fewer financial resources at their discretion, most find it
difficult to offer prospective employees better terms and conditions only through
remuneration. As a result, an important element is what can offer in terms of non-financial
rewards, such as shared vision, opportunities they have for self-realization, and skills they
acquire useful for their later career. Some point out people only perceive a job at a venture
more risky than it really is but that they often fail to recognize a diversity of potentials it
brings to them on the career path (including those to start a business themselves or step up
to another job).
Others say, on the other hand, now a labor market for Start-ups is being formed mainly
among those which have grown to a certain scale, especially with IT service-related
start-ups, though not yet so large a market as in the United States, and that people are
becoming more mobile there.
Source: METI, “2007 Survey of Creation and Development of Start-ups” (December 2007)
36
2. Challenges
(1) Expansion of the labor market for start-ups
As start-ups need to quickly acquire people who can be immediately effective to achieve
rapid growth, higher mobility in Japan’s labor market would bring great opportunities.
After the burst of the economic bubble in Japan, when its financial institutions were in
crisis and firms were merged, reorganized, or restructured, some of the excellent people
who left the financial sector flew into start-ups. They are now drivers of growth of
ventures in the country. In Japan, however, most of the technological and managerial
talent is still concentrated in large enterprises. Some mechanism should be developed to
induce such talent to start-ups, along with corporate venturing by large companies, which
we will describe in Chapter 8.
(2) Efforts to develop human resources
Some say ventures are unwilling to develop human resources by themselves. Indeed some
start-ups were too hasty in recruiting people but poured too little energy in training their
people on their own. According to a survey conducted by METI in 2007 of ventures that
had received investment from venture capitals, in order to train their employees, 58% of
the companies provided in-house training, 42% asked contractors to provide a training
program, 68% had an OJT plan, and 11% said they had no scheme dedicated to training.
Figure 4-2 How to train employees
How employees are trained? (Multiple response) (n=446)
There is a certain limit, however, to the capacity ventures have to employ talent at the
ready, especially considering competition with large companies. They must work to foster
their own people while developing their business. The government is also expanding
support for small and medium enterprises in the field of human resource development. As
Source: METI, “2007 Survey of Creation and Development of Start-ups” (December 2007)
In-house training
Training program by contractors
OJT
No training scheme
Others
37
part of the 2008 amendment of the tax code, the government has decided to improve tax
schemes for the promotion of investment in human assets, so that they will be more
available for SMEs. Ventures are expected to make effective use of such programs and
establish better systems for human resource development.
(3) More jobs for women
To offer more opportunities to women is another important issue for start-ups that hope to
employ talented people. Many women leave their jobs when they are pregnant, have a
baby, or devote themselves to childcare, but most of them also hope to work again once
their children grow to a certain age. In Japan a lower percentage of highly-educated
women participate in the labor force than in other countries. It is desirable to design and
propose more diverse types of employment and provide talented women with job
opportunities.
Figure 4-3 Types of job housewives hope to have by age of youngest child
No intention to
have a job Responsible job,
with overtime
work
Full-time job,
with no overtime
work
Working at home
Short-time job
Age of 3 Age of 4 and older but Elementary Jr-high school
and younger before elementary school school student student and older
Note: Responses to questionnaires on the internet to housewife part-timers and full-time housewives
whose youngest child is three years old or younger
Source: AiDEM Inc., “Survey of Actual Situations of Part-timers” (2000)
38
(4) Actions to counteract our aging and shrinking population
The population of Japan is rapidly aging and shrinking. The conventional recruitment
strategy of start-ups, which generally employ a large number of younger people, mainly
children of baby boomers (baby-boom juniors), looks to be getting more difficult to
implement year by year.
Figure 4-4 Population composition of Japan
2005
Age
Male Female Male Female
Baby
Boomers
Baby-boom
juniors
Population (10,000 people) National Institute of Population and Social Security Research
This requires that ventures should place more emphasis on how they can absorb the
experience and skills of baby boomers when they leave a company, as well as how they
can make better use of the generation of baby-boom juniors when they get older. The
national and local governments are working hard to match the supply of senior workers
and the demand of businesses through the “Shin-Geneki Challenge Plan” (baby boomers
reemployment program) and other initiatives. Ventures should use such schemes in an
effective way.
Source: Reproduced from NIPSSR’s website
2020
Age
2005
Age
39
Figure 4-5 Shin-Geneki Challenge Plan
(5) Effective employment of foreigners
Nowadays more of the start-ups in Japan employ foreigners from Asian countries,
especially IT experts, who have advanced skills and entrepreneurship.
In the United States, an advanced venture-industry country, foreigners also play a great
part in creating and developing Start-ups. For instance, according to “On the Road to an
Entrepreneurial Economy: A Research and Policy Guide, ” Kauffman Foundation, 2007,
immigrants from India and China contributed to foundation of 24% of the technology
companies in Silicon Valley, a quarter of companies in which investments were made in
and after 1990 by members of the National Venture Capital Association (NVCA) were
established by immigrants, and 24% of the high-tech companies set up in the United
States between 1995 and 2005 were started by incomers.
With the view of developing a vibrant entrepreneur society in Japan with its faster aging
and shrinking population, it is essential to employ in a more effective way people from
foreign countries, especially Asians. Japanese Start-ups, not many of which have extended
operations into overseas markets, should also globalize their people in order to advance
into new global markets.
From now on policymakers should consider what foreigners could do for creation and
development of Japanese start-ups when they study programs for foreign workers and
students.
A coordinator asks the secretariat to introduce a
shin-geneki who can work to solve a problem she
found in the business.
Shin-geneki
(boomers to be
reemployed)
Partner
companies
Boomers who
left a company
Alumni associations
of universities and
technical colleges
NPOs
private
organizations
Boomers who left
or are leaving a
company
Registered
Target:
registration of
30,000
shin-genekis
National
secretariat
Local secretariats
(located in each prefecture)
Agents
200 agents designated
in each prefecture
To match needs of both sides
To provide advanced training
To give counseling and
manage registered people
Agriculture-Commerce-Manufacturing
Cooperation & Local Revitalization
Local-government-base model programs
(around 10 programs)
Effective Use of the Highly-skilled
Industry-association-base model programs
(around 10 programs)
Cordinators at
Community Power
Cooperation Bases
Needs for shin-geneki
Target: matching of
10,000 cases
SMEs
40
(6) Dissemination among start-ups of know-how of recruitment, human resource development,
organization building, etc.
There are many venture entrepreneurs who are too busy in, for instance, business
expansion, marketing, and financing to have enough time to think about recruitment,
human resource development and organization building. As described above, however,
there are really many cases where shortage of people hampers growth of ventures. It is
necessary, therefore, to encourage venture entrepreneurs to pay more attention to such
issues and help them learn more know-how and skills in these spheres.
41
Figure 4-6 An example of recruitment know-how manual (METI, “ICT Venture
Recruitment Guidelines”)
ICT Venture Recruitment Guidelines: Table of Contents
(i) Whether someone should be employed?
/What types of people should be employed?
(ii) How should recruitment be carried out?
(iii) What should be done to have them
work as expected after employed?
T
y
p
i
c
a
l
s
y
m
p
t
o
m
s
1. I need some of my work to be entrusted to someone, but …4
wonder what task should be transferred in what way:
- I wonder how to decide what the chief executive should
and should not handle;
- I wonder whether the chief executive should handle a task
(s)he founded the company should place more emphasis on;
- The chief executive is swamped with operational affairs;
- I have a task to be entrusted to someone, but cannot find
a suitable person in the company;
2. If any task should be entrusted to someone, I wonder what …6
I should ask them to do to have them work as expected;
- In terms of people entrusted with marketing/technological
affairs/business administration;
- I’m going to employ someone, but wonder what
experience, skills, or philosophy they should have;
- I wonder to what extent I should empower someone;
3. The company has achieved a certain level of growth, but I …13
feel the quality of business is declining and its speed slowing. For
instance, we receive more complaints from customers:
- Planned quality or deadlines cannot be achieved;
- Problems cannot be solved before founding members step in;
- Products/services cannot be improved to have new
features, or product/service lines cannot be expanded;
- The customer base cannot be expanded;
4. The shortage of manpower hampers growth of sales: …16
- The level of anticipated orders suggests shortage of
manpower that cannot be overcome with existing personnel;
- Sufficient products/ after-market service cannot be
manufactured/provided;
- Products/services cannot be improved to have new
features, or product/service lines cannot be expanded;
- The customer base cannot be expanded;
5. Instructions aren’t being fully obeyed by employees/
they act …17
too slowly/relations among them are not smooth;
- The background of an instruction, which employees
took in before told, is not recognized unless made clear;
- Not every instruction is carried out;
- More trouble/quarrels take place in the company;
6. The company intends to go public, but progress is slow …19
in expanding the organization, developing the system
and enhancing the governance for getting listed:
- No/few directors are replaced after foundation;
- No person is designated to make arrangements for listing;
- Preparations to go public are not completed;
7. I wonder how to look for employee candidates: …29
- I wonder what of the connections I have can be used
for recruitment;
- I wonder how to use resources of outsiders (headhunters,
staff agencies, classified ads, etc.)
8. I wonder what concrete approaches I should make to a …39
targeted candidate:
- I have difficulty in inviting a candidate to an interview;
- I wonder how to avoid any trouble to candidates when
approaching them;
9. I would like to employ the candidate, but have problems …43
in assessing him or her:
- I wonder how credible the candidate is;
- I (chief executive) wonder how to assess the candidate
in terms of skills out of my expertise;
10. Many candidates decline a job offer we made: …51
- We fail to explain our promising future to the candidate;
- Her family members make an objection:
- We cannot pay as much as wanted;
- We fail to resolve concerns about the company;
11. I wonder how to carry out procedures through the process …55
as described above:
- I wonder what document should be presented by
candidates for selection;
- I wonder how to present an offer letter;
- I wonder what document should be received when a
person is hired;
- I wonder what procedures are required by law to be
completed when a person is hired;
12. People we hired fail to achieve performance as expected: …60
- I wonder how to deal with them;
- Especially, I wonder whether I should take a severe
action, for instance, demotion or pay cut;
13. Aperson we hired turns out to have lower skills than …62
expected:
- I wonder whether to take a severe action or provide more
training;
- When decided to provide additional training, I wonder how;
14. A person we hired does have skills, but they are not …63
effectively used because there are some gaps between
what the management expect and what the staff hopes to do;
- The person is demoralized because of some gaps
between what was told during hiring and the realities;
- The staff works differently from what the
management expected;
15 A person we hired does have skills, but is discordant …64
with colleagues:
- Does not get along with colleagues, which hampers
performance of the team;
- Does not get on well with specific person(s), which affects
their work;
16. Many of the people we hired quit: …71
- Even when we succeeded in hiring an excellent person,
they quits over something they feel discontent with;
- Even when we succeeded in hiring a skillful person, they
quits because they were given no opportunity to demonstrate
the skills and felt demoralized;
- The fact that an excellent person quit has negative impact
on colleagues;
- We cannot tell why they quit, and the turnover stays high.
17. We did everything we could before hiring a person, but …73
thy do not seem to do well:
- Cases of regular/contract employees and executives;
- Performance is unexpectedly low, and there is an indisputable
mismatch.
List of supporting companies …75
Recommendations from supporting companies …76
42
Chapter 5 For expansion of the customer base and market
1. Present state
It is said that fewer of the start-ups in Japan grow to be major global enterprises than their
peers in the United States or Europe, and that their growth is generally slower.
Many mention as a factor behind this that an insufficient scale of resources, including
money and people, that can be raised for venture businesses or the too slow speed at
which they can raised. Others say, however, there is also large difference in the pace of
expansion of the customer base and market.
(1) Japanese market emphasizes proven records
First, Japanese market start-ups, which have no or little proven record, find it difficult to
have their products accepted just because they lack established performance.
People and companies in Japan, as well as the government, prefer higher-quality goods
and services. To put it the other way around, they avoid buying unproven goods or
services. They often think that goods or services with little proven record, if they were
used as part of their own products or services, would bring a larger risk to them in terms
of the quality strategy for their goods and services.
You could say, however, that companies, as purchasers that avoid buying unproven goods
or services that have in fact good performance and quality only because they have little
proven record would be weeded out one after another through competition among
purchasers because they are likely to be less competitive than those which have abilities to
assess by themselves the performance and quality of goods and services and buy anything
good even if the products concerned have little to show in terms of their past record. Some
think intensifying global competition in recent years is bringing about changes, though
gradual ones, in the purchasing behaviors of Japanese companies.
(2) Japanese ventures are unwilling to expand overseas
Second, it is said that fewer venture companies in Japan go into foreign markets than
start-ups based in other countries.
Some point out the fact that Japan is the second largest economy and that has more than
100 million consumers, a scale of market that gives Japanese ventures all the fewer
43
incentives to go abroad because they can secure a business base in the domestic market
before they take the trouble to move into a foreign country.
In addition, the level of English language skills of Japanese businesspersons is indeed one
of the factors that hinder Japanese companies from entering foreign markets, especially in
the service sector. (On the other hand the Japanese language could be regarded as a barrier
that protects Japanese service business market against foreign players.)
But the recent development of the internet and other IT technologies has made far easier
to do business in any part of the globe wherever a company is based and whether or not it
has a marketing foothold there.
The increasing sophistication, fractionalization and customization of products offer
Start-ups more opportunities the chance of success as a global niche company.
Some Japanese ventures, taking advantage of markets overseas, which are more willing to
accept good products and services whether or not they have proven record, put their goods
and services in a foreign market first to demonstrate their performance there, before they
try to spread them in the Japanese market.
It is difficult to say how many start-ups have gone abroad. According to a survey
conducted by METI in 2007 of ventures in which venture capitals had equity, more than
one-third of the respondents had done business in foreign markets (including exports).
Figure 5-1 Current status of overseas business of Japanese ventures
Doing business overseas
Not doing business overseas, but contemplating starting
Not doing business overseas, but did in the past
Not doing business overseas, and not contemplating for future/DK
Source: METI, “2007 Survey of Creation and Development of Start-ups” (December 2007)
44
2. Challenges
(1) Brand strategies, alliances with large companies, partnerships among ventures and SMEs,
use of technology assessment services, and other initiatives for strengthening marketing of
products and services
In order to sell more in the Japanese market, start-ups that don’t have track records should,
for instance, develop a brand strategy for exposing their products through exhibitions,
seminars, and mass media, arrange an alliance with a large enterprise for achieving more
confidence, form a partnership with other ventures and SMEs for offering more diverse
and/or sophisticated products, and use technology assessment services for demonstrating
the level of their technologies.
In terms of alliances with large firms, a survey by the Organization for Small & Medium
Enterprises and Regional Innovation, JAPAN (SMRJ) revealed only 27% of big
businesses had been in any alliance with SMEs or ventures in the previous three years.
They are expected to change their way of thinking. On the other hand, the greatest
proportion of large enterprises that had allied with an SME or a venture mentioned
“Business did not go as scheduled” as the major difficulty they had encountered. This
suggests ventures also have something to improve.
To encourage partnerships among ventures and SMEs, the government has prepared
support programs. They are expected to use such initiatives in an effective way to develop
cooperation among them.
Technology assessment still has something to be improved in terms of its cost efficiency
and objectivity. But now you can find a few assessment service institutions that perform
rather inexpensive and objective evaluations of technologies. Further development of such
services is desirable.
45
Figure 5-2 How do large enterprises see partnerships with start-ups?
(2) Effective use of public procurement and trial orders, etc
Start-ups that lack track records could develop business and realize growth by achieving
public procurement from national or local governments or other public institutions, using
this as a springboard to expand their business base into other customers and improve their
products and services. That would be one of their options.
A survey conducted by METI in 2007 of ventures which had received investment from
venture capitals showed how many of them had made sales efforts targeting public
institutions and what percentage of them had succeeded. Almost half of the respondents
tried to sell their products or services to public organizations, and 80% of the prospective
vendors succeeded in selling.
Source: Adapted from SMRJ, “2004 Small & Medium Enterprise Environment Survey: Challenges of
Partnership between SMEs/Ventures and Large Enterprises, and Support to be Provided”
(March 2005)
Answers from large enterprises that were asked, “What problem/difficulty did you have in partnership you had” with SMEs/ventures
(multiple-response)
Business did not go as scheduled.
Both companies had different cultures.
It took long to build a consensus in the company.
It took long to build a consensus in between the companies.
The partner lacked strength to develop business.
Arrangements/rules between the companies were unclear.
The partner lacked an established internal control system.
Products/services developed through the partnership had
trouble.
We had difficulty in finding a partner.
People in the company were not enthusiastic.
Technologies/products lost some competitiveness during the
period of partnership for commercialization, etc.
It took long for the partner to build a consensus in it.
Our know-how, “seeds”, or technologies were leaked.
The partner changed its business policies.
The partner was not enthusiastic.
Others
UK
46
Figure 5-3 Have you ever tried to sell your products or services to public institutions?
Yes No DK
Figure 5-4 As a result of the efforts, have you succeeded in selling?
Yes No
Under WTO Government Procurement Agreements, the government is obliged in
principle to adopt competitive bidding for procuremenr. Under such restrictions, it
endeavors to buy as much as possible from SMEs by, for instance, setting procurement
targets from SMEs according to the Act on Ensuring the Receipt of Orders from the
Government and Other Public Agencies by Small and Medium-sized Enterprises. In 2000,
the government also introduced special measures to offer SMEs that have a high level of
technology more opportunities to participate in bidding, and in 2004 it adopted measures
to expand its IT-related procurement from ventures. With other programs and initiatives,
the government is working hard to provide SMEs and ventures with as many opportunities
as possible to acquire orders from public institutions.
Source: METI, “2007 Survey of Creation and Development of Start-ups” (December 2007)
Source: METI, “2007 Survey of Creation and Development of Start-ups” (December 2007)
47
Local governments are also obliged in principle to adopt competitive bidding for
procurement by WTO Government Procurement Agreements and the Local Autonomy Act.
After the 2004 amendment of the Enforcement Ordinance of the Act, prefectural
governments are allowed to offer negotiated contracts to suppliers who the governor or
other authorized persons recognize as those who are producing a new products to enter a
new business segment when the prefecture buys such a product. According to the
amendment the “Trial Order” system has been introduced by 41 prefectures as of March
2008.
If, however, a government gave excessive favors to start-ups in its procurement,
lower-quality or over expensive goods or services might be supplied as a result.
Procurement of public institutions from start-ups should be implemented in light of its
purpose, compensation for their intrinsic lack of record, and the procurement system
should be made better to offer companies that have excellent technological capabilities
more opportunities to participate in bidding.
Figure 5-5 Special measures for offering SMEs with high-level technologies more
opportunities to participate in bidding
Figure 5-6 Measures to expand the government’s IT-related procurements from ventures
On Measures to Expand the Government’s IT-related Procurements from Ventures (extracts)
1. Opportunities for joint ventures to participate in bidding
? In terms of bidding for projects that are announced with specific technical requirements, such as assignments of
high-level IT experts, opportunities to participate in the competitive bidding for each of the projects should be given
to joint ventures that satisfy requirements for the project after reviewing, among others, their responsibility control
systems and ways to secure necessary services after the contract is implemented.
2. More flexible administration of qualifications of bidders
? The system of qualifications for participants in competitive bidding should be managed in a more flexible way after
Source: METI, “Study Group for Promotion of Public Procurement from Start-ups,” (Handout 2, first
meeting)
Outlines of special measures for SMEs with high-level technologies on
qualifications for participation in bidding
Introduction of special measures
In 2000, with the view of offering SMEs with excellent technological
capabilities more opportunities to participate in bidding, “On More
Opportunities to be given to SMEs and other Suppliers with High-Level
Technologies to Participate in Bidding” was adopted.
* Decided by the board of secretaries of the Liaison Committee of Ministries and
Agencies for Promotion of Computerization of Procedures for Government
Procurement (excluding public construction work)
Special measures
SMEs are allowed to participate in a higher grade of bidding by either:
? Receiving additional points to be given according to results of technical
evaluation conducted in grading bidding participants in terms of
qualification, which assesses their skills on the basis of 100 points (15 points
added to bidders that have three patents or more applicable to the project to be
bid); or
? Submitting a past record that demonstrates they have manufactured some
products according to an equivalent or higher level of specifications than
specs for those to be bid.
Additional measures for 2006
The special measures above had been applied exclusively to “manufacturing of
products” of precision machines and four other sectors. The application was
extended to “manufacturing of products,” “sale of products” and “provision of
services, etc.” in any sector.
Extended sectors for special measures
Sectors for procurement by the national government
Products (27 sectors in total) Services (15 sectors in total)
Manufacturing Sale of Provision of services,
of products products (*) etc.
Five sectors for
special measures
E
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Extended to
all sectors
Extended to
all sectors
Medical
equipment, etc.
Medical
equipment, etc.
Software
development, etc.
* Applied only to sale of
products manufactured by
the company itself
?Major sectors for procurement of productsmedical equipment, computers, other machinery
among which initial five sectors precision machinery, industrial machinery, electrical/
receive special treatment telecommunication equipment, nonferrous metals/metal products,
furniture/utensils
?Major sectors for procurement of services software development, information processing, etc.
48
reviewing applicants in terms of specific technical standards, including their past contracts with private organizations,
record of development of equivalent systems, high-level IT experts to be assigned to the project, and results of
improvement in software processes.
3. Review of order unit
? In terms of orders for IT systems, pilot procurements should be carried out by the Cabinet Office and other selected
ministries to find a way of procurement that would help adopt excellent technologies from as many companies as
possible and which could avoid impairing the economic efficiency of procurements with an aim to examine further in
what unit an order should be made.
4. Support for ventures in cash management
? Many ventures have difficulty with cash flow when they receive a contract from the government under the term of a
year-end payment. To alleviate the problem, simpler procedures should be introduced for payment by a rough estimate
to adopt such payments for more contracts, with care paid to progress management for projects;
? Ministries and agencies generally conclude with suppliers a contract with a proviso that prohibits them from
transferring their payables to anyone (nontransferable receivables clause). A decision has been made recently that
nontransferable receivables clauses should be repealed only if payables are transferred to a financial institution or a
credit guarantee corporation. Examination should also be made whether suppliers should be allowed to assign their
receivables to specific institutions.
Figure 5-7 Implementations of Trial Order
? July 2003
Inaugurated by Saga Prefecture
first in Japan
? April 2004
Adopted by Gunma and
Tokushima
? November 2004
The Local Autonomy Act amended
? FY 2005
Adopted by Toyama and 22 other
prefectures
? As of April 2008
in operation in 41 prefectures in Japan
(3) SBIR system
The Small Business Innovation Research (SBIR) system is a technological development
contract scheme that the national government has introduced to promote development of
technologies by start-ups and help them put the technologies to commercial use in the
private sector or receive procurement orders by public agencies and institutions.
In the United States, the federal government introduced a SBIR system in 1982, and now
11 federal agencies with R&D budgets over US $100 million participate. They are obliged
to assign SMEs 2.5% of the budget for R&D activities that they contract out to other
institutions, and SMEs are elected through competition. It is said that when a start-up
succeeds in receiving a contract through SBIR, the fact is considered a demonstration of
the SME’s technical strength and works to a degree as a certification or signal in obtaining
investment from venture capitals or helps bring its products to market afterward. At
agencies engaged in a great deal of procurement, such as the Department of Defense and
Source: “On Measures to Expand the Government’s IT-related Procurements from Ventures,” agreements of
the IT-related Liaison Committee of Ministries and Agencies
Source: adapted from the website of Saga
Pre Prefecture
As of October 2006
660 items are designated
(approved) in total.
49
the National Aeronautics and Space Administration (NASA), it is believed that adoption
for SBIR often leads to success in receiving an order for procurement. Institutions that
spend a lot in R&D, such as the National Institutes of Health (NIH), are said to often give
an R&D contract at the third phase.
Figure 5-8 SBIR system in the United States
? The scheme is applied to SMEs (which employ 500 people or less), and has the following characteristics:
? Public invitation to application (for projects)
? Selection through competition at three phases
?Phase 1: Stage of feasibility study (financial support of not more than $100,000)
?Phase 2: Stage of full-scale R&D/designing of prototype (financial support of not more than $750,000)
?Phase 3: Stage of putting to commercial use achievements of R&D by SBIR (aid for commercialization, no
financial support)
The Japanese government has also introduced its own version of SBIR to spend some of
the R&D budget on SMEs and support their R&D activities for commercialization.
Different from the US version, Japan’s system has no obligatory target for the R&D
budget that should be assigned to SMEs. In 2006, the government spent 41,100 million
yen on SMEs, about 3% of the science & technology promotion budget. In 2008, a new
model program of multi-phase competitive selection was introduced. In the program
technical assignments are set, based on procurement needs, and a feasibility study is
carried out to select the appropriate high-quality R&D activities. The scheme is more
similar to the US SBIR. The government should continue to offer sufficient support in
development of innovative technologies that could be put to practical and commercial use.
(4) Treatment of new products and services at approval and under regulations
When a start-up starts to manufacture, sell, and/or supply new products or services, it
often takes more time and effort than existing enterprises to complete procedures to
acquire permits and/or licenses necessary for the manufacturing, sale, and/or supply due to
combination of novelty of the goods and/or services and lack of a past record. There may
also be regulations that were established before the type of goods or services were
anticipated.
National and local governments should act as flexibly and quickly as possible even in
Procedures
taken by
SBIR
agencies
Flow of
activities of
Start-ups
R&D topics given
by each agency
(Technical Topics)
Examination
Procurement by the
government, or sale
in commercial market
Examination
Public
invitation
Application
Adoption
Application
Adoption
Requirements for
application
? With 500 employees or
less
? Based in U.S., for profit
Phase 1
? Feasibility study
? Implementation period
of 6 months
? Financial support of
$100,000 or less
Phase 2
? Stage of full-scale R&D/designing of
prototype
? Implementation period of 2 years
? Financial support of $750,000 or less
Phase 3
? Commercialization
? No financial support
? Government
procurement
50
cases for which no precedent can be found, though consideration should be paid to the
relevant permissions and regulations.
(5) Aggressive expansion of business overseas by ventures themselves
Expansion of business overseas is an inevitable stage of progress for start-ups to grow to a
certain level and play a role as true front runners that should lead innovation in the
economy of Japan. Ventures should not stay still in the Japanese market, but instead
should work aggressively to expand their business overseas for further growth and
development.
(6) Enhanced support for start-ups in overseas expansion
As a program to support Japanese ventures overseas, the Japan External Trade
Organization (JETRO) has in place, among others, incubation programs in the United
States and United Kingdom, and programs for venture entrepreneurs for research and
trading overseas. SMRJ also offers support by working in partnership with private-sector
venture capitals to finance funds which make investment mainly in companies that are
expanding business overseas, or by employing management consultants for ventures
under business counseling programs.
As stated above, there are still only a small number of Japanese ventures that extend
operations into overseas markets. Considering the present state of things, more support
from the government in this domain would be desirable.
In particular, more support should be given for expansion of business in Asia as the
market is gaining more and more importance for Japan’s economy.
Start-ups that are entering a foreign market face difficulties not only in setting up an office
and employing people there; many say it is also difficult to form connections and establish
close relationships with people in related industries and in networks of supporters for
Start-ups, and to perform effective public relations activities. From such a viewpoint,
supporting organizations should maintain themselves relationships with such networks in
the host country and provide comprehensive support services, to introduce start-ups that
plant to start business overseas to relevant people there who they can consult with; to offer
them opportunities to take part in on-the-training or hands-on training; to help them
improve business plans; and to back up their public relations activities for their products
and services.
51
Chapter 6 Enhancement of direct financing to start-ups
§1 What meaning does direct financing have for start-ups?
Many start-ups face difficulties in financing at the start-up and expansion stages.
Particularly, most ventures have only limited abilities to raise funds through indirect
financing mainly because they have few particular assets, meaning few properties to be
put up as collateral, because few of them make enough revenues from which loans and
interests can be paid, and because, even with good sales, they need as much of their
revenues as possible to be reserved for growth. It would be no exaggeration to say that
how much a start-up can raise through equity and other direct financing decides whether it
successfully grows at the earliest stage.
For start-ups that seek to raise risk money through direct financing, there are diverse types
of financing methods to choose according to the stage of development and the level of risk
in their business, such as raising funds from retail investors (angel investors), receiving
investment from venture capitals, and listing stocks on a emerging equity exchange. What
is crucial is to develop environments where they can find a financing method appropriate
to them at any stage of development.
In the following sections in this chapter, we examine the current state of angel investment,
venture capitals, and emerging equity exchanges to find their challenges, and discuss what
should be done to tackle them.
Figure 6-1 Financing of start-ups at each stage of development
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Funder’s family
and friends, etc.
Business angels
Venture capital
Public offering
External
capital
Equity capital
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Starting-up
160,000 companies
(annual average
between 2001 and
2004)
Venture capitals
(total)
2,500 companies
(2006)
Emerging equity
exchanges (*)
IPOs
155 companies
(2006)
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Venture’s stages of growth
* “Emerging equity exchanges” refers to Mothers,
Hercules, JASDAQ, Centrex, Ambitious, and Q-Board.
52
§2 Expansion of angel investors
1. Current state of angel investment
(1) Significance of angel investment
For start-ups angel investors not only play financial roles as suppliers of risk money,
which is difficult to obtain at the early stage of business start-up. Most angels also support
them in business operations. Engagement they have in their business and advice they give
as a shareholder work to transfer their business experience and expertise to the ventures
and help them with business administration.
Especially in Silicon Valley and other places where ventures have been created and grow
constantly for a long period of time, many venture founders, once achieving success,
invest money they earned in the business in enterprises of other new entrepreneurs and
offer them what they learned from their own experience to help them create a new
business. There has been an ecosystem, or eco-cycle, formed among venture
entrepreneurs.
Angels, however, are not limited to those who have a tremendous amount of income or
wealth, for instance successful business owners. Surveys in the United States and the
United Kingdom reveal that average angels had an annual income of 10 million yen or so
and net asset of 100 million yen or less, belonging to the upper middle-class. There are
also data that indicate that in the United States 230,000 angel investors supplied 3 trillion
yen to 50,000 ventures, and that in the United Kingdom 20,000 angels provided 100
billion yen for 3,500 start-ups. That suggests in those countries angels in a range of
income bands play a great role in creating and developing ventures.
In Japan there are probably cases of angel investment made by, among others, business
owners and executives who have themselves started a venture business. But we have no
data that show specifically how much has been invested. Many suppose enthusiasm for
such investment activities is lower than in the United States or United Kingdom.
(2) Angel networks
Some angel investors form angel networks, webs woven among investors to acquire and
exchange information about investment and best-practice know-how. In the United States
and Europe there are each more than 200 angel networks formed, and they are building
partnerships with each other and being organized.
53
Angel networks work to offer more opportunities of investment to individuals who lack
information or skills full-fledged angels should have, and help them acquire such
knowledge and techniques. They are believed to be quite useful to expand the angel
investor base. For retail investors with sufficient abilities, angel networks as a group of
people who have different business experience and expertise are also helpful as they can
find more easily experts who perform due diligence and provide consulting for diverse
types of companies they invest in, which would bring them a higher rate of success in
angel investment and a larger return on such investment.
In Japan there are more than ten or dozens of angel networks. Nippon Angels Forum is
one of them. Japan has more room left for growth of such activities than the United States
and Europe.
Figure 6-2 Numbers of angel networks in the U.S. and Europe
Numbers of angel networks in Europe Numbers of angel networks in the U.S.
Source: Europe eban (European business angel network) (2005)
U.S. Center for Venture Research and Kauffman Foundation (04-05 data)
(3) Angel tax
Japan and other countries, recognizing what important roles angel investors play in
creation and development of start-ups, have introduced angel taxation, tax treatment
designed to promote angel investment.
Since 1997 when it adopted an angel tax system, Japan has added a series of amendments.
In 2003, it introduced the three following measures:
(a) For a year when an investor makes angel investment, he or she can defer the amount
of the equity which does not exceed gains she realized in the year from sale of other
stocks to the point of time when it is sold;
(b) If he or she achieved any gain from sale of the equity, the taxable capital gains are
54
halved;
(c) If he or she sold the equity with loss, the loss is permitted to be carried forward three
years from the following year.
Angel taxation in Japan, however, is only used for a small amount of investment. In 2006,
the favorable tax treatment only applied to angel investments of a little less than 1,300
million yen. Even in 2005, when the all-time record was set, it failed to reach 2,500
million yen. Especially, recent records show investments the angel taxation appears to
fluctuate just in line with changes in prices in the stock market. The linkage is believed to
take place because the treatment of investment being deterred for the year when the
equities are purchased (mentioned above in (a)) is linked to gains realized in the year from
sale of stocks.
Against such a background, the government and the ruling coalition parties, recognizing
that more attractive incentives must be offered to increase angel investment, have decided
to introduced an “income exemption system” as part of the 2008 amendment of the tax
code. Under the system an angel who made an angel investment in a start-up established
within past three years which satisfies specific conditions is allowed to deduct from his or
her total income for the year of investment the amount of money substantially equivalent
to the investment (less 5,000 yen, with the upper limit of 10 million yen), and he or she
can choose either the new exemption system or the existing treatment, as stated above in
(a).
Introduction of the income exemption system should provide a greater incentive for
people who refrain from selling any stocks and, naturally, have no profits made in trading,
though such people have so far been refused tax advantages offered for the year of
investment. It is also supposed that people in parts of Japan who intend to support a
“company with something gleaming” in its foundation, including friends of the founders,
should be encouraged by the tax treatment in quite an effective way to make investment,
and that it should make great contribution to revitalization of local communities.
Several parts of the world – the United Kingdom, France, South Korea and Taiwan- have
already introduced a system designed to offer taxpayers a credit equivalent to a specified
percentage of investment they made (or to deduct it from their total revenues). The income
deduction system Japan is introducing should offer its taxpayers tax treatment not less
favorable than in such places.
Considering such circumstances, it is desirable that tax reform bills should get through the
55
Diet as early as possible to introduce the income deduction system (still under deliberation
at the Diet as of April 24, 2008).
Figure 6-3 Investments in Japan which the angel tax is applied to, and a tax price index
Million yen
Green Sheet
Designated funds
Direct investment
JASDAQ index (right-hand scale: 1 = March 1998)
FY1997 FY1998 FY1999 FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006
Figure 6-4 Outlines of the 2008 reform of the Angel tax system (introduction of the
income exemption system)
Existing system (angel tax) FY 2008 (income deduction system added)
Favorable Favorable treatment (Investors choose each of the favorable treatment A or B.)
treatment
* Figures for each year may be revised up as they are counted as of the date investment
was made. (Investment made in March 2007 may be reviewed in July 2007.)
Radical
expansion
(1) At time of investment made
The amount of investment is deducted from
gains made in the year from sale of stocks.
(2) At time of the equity sold (?1)
(i) When sold at a profit
Taxable gains from the sale is halved.
(ii) When sold with loss
The loss can be carried forward for
deduction three years from the
following year.
(1) At time of investment made
The amount of investment less ¥5,000 is deducted from the total
income made in the year.?
* The upper limit is (the total income ×0.4) or ¥10 million, whichever
is smaller.
(2) At time of the equity sold ((i) Preferable treatments for profits are
abolished.) (?2)
When sold at a loss, the loss can be carried forward for deduction
three years from the following year (maintained)
*2 The amount of money that was deducted from the total income is subtracted
from the acquisition cost for calculation.
(1) At time of investment made
The amount of investment is deducted from gains made in the year
from sale of stocks.
(maintained)
(2) At time of the equity sold ((i) Preferable treatments for profits are
abolished.) (?1)
When sold with loss, the loss can be carried forward for deduction
three years from the following year (maintained)
*1 The amount of investment that was deducted from stock sales gains
is subtracted from the acquisition cost for calculation.
The favorable tax treatment A is applicable to a case of investment by a company which a designated capital fund
has equity in or which is designated as Green Sheet Emerging when the case satisfies specified conditions.
56
Figure 6-5 Angel tax systems in countries
U.S. England France S. Korea Taiwan
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? Investments are
deducted from capital
gains (carried forward).
? 20% of the investments (up to
?400,000) are deducted from
the income tax.
? Investments are deducted from
capital gains from other stocks
(carried forward; the income tax
reduction above is applicable
together).
? 25% of the investments
(up to €20,000;
Doubled for a couple)
is deducted from the
income tax.
? 10% of the investments
is deducted from the
total income (up to
50% of the total
income).
? 10% of the investments made in
specific industries is deducted
from the income tax.
(deductible up to 50? of the
total income tax; the rest can be
carried forward four years from
the following year.)
? Tax exemption for half the
gains from stocks held for
5 years or more
? Tax exemption for gains
from stocks held for 3
years or more
? Tax exemption for gains
from stocks held for 8
years or more
? Tax exemption for gains
from stocks held for 5
years or more
? Losses from stocks sold can
be offset against other
incomes.
? Losses can be carried forward
indefinitely.
? Losses from stocks sold can
be offset against other
incomes.
? Losses can be carried forward
indefinitely.
? Losses from stocks sold can
be offset against other
incomes.
? Losses can be carried forward
5 years
? Total assets of $50 million or
less;
? Equities issued on and after
August 11, 1993;
? 80% or more of the assets are
used for designated industries
(sectors other than finance,
agriculture, hotels and
restaurants), etc.
? Total assets of ?70 million
or less, and less than ?80
million even after the
investment;
? Operating in the UK;
? Operating in designated
industries;
? Financing for operations in
designated industries;
? Applicable only to purchase
of newly issued common
stocks, etc.
? Unlisted companies
headquartered in EEAwhich
are subject to corporate tax;
? More than 75% of the equity
is owned by individuals or
specific family companies;
? With less than 250
employees;
? With annual sales of €50
million or less, or total
assets of €43 million or less
? SMEs that satisfy one of the
three requirements below:
? With 50 million won or
more invested and 10% or
more of the equity owned by
start-up investment
companies (SICs), etc.;
? With annual R&D expenses
of 50 million won or more
(5% or more of the sales),
and recognized as excellent
by the Small Business
Corporation, etc.;
? Companies guaranteed by
the Korea Technology Credit
Guarantee Fund (KOTEC),
or those with loans of 80
million won or more and
accounting for 5% or more
of the total assets from
KOTEC
? Companies founded under
the Taiwanese Corporate
Law for economic
development and industrial
sophistication;
? Applicable to more than 150
items in 7 manufacturing
and 12 technology service
sectors. Specifically,
information hardware,
telecommunication device,
consumer electronics,
precision electronic devices,
precision
machinery/equipment,
aerospace,
bio-medical/special-use
chemicals, and other
manufacturing sectors, and
internet software, internet
services, and other sectors.
57
2. Challenges
(1) Survey of realities of angel investors in Japan, and collection of cases of success / public
relations campaign
As mentioned above, there is no sufficient survey or data on the realities of the angel
investment situation in Japan. In the United States, everybody knows the success of
Google was supported by an angel investor, Andreas Bechtolsheim, the first person who
made an investment in the company. Such a positive perception of people about angel
investment helps motivate them to be angel investors themselves.
Japan should examine in more detail about the realities of angel investment in the country,
as well as collect cases of successful start-ups that achieved rapid growth and conduct
public relations campaigns to have them widely known as part of efforts to have angel
investment take root in the society and culture of Japan.
(2) More applicability of the angel tax system, and simpler procedures for the system
If the income deduction system as described above is introduced in 2008, the angel tax
system would work as a stronger incentive and boost angel investment. After the
introduction of the system, aggressive public relations efforts should be made to have the
taxation known by venture entrepreneurs, existing and potential angel investors, licensed
tax accountants and start-up supporters. In addition, consulting and other services should
be provided for those who intend to receive the favorable treatment to encourage more
people to use the system.
Under the current angel tax system, many people complain that complicated procedures
must be taken before a taxpayer receives a tax break. In order to encourage more angel
investors to use the system, studies should be conducted on how to make simpler as wide
a range of procedures as possible.
(3) Treatment of failed ventures
As start-ups in which angel investments are made are challenge businesses that face
higher risks, the majority of them fail. Few of the failed companies, especially smaller
ones, are liquidated through legal proceedings. Most of them, instead, are left as
“zombies.” In the United States, the tax code allows taxpayers to regard investment in
such companies as deductible expense in relatively simple ways, by, for instance,
declaring it on a tax return. Japan should consider whether and/or how to introduce some
58
measures to allow such equity to be deductible.
(4) Efforts to expand angel networks
In order to expand the angel investor base, more aggressive activities of angel networks
would be effective. Especially for Japan, where there are still only a limited number of
angel investors who have themselves founded a start-up, it is quite important to develop
environments where people with diverse types of backgrounds and experience can take
part in angel investment.
In order to make the activities of angel networks in Japan more energetic, it would be
effective to form partnerships between such networks based in parts of Japan and help
them share information about start-ups and best practices for angel network management.
It would also be helpful to encourage them to interact with angel networks in the United
States and other advanced angel networking countries and conduct surveys to learn their
advanced skills to manage networks and angel investment techniques, such as convertible
loan stock. Another effective way is to work to have angel investment activates
understood by SME owners and other people who may potentially have interest in angel
investment. Examination should be conducted on what the government should do to
support such efforts.
(5) Venture capitals of types to support angel investment
In order to make more energetic activities of angel networks in Japan, it would be
effective to form partnerships between such networks based in parts of Japan and help
them share information about start-ups and best practices for angel network management.
It would also be helpful to encourage them to interact with angel networks in the United
States and other advanced angel networking countries and conduct surveys to learn their
advanced skills to manage networks and angel investment techniques, such as convertible
loan stock. Another effective way is to work to have angel investment activates
understood by SME owners and other people who may potentially have interest in angel
investment. Examination should be conducted on what the government should do to
support such efforts.
In the United States and Europe, some angel networks own venture capital funds, referred
to as sidecar or affiliate funds, as a tool for making angel investments, and such funds are
now becoming more common. In Japan, Nippon Angels Forum, an angel network, has a
sidecar fund. On the other hand, some of the venture capital funds there which raise
59
money mainly from retail investors provide services similar to those of angel networks.
Such convergences of angel networks and venture capital may help angel investors learn
the expertise venture capital funds have on venture investment, and in turn allow venture
capitals to use the business experience people in angel networks have and knowledge and
know-how experts there possess when they perform diligence or provide business
advisory services.
In order to encourage more aggressive use of the scheme of venture capital in angel
investment activities, an examination should be conducted on what the government should
do to support efforts in this sphere. For instance, MSRJ’s program of investment in funds
should be used in an effective way to provide support for angel investment.
§3 Increase of financing through venture capitals
1. Present state of venture capitals
(1) Amount of venture capital investment
Venture capital funds in Japan have investments of 1 trillion yen on an outstanding basis.
Compared with the scale of venture capital investment in the United States or Europe,
which amount to more than tens of trillions yens, the gap remains very large. The ratio of
such investments to GDP has also stayed at quite a low level among advanced countries.
In terms of ratio to GDP, there is great room for more investment to be made.
Figure 6-6 Venture capital investments outstanding: comparison between Japan, the U.S.
and Europe
US Europe Japan
Source: Venture Enterprise Center, “Survey on Current Status of Investment of Venture Capitals and Other Funds”; NVCA Yearbook
2007; EVCA Yearbook 2007;
Translated as: $1=¥119; €1=¥158
For the United States, investments made by VCs exclusively in the country, and for Europe, investments including those by
private equities and those made overseas.
For Japan, investments including those made by turn-around buy-out funds for 2003 and before, and investments excluding
those made by such funds for 2004 and after (including investments overseas for all the years). Data of investments
outstanding in Japan are as of March 31 each year.
60
Figure 6-7 Ratios to GDP of annual totals of investments by venture capitals in developed
countries
(2) Structure of the industry
Many venture capitals in Japan are subsidiaries of securities companies, banks, or other
financial institutions or industrial corporations. In the United States, by contrast, most
venture capitals are independent, operated by a capitalist as an individual.
The composition of financiers of venture capitals in Japan also shows most of their funds
are raised from financial institutions or industrial companies, their parents, and that other
financiers, such as pension funds, major investors in the United States and Europe, have
only marginal shares.
Percentage
of
GDP
Israel (1)
United States
Iceland
Canada
OECD19 (2)
OECD23 (4)
Korea (3)
Sweden
United Kingdom
Netherlands
Finland
European Union
Europe
Australia (5)
Norway
Spain
Denmark
France
Belgium
Ireland
Euro area
Germany
New Zealand (5)
Italy
Portugal
Switzerland
Czech Republic
Austria
Poland
Greece
Hungary
Japan (5)
Slovak Republic
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8
2000??2003???????
??????????
Notes? (1) 2000-2002; (2) Europe, Canada and United States; (3)
1998-2001; (4) Europe, Czech Republic, Hungary, Poland,
Slovak Republic, Canada, and United States; (5) 1998-
2001.
Percentage
of
GDP
Israel (1)
United States
Iceland
Canada
OECD19 (2)
OECD23 (4)
Korea (3)
Sweden
United Kingdom
Netherlands
Finland
European Union
Europe
Australia (5)
Norway
Spain
Denmark
France
Belgium
Ireland
Euro area
Germany
New Zealand (5)
Italy
Portugal
Switzerland
Czech Republic
Austria
Poland
Greece
Hungary
Japan (5)
Slovak Republic
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8
Israel (1)
United States
Iceland
Canada
OECD19 (2)
OECD23 (4)
Korea (3)
Sweden
United Kingdom
Netherlands
Finland
European Union
Europe
Australia (5)
Norway
Spain
Denmark
France
Belgium
Ireland
Euro area
Germany
New Zealand (5)
Italy
Portugal
Switzerland
Czech Republic
Austria
Poland
Greece
Hungary
Japan (5)
Slovak Republic
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8
2000??2003???????
??????????
Notes? (1) 2000-2002; (2) Europe, Canada and United States; (3)
1998-2001; (4) Europe, Czech Republic, Hungary, Poland,
Slovak Republic, Canada, and United States; (5) 1998-
2001.
Source?OECD, “The SME Financing Gap” (2006)
Ratio to GDP of average
investments between 2000 and 2003
61
Figure 6-8 Structural proportion of venture capitals in Japan and the United States by
attribute
Breakdown
Attribute Share
Government-affiliated
Others
Others
Independent
Industrial Financial institution-affiliated
corporation-affiliated
Breakdown
Attribute Share
Bank-affiliated
Securities-affiliated
Insurance-affiliated
Figure 6-9 Structural proportion of financiers of venture capitals in Japan, the United States,
and Europe
(3) Current status of investment of venture capital firms
Many venture capital firms in Japan make small amount of investments in a large number
of companies. Their investment in a company averages less than 100 million yen, less
than one-tenth of that in the United States and one-fifth of that in Europe. Shares of
companies they invest in by stage of development in terms of money invested show a
higher proportion of investments are made in companies at an early stage after starting-up
than in Europe and the United States.
Note: Structural proportion of investments outstanding by
attribute (as of March 31, 2007)
Source: Counts by METI, adapted from “2006 Survey of
Venture Capitals” Nikkei Financial Daily, July 3, 2007
Note: Structural proportion of investments outstanding by
attribute (as of end of 2006)
Source: NVCA Yearbook 2007
Source: NVCA Yearbook 2004 Source: EVCA Yearbook 2007 Source: Venture Enterprise Center, “2006 Survey on
Current Status of Investment of Venture Capitals
and Other Funds” (December 2006)
Industrial
corporation-affiliated
Others
Financial
institution-affiliated
Independent
Industrial Corporation
2%
Individual
10%
University
foundation/ Pension
endowment fund
21% 42%
Financial
institution/insurance
25%
December 2003
U.S.
(Dollar term)
$10.96
Billion
December 2006
Europe
(Euro term)
€112.3
Billion
December 2005
Japan
(Yen term)
€112.3
2,305 ??
Others
16? Pension fund
26%
Gov-affiliated
institutions
8%
Individual
9%
Fund of Financial
funds institution/
17% insurance
24%
Pension fund
5%
Others (other
VCs, foreigners,
etc.)
22% Financial
institution
(bank/
securities)
31%
GP
18%
Individual
4%
Industrial corporation Foundation/
19% endowment
1%
230.5 billion
62
Figure 6-10 Average investment in a company by venture capitals in Japan, the United
States and Europe
US Europe Japan
Figure 6-11 Shares of companies in which investments are made by stage of development
in terms of money invested
Japan U.S.
Jun 00 Sep 01 Sep 02 Sep 03 Mar 04 Mar 05 Mar 06
Investment Starting-up - 4th year 5th - 9th year
for starting-up
10th - 14th year 15th year and after
Europe
Source: Venture Enterprise Center, “2006 Survey on Current Status of Investment of Venture Capitals and Other
Funds” (December 2006); NVCA, Yearbook 2007; EVCA, press release (June, 2007).
For Japan, data are as of FY 2005; for the U.S. and Europe, as of 2006.
Calculated by dividing annual investments by the number of companies in which they are made.
Translated as $1=¥116.25, and €1=145.46 (average rate in 2006).
Source: Venture Enterprise Center, “2006 Survey on Current Status
of Investment of Venture Capitals and Other Funds”
(December 2006); NVCA, Yearbook 2007; EVCA, press
release (June, 2007).
m
i
l
l
i
o
n
y
e
n
63
(4) Return on investment
Returns on investment of venture capital firms vary greatly year to year due in part to
fluctuations in the stock market. That makes a general description difficult, but the level of
returns Japanese venture capitals earn from their investment remains lower than that of
their peers in Europe or the United States.
As a cause of the lower return some point out lower risk appetite of people and institutions
in Japan that invest in venture capitals. It is also attributed to the fact that the only way for
venture capitals to realize profits from their investments is to list the stock on an exchange
for start-ups. Others point out that as most of Japanese venture capitals are set up by
financial institutions or other corporations as subsidiaries, they accept a large number of
people from the parents, transferred temporarily or permanently to work as venture
capitalists, not all of whom, however, have received a sufficient level of education needed
to successful or skillful venture capitalists.
Figure 6-12 Return on investment of venture capitals in Japan, the United States and
Europe
US (VC) Europe (VC) Japan (VC)
1 year 3 years 5 years 10 years 20 years
Years of management
Source: Venture Enterprise Center, “2006 Survey on Current Status of Investment of Venture Capitals and
Other Funds” (December 2006); NVCA, Yearbook 2007; EVCA, press release (June, 2007).
* ROIs are the average of IRRs (internal rate of return) weighted by the amount of investment.
Note: For the U.S., data are between October 2005 and September 2006, for Europe, as of 2006, and for
Japan, as of 2005.
64
(5) Venture capital policies
The history of venture capital in Japan started with small and medium business investment
and consultation companies founded by the government in 1963 (Tokyo, Osaka and
Nagoya SBICs). Since 1972, when private sector venture capitals started to grow, the
industry has been expanding with development of legal and regulatory arrangements, such
as the amendment of the Antitrust Act in its treatment of venture capitals (their relation to
the clause prohibiting holding companies, etc.), and introduction of the system of limited
liability partnership (LLP) for investment. SMRJ and the Development Bank of Japan
(BDJ), together with private sector investors, are working aggressively for projects to
form venture funds under the scheme of investment LLPs. They are working, you could
say, to prime the pump to enable money to be injected from the private sector, and help
more venture funds to be formed in Japan.
65
2. Challenges
(1) Diversification of suppliers of capital
Venture capitals in Japan still have a shortage of funds to invest. (In other words, with
more money supplied to them, they could invest more in start-ups.)
Measures should be taken to attract more diverse types of suppliers of capital to the
venture capital industry and have them invest more in venture capitals, so that more
investment will be made in Start-ups.
Figure 6-13 Balance of venture capitals between money supplied and companies to invest
in
Others
8.0%
With more money supplied,
wish to invest more
48.0%
Money supplied and investments
made are in balance.
36.0%
Enough money supplied, but insufficient
companies to invest in
8.0%
(i) Capital from pension funds
In Japan, pension funds, a major category of suppliers of money to venture capitals in
Europe and the United States, have the potential to invest more.
At present, there are only a limited number of pension funds in Japan which invest in
Japanese venture capital firms. In particular, public pension funds are prohibited from
investing in venture capital, a type of investment in unlisted stocks, by the Government
Pension Investment Fund (GPIF) as part of its management policy.
Nowadays, on the other hand, with the view to investing in more diverse asset classes and
diversifying risks, an increasing number of pension funds are investing in alternative
forms of assets. Some data suggest that in 2007 three quarters of the pension funds were
engaged in alternative investment. Most of their investments, however, were made in
hedge funds, and only a fraction of the money came to venture capital firms.
N=25
Source: Questionnaires by METI to JVCA members (September 2007)
66
* Alternative investment: refers to investments in financial instruments other than stocks,
bonds and other conventional assets that are traded mainly on
exchanges, which are highly liquid as a result, and have long
histories as investment vehicles. They are put in a portfolio in
the hope of diversifying risks. Some of the typical alternatives
are venture capital firms and private equities, such as buy-out
funds, real estate funds, and hedge funds.
67
Figure 6-14 Alternative investment by corporate pension funds
Share of corporate pension funds investing in alternative assets
No plan of such investment
Under
consideration
Investing in alternative assets
Types of alternative assets they invest in
Types of private equities they invest in
For venture capitals to raise more money from pension funds, further efforts should be
made to make them more attractive as an investment vehicle when compared with hedge
funds, which offer a relatively steady return in a rather short lock-up period, or stocks in
emerging economies, which have been realizing high yields in recent years.
Source: Daiwa Fund Consulting, “Pension Newsletter: featuring Alternative Investment” (October 2007)
Hedge fund
Domestic/overseas REIT
Real estate funds
Emerging stock
Private equity
CDO
Inflation-indexed bond
Others
Domestic venture capital
Oversea venture capital
Domestic buy-out
Overseas buy-out
Domestic fund of funds
Overseas fund of funds
Others
68
There are also many challenges in terms of the disclosure of information and public
relations, such as the absence of benchmarks for venture capital investment, insufficient
information about investment tools, and the lack of transparency of the information
disclosed.
In terms of public pension funds, a recommendation has been made recently that they
should be allowed more discretion in management of their reserves and be authorized to
invest in alternative assets, so that they are managed in a way suitable for one of the
largest pension funds in the world with the view to keeping pension financing in a sound
condition, as well as granting more to future pensioners and reducing the burdens of
present contributors (“For Reform of Management of Public Pension Funds,” Second
Report of the Working Group on Financial and Capital Markets, Expert Committee on
Reforms Addressing Globalization, Council on Economic and Fiscal Policy, April 2008).
Present obstacles that outright prohibit pension funds from investing in venture capitals
should be removed soon.
(ii) Capital from investors overseas
Investments from overseas in Japanese venture capitals account for only 3% of the total
capital they have received. According to the current tax code of Japan, a venture capital
formed under a Japanese partnership scheme which a foreigner (non-resident) has invested
in is regarded as the permanent establishment of the foreigner (referred to as Item-1 PE),
and profits from the fund are taxed by Japanese tax authorities. Furthermore, in order to
secure the taxation, they started in 2005 to impose a 20% withholding of income tax on
the distribution to foreigners of business profits from such partnership agreements. Some
point out such measures as major factors that have kept foreign investors away from
investment in venture capitals in Japan. Foreigners would invest more in Japan and the
money could be used effectively to promote innovation of Japan’s economy and revitalize
it only when they recognize new businesses in Japan to be finally attractive. Policies and
programs to realize this situation should be introduced.
(2) Collection and provision of information about venture capitals
(i) Why is collection and provision of information about venture capitals necessary?
In the United States and Europe, there are databases, such as VentureOne and Thomson
Financial that store information, including records of return on profit of start-ups and
investments in them. Their services are commonly used by venture capitals when they
69
make decisions on investment in start-ups and by institutional investors in making
investment decisions in venture capitals. They are an important part of the infrastructure
that circulates money from institutional investors to venture capitals, and from venture
capitals to start-ups.
In Japan records of return on investment in the venture capital industry should also play
an important role to encourage institutional investors, especially pension funds, to
increase investment in the sector. Databases of such records would help venture capitals
use their limited resources in an efficient way to make decisions on investment and
achieve high performance in their investment. In addition, venture capital data bases
would be needed for the industry as a whole to train excellent venture capitalists. To
obtain promising venture capitalists, it is essential to prepare environments that help them
set up their own venture capital in future.
(ii) Mechanisms to be prepared for the collection and provision of more information about
venture capital investment
In Japan, since 1985 the Venture Enterprise Center (VEC) has been conducting
questionnaire surveys on venture capitals to examine the current status of VC investment
and offer compiled data.
The Japan Venture Capital Association (JVCA) has also been carrying out research on its
members to survey their investment activities.
Recently the Japan Venture Research (JVR), an incorporated NPO established by
researchers studying start-ups and people involved in the sector, has started to build a
database of information about capital policies of companies venture capitals made
investments in from their foundation through listing, based on prospectuses for issuing
securities.
The Organization for Small & Medium Enterprises and Regional Innovation, the Japan
(SMRJ), an independent administrative institution which implements programs of
investment in venture capitals to secure smoother supply of capital to start-ups, collects
information about investments made by venture capitals it financed and reviews their
performance as part of its policy assessment.
In order to collect and provide information on venture capital investment in a more
effective way, people and organizations as mentioned above that have been supplying
such services in Japan, among others, should work to establish mechanisms to collect and
70
provide such information in a desirable manner.
(3) Further investment in companies at the early stage of business start-up
Some point out that in the United States, among others, while the amount of money
venture capitals manage has increased mainly due to the growing inflow of capital from
pension funds, fewer of these are engaged in hands-on support, one of features they
originally had, and that they make fewer investments in start-ups at the early stage of
business start-up, which has made it more difficult for the start-ups to raise money.
In Japan, venture capitals make a higher proportion of investment in start-ups at the early
stage of business start-up than their peers in the United States and Europe. Granted that
the total amount of investment of the industry itself is much smaller, but it is expected to
grow. However, investment in start-ups at the early stage of business start-up might
decline as it has in the United States and other countries. With the view to providing them
with the capital they need, further policies and programs should be introduced to
encourage investment in such companies.
SMRJ finances hands-on venture funds, which invest mainly in start-ups at the early stage
of business start-up. The independent administrative institution is expected to increase
such investment.
(4) Development of human resources of capitalists for more hands-on support
For venture capitals to raise the level of potential that start-ups have for growth and, as a
result, to provide investors greater returns on investment, hands-on support (or support
that venture capitals provide directly for start-ups in terms of their business management)
is be essential.
In part because such services have been offered to start-ups by banks, venture capitals
have not provided sufficient hands-on support. In order to attract investors in competition
with other financial vehicles, venture capitals should give more hands-on support to
ventures and achieve better performance in management of funds.
For venture capitals that provide hands-on support, it is critical to secure venture
capitalists, people who work for them for investment in venture capitals.
Venture capitals should endeavor to enhance their system of inner incentives for the
purpose of calling in people with experience and skills, such as those who have
71
themselves founded a start-up. They should also work to train their own people to be
capitalists.
JVCA also works to develop human resources. For instance, it sponsors training seminars
and certification examinations for venture capitalists. The association is expected to
continue such initiatives. Graduate schools offering MBA and MOT degrees are
introducing courses of education designed for venture capitalists to strengthen their
comprehensive competence.
MSRJ conducts programs of investment in capital funds (see above (3)) to primarily
supply capital to those independent venture capitals and emerging venture capitals with
little past record of investment that the organization recognizes as having great ability to
foster growth. The programs play a part in developing a pool of capitalists. It is desirable
to maintain such a point of view in making investments. In addition, it might be necessary
to consider some policies and programs to back up training or other educational activities
carried out to produce more capitalists.
(5) Challenges in legal and accounting systems
(i) Ways to apply accounting standards to venture capital investment
Financial Accounting Standards should be applied in such a way as venture capital
investment is treated in an appropriate manner. Reviews must be conducted on accounting
practices to clarify points of issue, and arrangements should be made to introduce
necessary legal, regulatory, and institutional systems.
For instance, when a venture capital assesses the fair value of unlisted shares issued by a
company in which it has invested, if the investor has acquired a position which allows it to
see in detail how the business is operated because, for instance, it has sent someone to the
company as a director, or because it has been providing hands-on support for the company,
the investor may be able to judge whether fair value of the stocks could recover, because
the venture capital can obtain medium- and long-term business plans and anything
necessary from the company just as a case where it would have invested in a company
founded for a specific project. Seen from such a viewpoint, even under the current system,
when the fair value of shares issued by a company in which a venture capital invested in
has declined to less than 50% of the acquisition costs, it may not always need to recognize
the difference as a loss. That is, the reporting of the difference as a loss might not be
needed when the investor reasonably anticipates that losses the company has accumulated
since its foundation could be resolved in a certain period of time, and that its subsequent
72
financial performance could avoid falling far below the level that was estimated in the
business plan, for example.
The current system, on the other hand, requires listed venture capitals to consolidate
accounts of investment partnerships in which they are a general partner (GP) into their
own financial statements. Some point out problems that take place when venture capitals
are obliged to consolidate investment partnerships only because they are GPs, such as (a)
that the accounting treatment may make financial conditions and earnings of the listed
venture capitals less transparent because fees and interests paid and received between the
investment partners and venture capitals are internalized; and (b) that consolidated assets
of venture capitals that serve as GPs in a small number of investment partnerships may
fluctuate widely every time a partnership is founded or dissolved, which would not
correctly represent the realities of their business. For the time being, to cope with such
problems, venture capitals consolidate accounts of investment partnerships in which they
serve as GPs into their financial statements according to accounting standards, with their
unconsolidated statements added for reference. In the medium and long term, studies
should be conducted on standards that decide, among others, in what case they should be
consolidated and in what case they should not, so that accounting disclosure can better
represent realities of their business.
(ii) Regulations of venture capitals
Regulations of venture capitals are being tightened. For instance, with the Financial
Products Trading Act, venture capitals are also required to be registered or reported
according to the Act. When regulations are introduced, it is important to pay due attention
both to the benefits they bring, such as protection of investors, and to compliance costs
which those regulated would bear and restrictions imposed on their acts, and maintain an
appropriate balance between them, so that the regulations will not exceed a necessary
level. For instance, when a venture capital forms a fund with money raised from outside
investors (the main fund), it may prepare another fund (a parallel fund) which offers
membership exclusively to its venture capitalists (executives of the venture capital) and
make investments in the same companies which the main fund invests in, so that it will
provide incentives for venture capitalists and attract talent. But such executive funds
usually do not include “professionals,” and they are not eligible for exceptional operations
permitted only to qualified institutional investors, so they must be registered. Obviously
this represents excessive regulation. An executive fund that is managed by general
partners of the main fund or their executives and offers membership exclusively to
executives of the GPs should be exempted from registration.
73
§4 Ways to increase participants in emerging equity markets and revitalize them
1. Current state of emerging equity markets
(1) Increased numbers of emerging equity markets
In Japan, there have been a total of seven emerging equity markets founded: the Mothers
(Tokyo Stock Exchange) and Centrex (Nagoya Stock Exchange) exchanges, the two first
emerging equity exchanges opened in 1999; JASDAQ (reorganized from the OTC
market); NEO (opened in 2007) Hercules (Osaka Securities Exchange, opened in 2000);
Ambitious (Sapporo Securities Exchange, opened in 2000); and Q-Board (Fukuoka Stock
Exchange, opened in 2000).
Since 2000, more than 1,000 stocks have been listed on the seven exchanges, with 100 to
150 new listings each year after 2000. The number of companies listed has come quite
close to those on similar exchanges in the United States and Europe. They deserve credit
for, over the decade, having rapidly improved the environment for start-ups in financing in
the stock market.
On the other hand, some point out problems, for instance, that the rapid increase of
emerging equity exchanges has made them less distinctive or less unique; and that
excessive competition among them has led some to too-lax listing examinations.
Figure 6-15 List of emerging equity exchanges in Japan
Emerging equity exchanges in Japan (in no particular order)
Exchange Listed stocks Opened in Exchange Market capitalization Trading value Turnover
per stock per stock ration of
(¥1 million) (¥1 million) trading (%)
Mothers (TSE) November 1999 Mothers (TSE)
Hercules (OSE) May 2000 Hercules (OSE)
Centrex (NSE) October 1999 Centrex (NSE)
Q-Board May 2000 Q-Board
Ambitious April 2000 Ambitious
JASDAQ February 1963 JASDAQ
NEO August 2007 NEO
(Ref.) TSE 1 May 1878 (Ref.) TSE 1
(Ref.) TSE 2 October 1961 (Ref.) TSE 2
Emerging equity exchanges overseas
Exchange Listed stocks Opened in Exchange Market capitalization Trading value Turnover
per stock per stock ration of
(¥1 million) (¥1 million) trading (%)
NASDAQ (US) February 1971 NASDAQ (US)
AIM (UK) 1995 AIM (UK)
GEM (Hong Kong) November 1999 GEM (Hong Kong)
* Adapted from statistics carried on websites of the exchanges and NOMURA CAPITAL MARKET REVIEW, Nomura Institute
of Capital Market Research.
* Trading values are monthly figures for March 2007. (For foreign exchanges, monthly averages between January and March
2007.)
* Market capitalizations and listed stocks are as of March 31, 2007.
* Market capitalizations and trading values are translated at the exchange rate as of March 31, 2007.
74
(2) Increasing cases of companies delisted due to breaches of the law, etc.
Recently several cases occurred where companies listed on emerging equity exchanges
were accused of, or delisted due to, for instance, misstatements, window dressing, or links
to antisocial organizations. Such problems are not necessary unique to emerging equity
exchanges, but tend to come up more often than in major exchanges. In emerging equity
exchanges, it is pointed out, such troubles arise due mainly to excessive competition
among the exchanges, premature listing of companies before they acquire adequate
business bases, or lack of a fully developed management awareness, and substandard
examination and auditing systems at some securities underwriters and auditing firms.
Figure 6-16 Companies delisted due to breach of the law, etc.
A. Companies listed on the major exchanges
Companies delisted from the major exchanges
a. Companies delisted for reasons above
b. Proportion to the listed companies
B. Companies listed on the emerging equity exchanges
Companies delisted from the emerging equity exchanges
a. Companies delisted for reasons above
b. Proportion to the listed companies
Adopted by METI from the website of kabu.com Securities and those of the exchanges
(3) Retail investors support emerging equity exchanges
Most of the transactions on the emerging equity exchanges are conducted by retail
investors, and only a limited number of institutional investors take part in the trading. This
is attributed to their smaller market capitalization and lower liquidity, which hinders them
from meeting the needs of institutional investors in terms of money management. The
phenomenon brings the contrast between the emerging equity exchanges in Japan and
those in the United States and Europe, such as NASDAQ in the United States, and AIM in
the United Kingdom, where institutional investors play a major role in transactions.
The central role retail investors play in emerging equity exchanges in the country is also
mentioned as one of the causes of wild fluctuation of stock prices there. Especially, with
the recent spread of stock trading on the internet, the number of “day traders,” individuals
who continually buy and sell in a short period of time, is increasing. Some believe they
are another factor that makes share prices volatile.
Proportions to the companies delisted of those due to disclaimer of audit opinion, misstatement, protection of public
interests/investors, and breaches of listing agreements
75
Figure 6-17 Compared shares of transactions by type of investor (trading value basis,
2007)
Unit: %
TSE 1 TSE 2 Mothers JASDAQ Hercules
Financial institutions
Investment trusts
Business companies
Others companies
Securities firms
Individuals
Foreigners
Total
Source: websites of the exchanges
Note: The shares are calculated only with payments made by buyers through brokers.
(4) Volatile / depressed stock prices at present
With some companies having been delisted due to breaches of the law or for other reasons,
and others having lowered earnings estimates immediately after being listed, emerging
equity exchanges are losing the confidence of investors. In addition, general conditions of
the market are deteriorating due mainly to problems with the subprime loan market. As a
result, stock prices at the emerging equity exchanges are still depressed, having peaked
out at the end of 2005 before falling down to just over 20% of the record high in April
2008.
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Figure 6-18 Stock prices at the emerging equity exchanges
Stock prices at exchanges (monthly basis)
JASDAQ(right-hand)
TOPIX
Hercules
Mothers
1997/Jan 1998/ Jan. 1999/ Jan. 2000/ Jan. 2001/ Jan. 2002/ Jan. 2003/ Jan. 2004/ Jan. 2005/ Jan. 2006/ Jan. 2007/ Jan. 2008/ Jan.
Index: closing Mothers Index: Hercules index Index: closing TOPIX Index: JASDAQ index
index (all listed stocks) (right-hand)
Source: Statistics carried on websites of Bloomberg, AMSUS and the exchanges
(5) More rigorous examination for listing
With an increasing number of listed companies accused or having been delisted due to, for
instance, misstatements, window dressing, or links to antisocial organizations, the
emerging equity exchange are examining listings more carefully, and securities
underwriters and auditing firms are becoming more cautious. Some start-ups, among
others, claim that listing examinations are becoming more rigorous. No change has been
made in anything about formalities stipulated in the criteria for listing (rather, some of the
standards are relaxed), but parts relating to examinations of substantiality (viewpoints
such as appropriate disclosure of conditions of the company and information of its risks,
soundness of the business, and public interests / investor protection) are getting stricter.
Especially among venture capitals and start-ups, a majority say listing that examination
has gotten much tougher than a few years ago.
Issues that have gotten tougher include the internal control system checks, links for to
antisocial organizations, and scrutiny of business plans. All these are important, but
checking for relationships to antisocial groups is pointed out as an increasingly urgent
problem and JASDAQ mentions it explicitly as one of its delisting criteria, and other
exchanges are also putting forth more efforts to tackle the problem. Some say, on the other
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hand, there are cases where start-ups are required to develop a internal control system they
are unable to put in effect, where an unclear definition or range of antisocial organizations
to be examined, puts them to trouble in deciding specifically what they must do, or where
an exchange that demands excessive feasibility in business plans refuses even a
reasonable degree of future uncertainties about growth when such uncertainties are present
for start-ups, by their very nature.
Figure 6-19 Changes in listing examinations by exchanges in the start-up stock market
Venture capitals perceive as:
Others
Same as before 4.0%
0.0%
More rigorous than
a few years ago
96.0%
Source: Questionnaires by METI to JVCA members (September 2007)
N=25
78
Start-ups perceive as:
Others
2%
DK
32%
More rigorous
than a few
years ago
64%
Same as
before
2%
Source: Questionnaires by METI to Japan Venture Conference (October 2007)
(6) Difficult assignment of auditing firms
Furthermore, with cases of misstatements and window-dressing having occurred in the
start-up stock markets, auditing firms are becoming more cautious as to whether to
undertake the auditing of a start-up immediately before or after its listing. An increasing
number of start-ups feel it is getting more difficult to find an auditing firm that accepts
them. Fees auditing firms require from start-ups are also rising compared to a few years
ago.
Figure 6-20 Changes in attitudes of auditing firms to private companies
Venture capitals perceive as:
Others
Same as before
Auditing fees have risen
More often refused auditing
than a few years ago
Source: Questionnaires by METI to Japan Venture Conference (October 2007)
N=57
N=24
79
(7) Introduction of the internal control reporting system
In addition, the internal control reporting system has been introduced according to the
Financial Products Trading Act, which applies to listed companies from the first business
year that begins on and after April 1, 2008. There are worries that the system might drive
listing costs up further, or that it might make it more difficult to secure an auditing firm.
(8) Deteriorating listing conditions for start-ups
With more rigorous examination for listing pointed out, as described above, along with
falling or depressed stock prices at present, the increasingly difficult assignment of
auditing firms, the introduction of the internal control reporting system, and other
difficulties, the conditions for start-ups attempting to list are significantly deteriorating.
The situation has gotten much tougher than a few years ago for start-ups that endeavor to
raise money at a start-up stock exchange.
Figure 6-21 Numbers of public offerings on start-up stock exchanges
Q-Board
Offerings Ambitious
Centrex
Hercules
Mothers
NEO
JASDAQ
-31.6% from
a year ago
1999 2000 2001 2002 2003 2004 2005 2006 2007
Adapted by METI from data released by the exchanges
(9) Concerns about a slump in investment in start-ups in general
As conditions are thus getting tougher in a variety of aspects for start-ups that intend to go
public on a emerging equity exchange, there are concerns emerging not only that start-ups
might have more difficulty in raising money from an emerging equity exchange, but also
that the impact might extend to venture capitals and angels, which at present make profits
from capital gains they earn mainly by taking start-ups public on a emerging equity
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exchange. In particular, when venture capitals commit themselves to earning a certain
percentage of profits on their investments, a depressed offering price leads to a diminution
of the money venture capitals can afford to invest. Greater impacts of such shrinking
investments are felt, it is said, especially by start-ups in the biotechnology sector. With
such difficulties left unsolved, the impact on direct facing may become severe.
2. Challenges
(1) Enhanced self-discipline and governance by start-ups themselves
The recent loss of confidence in emerging equity exchanges, and depressed trading
volumes and prices have resulted mainly from window-dressing, misstatements and links
to antisocial organizations by start-ups listed there. They should, keeping these lessons in
mind, work to secure the sound functioning of emerging equity exchanges, which
represent their most important tool for gaining capital and achieving credibility. For
instance, start-ups and their management should develop their own awareness of
compliance issues, disclose information of the company from the viewpoint of investors
about anything at any time, and have independent directors appointed who should monitor
management as outsiders. They should recognize that it is critical for them to develop
adequate management control systems.
In the first place, no capital could be raised in a stock exchange without participation in it
of buyers of stocks, or investors. Start-ups that finance in the stock market should
maintain good communication with investors and offer them sufficient information.
(2) How should listing procedures be from now on?
(i) Listing procedures that strike a balance between the growth of start-ups and the protection
of investors
It is indeed important to conduct listing examinations from the viewpoint of appropriate
disclosure about conditions and risks, financial soundness, and the public interest and
investor protection. But excessive, unnecessarily rigorous listing examination might
impose too heavy a burden on start-ups that intend to go public.
There is disagreement, about whether listing examinations are actually getting more
rigorous nowadays or they are merely adhering to the same criteria but becoming
“deeper.” If, however, an exchange’s stance on implementation of listing examinations
were largely swayed by several cases of breaches of the law or the mood prevailing in the
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market, this would not be desirable to promote growth of start-ups in the sense that it
would ruin predictability about listing. Larger swings or unpredictability with
implementation policies would ultimately hamper venture capitals from supplying capital
to start-ups, which might impact the whole venture capitals financing system.
In terms of financial and capital market regulation, it is important, needless to say, to pay
due attention both to fairness and transparency in the market and the protection of
investors, as well as to compliance costs market participants pay and restrictions imposed
on their behavior, and strike an appropriate balance between all of these.
If such balance is lost in emerging equity exchanges in Japan, there would be a rapidly
increasing number of Japan-based start-ups that will raise capital from an emerging equity
exchange overseas or move their headquarters abroad. Such movements would be a great
problem for Japan in securing competitiveness in the global financial and capital market
and from the viewpoint of revitalizing our economy as a whole.
In view of this, exchanges are keenly expected to conduct listing examinations in a way
that balances the need to grow start-ups while protecting investors.
For instance, some say that there are cases where, in terms of internal control systems,
relations with anti-social organizations, or inaccurate business plans, start-ups are required
to develop unworkable internal control structures where an unclear definition or range of
antisocial organizations to be examined puts them to trouble in deciding specifically what
they must do, or where an exchange that demands excessive feasibility in business plans
refuses even a reasonable degree of future uncertainty in terms of growth. Exchanges are
expected to take measures to solve such problems.
Exchanges are also developing mechanisms to tackle antisocial groups. They are expected
to work together with related parties and make further efforts to support companies in
preparing internal systems that protect them from harm.
When the statutory annual securities report a company attaches to the application for
listing carries a note of significant doubt, there is little chance, it is believed, that the
listing will be approved. Some claim that whenever a significant doubt related to financial
conditions exists, such as difficulties in raising new capital, if it is judged that the doubt
would be removed by the listing, once it is approved, the application should be treated at
the listing examination as if the note of doubt about its going concern had not been made.
The Financial Service Agency (FSA) should not supervise or inspect exchanges, securities
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firms or auditing firms in a way people concerned are held accountable in an
unnecessarily harsh way for cases of a listed company that was accused or delisted due to,
for instance, a breach of the law. Instead, the Agency should adopt a risk-based approach,
which makes clear what areas and items have greater impacts on users and markets for
focused supervision and inspection.
(ii) Exchange of information about listing examination procedures for better understanding of
the procedures
It is necessary to promote better communication between parties related to the start-up
stock market and eliminate poor public relations and avoidable misunderstandings among
them. For instance, exchanges should play a central role in providing parties related to the
start-up stock market, such as start-ups that raise capital from exchanges, and securities
firms, auditing firms and attorneys that support them in listing procedures, with
opportunities to exchange opinions regularly.
It is also important for exchanges to explain, in what cases listings would be rejected
through listing examination at explanatory meetings and other occasions for applicants for
listing, on listing manuals and guidelines, and in FAQs and the like, with as many
examples as possible given.
(iii)Necessary actions to solve issues with auditing firms
In view of the responsibility of auditing firms and accountants, it is reasonable to a certain
degree for the firms and accountants as individuals to select clients on the basis of their
level of audit risk. On the other hand, in view of the statutory requirements clients must
satisfy when listed with the assignment of auditor, the auditing firms and accountants as a
group have social responsibility to the economy as socio-economic infrastructure and
public institutions to provide companies that hope to go public with the services they need.
The auditing firm and accountant community should take action to deal with difficulties
which at present many of the companies hoping to go public encounter when assigning an
auditor. Especially, it seems necessary to promote and develop auditing firms specialized
in services for start-ups.
The concern is that the tightened compulsory rotation of auditors might lead to a smaller
number of auditing firms and accountants that undertake audits of start-ups. Considering
the characteristics of ventures, most of which are yet to have a full-fledged corporate
structure, it might be necessary to examine whether the regulation for obligatory auditor
rotation should be relaxed in terms of companies that are preparing for an initial public
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offering.
(3) Shift of focus from listing examination to post-listing actions
(i) Necessary recognition as ex post facto supervision system
Cases of companies that were delisted because they turned out, once listed, to have failed
to satisfy listing standards should be recognized as demonstrating a shift to an ex post
facto supervision system. Anyway, cases of failure to meet listing criteria should not be a
reason for the hasty introduction of stronger and stricter listing examinations before
contemplating other measures.
(ii) Study of Japanese Nomad (system for support for disclosure after listing)
With the view to supporting listed companies in terms of maintaining their capacities for
disclosure after going public, instead of excessively tightening examination for listing,
Japan might as well examine whether it should also introduce a system under which third
parties (advisors) help companies with disclosure, something like the Nominated Adviser
(Nomad) of AIM in the United Kingdom, the OTCQX system made by Pink Sheets in the
United States, and the GEM system in Hong Kong.
A Japanese Nomad system, however, should be designed as an addition to be made to the
existing system, where listing examination and other procedures are implemented in a
strict way, or as mere rigid regulation. It should, instead, be constructed as a voluntary
scheme that offers start-ups another option along with the existing mechanism and which
gives them incentives. Another issue is how they should be offered benefits that offset the
increased costs of the introduction of a Nomad system.
The proposed amendment of the Financial Products Trading Act, now before the Diet, is
to introduce a system similar to Nomad into “professional exchanges” (see (4) (v)), a
category of bourse to be founded under the amended Law. While monitoring how the
system is operated in “professional exchanges,” examination should be conducted whether
and/or how a mechanism of third parties (advisors) offering support for disclosure should
be used in other exchanges.
(iii)Voluntary efforts by securities firms and exchanges
Whether a Japanese Nomad is introduced or not, securities firms, which sponsor ventures
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and other companies for listing, should more willingly provide them with support and
advice for their disclosure after they are listed.
The Tokyo Stock Exchange obliges companies listed on Mothers to hold more than two
explanatory meetings per year three years after listing. In April 2004, JASDAQ also
introduced a system that requires all its listed companies to have two IR meetings a year
(four meetings per year for companies listed on the NEO, established in 2007), and, along
with the system, it set up a special unit to provide the companies with necessary services.
The free services for all the listed companies, “JQ IR Support Service,” include lectures
by IR experts, seminars where IR practitioners offer their experiences as a lesson for
others, and a “website dedicated to IR,” which provides investors and the companies with
opportunities to communicate. It also has a system of annual commendation to have
examples that should be guides to IR activities that should be made widely known and
that should promote more aggressive efforts, so that its listed companies will offer more
and better IR services and, as a result, that the JASDAQ itself will function better. With
such initiatives in mind, exchanges should provide companies listed on them with more
support in disclosure activities they perform for investors, such as IR meetings held for
them.
(iv) Examination of effective use of intellectual property reports and intellectual assets
management reports
JASDAQ already has a free analysis service provided for companies listed on the
exchange to evaluate their intangible value that are not expressed on financial statements,
such as “know-how,” “R&D capacity,” and “royalty of employees.” Now examination
should be conducted in a positive manner on how intellectual properties reports and
intellectual assets management reports can be used effectively as disclosed information
that demonstrates the potential of a company for growth based on its technologies.
(v) Observation of and action to outcomes of the internal control reporting systems introduced
In Japan an internal control reporting system comes into operation this year according to
the Financial Products Trading Act. In the United States, the introduction of a similar
system under the Sarbanes-Oxley Act led to increased costs companies subject to the law
must bear to cope with the new system and which has postponed application of the Act to
SMEs. We should carefully observe how things go after the reporting system comes to
effect, especially how it is enforced in terms of companies listed on emerging equity
exchanges.
An increasing number of people are concerned whether the introduction of the internal
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control reporting system to companies listed on emerging equity exchanges might cost
them a lot. Examination should also be conducted on whether and/or how start-ups should
cope with the system as relevant to their needs.
If the internal control reporting system should turn out to place too heavy a burden on
companies listed on emerging equity exchanges, it might be necessary to review whether
it should be applied in a uniform manner.
(vi) Examination of potential growth after listing
Emerging equity exchanges should decide whether a company should be listed not on the
basis of its performance at the time of listing but rather in view of its potential and
prospects, and indeed they have been conducting examinations in such a manner. It would
make sense, accordingly, if reviews are conducted in a certain period of time after a
company is listed to see how fast it grows after the listing and to compare its outlook
given when listed with its actual performance.
However, if, for instance, formalistic standards are applied in a strict manner to assess the
growth of a company in a certain period of time after it is listed and if the results are used
to decide, say, whether it should be delisted, that might lead to an unhelpful focus
revenues and/or profits, resulting in more cases of window-dressing, unreasonable
mergers, and the like. To avoid this, careful examination should be conducted on what
criteria should be laid down for review of growth after listing, how the review should be
conducted, and in what manner its results should be dealt with.
86
(4) Efforts to increase participation of institutional investors
(i) Enhanced efficiency and further globalization of exchanges to make them more attractive
In the United States and Europe, arguments are emerging about global competition among
emerging equity exchanges. To encourage more institutional investors to take part in
emerging equity exchanges in Japan and also to boost their brand image, they should
invite foreign companies with large market capitalizations to list their stocks there. For
that purpose, they need to accept disclosure according to the International Accounting
Standards (IASs) and United States Generally Accepted Accounting Principles
(US-GAAP), provide disclosure documents in English, and take measures to complete
listing examination in a shorter period of time. The acceptance of IASs and US-GAAP is
especially important. At present, foreign companies that intend to list their stocks on a
Japanese exchange before being listed on any other bourse must have their financial
statements audited every two years according to Japanese accounting standards, so in
substance it takes at least two years to complete preparations for listing there. Admission
of the foreign standards resolves the problem. As efforts are being made to harmonize
Japanese standards themselves more closely with IASs by 2011, there would be little
necessity left to adhere to the current indigenous standards.
If more foreign Start-ups, especially Asian ones, are listed on emerging equity exchanges
in Japan, it is expected that more capital from overseas institutional investors will flow
into Japan’s emerging equity exchanges for Asian ventures, and that trading volumes will
grow with a larger number and greater variety of investors.
Some point out that Japan’s emerging equity exchanges are smaller than their overseas
peers, and that there are too many of them. It is necessary to reexamine what roles they
each should play from the viewpoint of their scale, global competitiveness and efficiency.
Local exchanges, on the other hand, might be given a more ambitious position with the
view of working to revitalize local communities. When examination is conducted on how
Japan’s emerging equity exchanges should be, such points of view must be considered in a
comprehensive manner.
(ii) Examination of an analyst introduction system
As part of efforts to increase investment in small and medium cap stocks, NASDAQ
founded the Independent Research Network (IRN) in September 2005 as a joint-venture
with Reuters. IRN acts as an intermediary for small and medium cap companies listed on
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the exchange that are not covered by analysts to look for and ask one to write a report on
such companies.
Introduction of such a scheme into Japan’s emerging equity exchanges might help
encourage institutional investors to invest more.
As there are some concerns that the engagement of exchanges in such businesses might be
inconsistent with the scope of business stipulated in the Financial Products Trading Act
(Article 87-2), some measures should be taken to make it clear that exchanges are legally
allowed to provide such services.
From the viewpoint of economies of scale and efficiency, it might be a better option if
several emerging equity exchanges form a partnership for such a business.
(iii)Development of an index of the emerging equity exchanges
At present institutional investors, including public pension funds, have investments in
small and medium caps. But the benchmark, typical index, for small and medium cap
investment, Russell/Nomura Small Cap Index, is dominated by stocks listed on the TSE
1st Section. That is part of the background that hinders investment trust managers, who
are assessed by institutional investors in terms of their management performance, from
aggressive expansion of investment in companies listed on emerging equity exchanges,
even though they are also classified into small and medium cap.
With the view to addressing the problem, the emerging equity exchanges might be able to
jointly develop a unified stock market index.
In November 2007, Standard & Poor's started to release the S&P Japan Emerging Stock
100 Index, index consisting of the top 100 companies among those listed on a Japanese
emerging equity exchange in terms of market capitalization after floating stock
adjustments which maintain a certain level of market liquidity. In March 2008, Nikko
Asset Management listed an ETF that tracks the index on TSE.
The release and effective use of such indexes is expected to be helpful to encourage public
pension funds other institutional investors with large capital to expand investment in
stocks on emerging equity exchanges.
(iv) Liquidity provider program
88
With the view of inviting more institutional investors, it is important to provide more
liquidity to emerging equity exchanges. On April 1, 2008, JASDAQ started the Liquidity
Provider Program, a mechanism to offer secures firms trading fee discounts as an
incentive to supply liquidity. A wide range of study should be further conducted on new
schemes to make exchanges more liquid.
(v) Development of venture stock exchanges for professionals
Development of exchanges exclusively for professionals is effective to supply long-term
stable capital to Start-ups and relax listing examination and disclosure procedures,
because such exchanges have no need to consider the protection of ordinary investors. On
such exchanges you could expect more reasonable stock pricing because professional
investors assess share prices.
In the Plan for Strengthening the Competitiveness of Japan’s Financial and Capital
Markets, announced by the FSA in December 2007, the Agency declared that it would
develop a framework of exchanges based on new rules that should expand the range of
market participant to designated investors (or “professional exchanges”). Amendments to
the Financial Products Trading Act necessary to set up such exchanges are now under
deliberation before the Diet. The amended Law, once the bill passes the Diet, is to allow
exchanges to be designed in a way their features as a professional market can be exploited
effectively: stocks listed there are exempted from the internal control reporting system;
quarterly reporting can be replaced by annual disclosure; and disclosure documents
written in English can be accepted.
TSE plans to set up sometime in 2008 a new start-ups exchange based on the framework
together with the London Stock Exchange.
In developing structures of professional exchanges, formalistic standards for listing
examination should be significantly relaxed and they should exempted from the internal
reporting system, quarterly reporting, and other obligations laid by the Financial Products
Trading Act especially with the view of making clear advantages they offer as professional
market. In addition, they should also provide obvious benefits in terms of the length of
time for procedures. For instance, they should enable companies to raise capital in not
more than three months after their listing examination started.
Institutional investors based in Japan are more averse to risks than retail investors, and
their presence is marginal in the emerging equity market. In developing professional
exchanges, therefore, it is crucial to attract professional investors overseas. For that
89
purpose, in developing venture stock exchanges for professionals, they should accept
disclosure according to the IASs and US-GAAP and disclosure documents written in
English.
Study should be conducted on, among others, whether and/or how some policy incentives
should be given to stocks listed on professional exchanges in order to encourage
investment in them.
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Chapter 7 Capital ties with existing companies
1. Present State
(1) Sale of Start-up stocks from venture capital funds to existing companies
In Japan, venture capital funds rely mainly on public offerings as a way to recover
investments (“exit”), and they rarely sell equity directly to other companies with profits.
Usually stocks are sold to other companies to “stop loss.”
In the United States, in contrast, venture capital funds sell more often and more in value
directly to other companies than through public offerings, and there is little difference
between public offerings and sales to other companies in terms of proceeds per case. In
almost 70% of the cases where stocks of a company were sold to other companies, the
proportion of proceeds to investments exceeded 1. These facts demonstrate that sale to
other companies is considered as one of the desirable “exits” for venture capital funds.
Figure 7-1 Venture capital funds’ ways to recover investments (“exits”)
Profit/loss Companies Share in the total Profit/loss per company
(¥1 million) (¥1 million)
Public offering
Bankruptcy/liquidation/depreciation
Resale to owners, etc.
Sale to secondary funds, etc.
Sale to other third parties
Others
Note: Some of the companies are counted twice or more.
Source: Venture Enterprise Center, “Survey on Current Status of Investment of Venture Capitals and
Other Funds” (December 2007)
Unit in value: $1 million
2006
Public offering Public offering
companies average in companies average in companies average in companies average in
value value value value
1st quarter
2nd quarter
3rd quarter
4th quarter
annual total
In many cases of M&A, proceedings are not disclosed. The averages in value are calculated by
dividing the total proceedings in disclosed cases by the number of companies.
Source: NVCA, THOMSON Venture Economics
91
Figure 7-2 VC’s proportions of proceeds from sale of Start-up stocks to other companies
to the investments
Year smaller from 1 to 4 from 4 to 10 10 times of
than TVI times of TVI times of TVI or larger
Source: NVCA, THOMSON, “National Venture Capital Association Yearbook 2007” (April 2007)
In the United States, however, it was in the 1990’s when sale to other companies started to
grow fast, and it has not been long since it became a major way to recover investments. In
Japan, many venture capital funds were formed around 2000, the days of the IT bubble.
Now that many of them are reaching maturity they need to take some actions to liquidate
stocks of companies they invested in. It is anticipated, therefore, that more of the stocks
will be sold to other companies.
However, according to a survey conducted in 2007 by METI, which asked Start-ups
whether they considered sale of their stocks to other companies as part of strategies or
business plans for future growth, only 3.8% replied that they did. This suggests most of
the Start-ups regard sale of their shares from venture capitals to other companies as
undesirable.
92
Figure 7-3 Cases of sale of stocks of companies venture capitals have investments in, and
their average proceeds (time series) in the United States
0
50
100
150
200
250
300
350
400
1980 1985 1990 1995 2000 2005
(year)
Price?Average?
(? Millions?
Total Number
Figure 7-4 Start-ups’ view of sale of their shares from venture capitals to other companies
Strategies/business plans for future strategy (n=442)
Considering IPO
Considering sale to other
companies
Considering acquisition of other
companies
No specific plan
Others
Source: METI, “Questionnaires Survey on Creation and Development of Start-ups,” (December
2007)
(2) Repurchase provisions in investment contracts with venture capitals
Some point out that repurchase provisions in investment contracts with venture capital
funds lead to an unhelpful obsession with public offerings, narrowing options of “exiting”
of venture capital investment other than placing the equity in the market.
A repurchase provision refers to a stipulation in an investment contract concluded between
a venture capital fund and a company it invests in that if, among others, it fails to have its
Source: NVCA, THOMSON, “National Venture Capital Association Yearbook 2007” (April, 2007)
93
stocks listed, the company or its management shall buy back the shares the fund owns.
In the United States, it is not very common that an investment contract with a venture
capital fund contains a clause requiring redemption of shares, and usually such a contract
has no stipulation that individuals in the management shall buy them back. The type of
causes is believed to be unique to Japan.
According to a poll to general partners (GPs) of venture capital funds SMRJ has financed,
around 70% of the respondents placed a repurchase provision in their investment contracts,
and 7% of them had exercised the claim for repurchase.
Depending on requirements for exercising a repurchasing claim and ways to set a
repurchase price, a repurchase provision allows a venture capital to secure upside benefits
without assuming any downside risk. From the viewpoint of Start-ups, some argue that
such clauses are undesirable in terms of appropriate sharing of business risks between
Start-ups and venture capitals.
On the other hand, seeing the issue from the side of venture capitals, many claim that
repurchase provisions are necessary for the purpose of encouraging Start-ups to work hard
to go public and securing liquidity of shares a fund owns when it is about to reach the
maturity date.
(3) Moves of corporate venture capitals
Nowadays in the United States, and also in Japan, an increasing number of business
corporations, especially large companies, form a corporate venture capital, venture capital
fund they found exclusively for themselves.
In the background of such moves lies the fact that large companies are compelled mainly
by increasingly fierce global competition and shortening product life cycles to
discriminate their contents of R&D more clearly and produce achievements in R&D more
quickly, while they struggle to select business segments and concentrate their resources on
them to cut down on R&D expenses. Large enterprises make investments through
corporate venture capitals with the view of selecting, among new technologies which are
being developed by Start-ups they have investment in, those which have reached a certain
level of maturity and should satisfy their needs to acquire them.
94
Figure 7-5 Numbers of corporate venture capitals based in the U.S. by year of foundation
Source: adapted from a study by NIST/ATP & MIT Sloan
95
2. Challenges
(1) Development of secondary markets for shares of unlisted Start-ups
In Japan, as described above, venture capitals depend largely on public offerings as
“exits” of investments they have in Start-ups. Seeing from the side of Start-ups, some say
that this compels them, without careful consideration placed on what phase of
development they are at, to go public on an emerging equity exchange before the maturity
date of the venture capital fund, and that as a result they may fail to achieve full growths.
From the viewpoint of venture capital funds, their performance is largely influenced by a
climate for listing in the emerging equity market, which might lead to diminished
attractiveness of venture capital investment for institutional investors.
From now on it is necessary to diversify “exits” of venture capital investment other than
public offering by, for instance, taking advantage of moves of large enterprises setting up
corporate venture capitals, and to offer venture capitals more routes to successful
investment.
Especially, as many of the venture capitals formed around 2000, during the IT babble
years, come to maturity in coming years, it is an urgent task to form secondary funds for
liquidation of their assets. The government should also examine what policies and
programs it should offer to encourage such moves.
(2) Improvements in repurchase provisions in investment contracts with venture capital funds
The repurchase provision seen in investment contracts with venture capital funds was
invented in the days when their ways to recover investments (“exits”) were limited almost
exclusively to public offerings. Some improvements must be made in it to give the act of
selling shares to other companies the position as another desirable “exit.”
In the first place, what side effects a repurchase prevision causes depends largely on what
specific content the stipulation has. Especially important elements are requirements for
invoking the repurchase clause and ways to set a repurchase price.
According to interviews with major venture capitals, repurchase clauses can be classified
into several types in terms of their exercise terms and conditions, as stated below.
Most repurchase provisions specify as requirements for exercising a claim for buyback
two cases:
(1) Where the Start-up breached the law or the investment contract; and
96
(2) Where it fails to go public; and some also include the case:
(3) Where the fund is about to reach the maturity date.
Repurchase provisions that fall under the requirement (2) are further divided into:
(i) “short-of-effort type,” where the repurchase clause is invoked when the Start-up
avoids going public though its profits, financial position, and other conditions of its
business satisfy requirements for listing; and
(ii) “formalistic-standards type,” where the clause automatically comes into effect unless
the company gets listed before a specific date.
Most venture capitals adopt the former, “short-of-effort.”
Figure 7-6 “Short-of-effort type” and “formalistic-standards type”
(i) Short-of-effort type
Case 1: Where the Start-up avoids going public though its profits, financial position, and other
conditions of its business satisfy requirements for listing;
Case 2: Where the Start-up gives up going public for a business strategy reason though its
profits and financial position satisfy requirements for listing at a specific point of time;
Case 3: Where although the Start-up’s profits and financial position satisfy formalistic
conditions for listing, and the venture capital fund concludes that it should be able to
start or continue preparations for listing on the basis of assessment of the managing
underwriter and past examples of listing, the company avoids starting preparations or
procedures necessary for going public, refusing to make reasonable efforts to achieve its
listing;
(ii) Formalistic-standards type
Case 1: Where the Start-up fails to go public by a specific point of time;
Case 2: Where the venture capital fund has reached the conclusion that performance of the
Start-up, conditions of the stock market or any other issue present the company
significant difficulty in going public by a specific point of time;
Among them, Type (1) is excluded from the analyses below because it represents
exceptional cases, such as where a company totally fails to perform a contract. In the
following paragraphs, we examine how repurchase prices are set in cases of Type (2) and
(3).
In most cases of (2)-(i) “short-of-effort type,” a repurchase price is set at the acquisition
97
cost the venture capital fund paid (or the cost plus accrued interests) or one of assessed
stock prices that are calculated by a variety of methods at the time of buyback claim,
whichever is the highest.
Figure 7-7 Repurchase price in the “short-of-effort type”
Company A Company B Company C Company D Company E Company F Company G Company H Company I Company J Company K
Highest among the prices below:
(i) Acquisition cost the VCF paid
(?: plus accrued interests)
(ii) [Acquisition cost the VCF paid]×1.2
(iii) Price calculated by the method used by
the VCF when it acquired the equity
(iv) Net assets per share
(v) Price calculated by the comparable
business sector method
(vi) Nearest transaction price
(vii) Price assessed by a third party designated by VCF
(viii) Price assessed by a third party
* Most-favored-nation treatment * * * *
In no case of (2)-(ii) “formalistic-standards type” a repurchase price is set at the
acquisition cost the venture capital fund paid (or the cost plus accrued interests). In most
cases a buyback price is settled at one of assessed stock prices that are calculated by a
variety of methods at the time of buyback claim, whichever is the highest.
Figure 7-8 Repurchase price in the “formalistic-standards type”
Company L Company M
Highest among the prices below:
(i) Acquisition cost the VCF paid
(?: plus accrued interests)
(ii) [Acquisition cost the VCF paid]×1.2
(iii) Price calculated by the method used by
the VCF when it acquired the equity
(iv) Net assets per share
(v) Price calculated by the comparable
business sector method
(vi) Nearest transaction price
(vii) Price assessed by a third party designated by VCF
(viii) price assessed by a third party
*Most-favored-nation treatment
In Type (3), where funds are about to reach the maturity date, though the number of
samples is limited in the first place, a repurchase price is set, in a case, at the acquisition
cost the venture capital fund paid (or the cost plus accrued interests) or one of assessed
stock prices that are calculated by a variety of methods at the time of buyback claim,
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98
whichever the venture capital fund chooses after talks with the Start-up.
Figure 7-9 A case where the fund is about to reach the maturity date (one sample only)
A price the venture capital fund choose among those below:
(i) Acquisition cost the VCF paid
(?: plus accrued interests)
(ii) [Acquisition cost the VCF paid]×1.2
(iii) Price calculated by the method used by
the VCF when it acquired the equity
(iv) Net assets per share
(v) Price calculated by the comparable
business sector method
(vii) Nearest transaction price
(vii) Price assessed by a third party designated by VCF
(viii) Price assessed by a third party
Realities of pricing for each type of repurchase as described above suggest attention
should be given to the following issues.
First, in cases of (ii) of Type (2), where Start-ups fail to go public, and those of Type (3),
where funds are about to reach the maturity date, a repurchase price is set at the
acquisition cost the venture capital fund paid (or the cost plus accrued interests) or one of
assessed stock prices that are calculated by a variety of methods at the time of buyback
claim, whichever is the highest (or a price the venture capital settles). The practice might
be unfair in the sense that although a repurchase provision is invoked as a result of
external environments regardless of efforts the Start-up itself made, all the consequent
downside risks are passed onto the venture.
Second, in cases of Type (2) ((i) short-of-effort type and (ii) formalistic-standards type),
where Start-ups fail to go public, and those of Type (3), where funds are about to reach the
maturity date, when a repurchase price is set at one of assessed stock prices that are
calculated by a variety of methods at the time of buyback claim, whichever is the highest
(or a price the venture capital settles), that might consequently make it difficult for the
venture capital fund to sell the shares to other companies as a way to recall its investments
(“exit”).
That is, even when the shares can be sold to other companies at a higher price than one
which would have been realized had the company be listed, it rarely exceeds the highest
price among assessed prices that are calculated by a variety of methods stipulated in the
repurchase provision. (It would be more likely, instead, that the price falls somewhere
99
near the median or the mean.) Under the contract, investors in the venture capital could
recover more of their investments by requiring the Start-up or the management to buy
back the shares than selling them to other companies.
The two issues we have discussed above suggest that in cases of (ii) of Type (2), where
Start-ups fail to go public, and those of Type (3), where funds are about to reach the
maturity date, it might be more appropriate if Start-ups and venture capital funds, using
assessed stock prices calculated by a variety of methods at the time of repurchase claim as
bases, talk to decide a price at which the shares should be bought back (or a fair price at
the time). In cases of (i) “short-of effort-type” of (2), where Start-ups fail to go public, it
might be more desirable if the shares are bought back at a price which the Start-up and
venture capital fund set through talks between them, using assessed stock prices calculated
by a variety of methods at the time of repurchase claim as bases, or the acquisition cost
the venture capital paid (or the cost plus accrued interests), whichever is higher.
100
Chapter 8 Viewpoints of existing companies on ventures
1. Present state
(1) Expectations for corporate ventures
While innovation is expected to play a role in creating new industries, private sector
companies have their own focus and often lack the resources to develop new business.
Inevitably they are required to convert their business management systems into those
which exploit aggressively external resources for growth by, for instance, fusing their own
knowledge with that in different fields or making effective use of funds raised from
outside sources. But some private sector companies, in their R&D and commercialization,
adhere to the principle of technological or operational self-help, keep research results idle
inside the company, or place emphasis only on the current profitability with the result that
they reduce investment in new business. Such a phenomenon, often called “big company
disease,” has been pointed out as a limiting factor.
Figure 8-1 How are R&D achievements dealt with when not used for business? (All
sectors)
Often licensed for a fee
Often the R&D continued below the surface (for future use)
Often made public and, if required, licensed to other companies
Often the R&D discontinued, without any results left
Source: Japan Research Industries Association
101
Figure 8-2 Factors hindering R&D achievements from being used for business
Yes No
Inclination to give priority over
existing business segments
Understanding of the leadership
Funds secured to commercialize
the achievements
Worries about risks (e.g. risky due
to few precedents)
Source: Japan Research Industries Association
To solve such problems, industry has cooperated with academia and formed strategic
alliances to create innovation. An influential management method that is now attracting
attention is corporate venturing, where large companies exploit external organizations
such as ventures in a strategic way, to develop, for instance, new businesses.
The areas of manufacturing techniques and advanced technologies are characterized
especially by: (1) that they require a stock of technologies, and large-size research
equipment as a prerequisite; and (2) that it takes longer to put them to commercial use.
Large enterprises own a great amount of such technology assets and equipment. Ventures
have roles to play in creating new, next-generation industries. Building cooperation
between a large company and a venture as a base for steady growth of the small company
would be quite effective in creating such industries. Much hope is placed on corporate
venturing.
In addition, corporate venturing works to revitalize existing companies, helps independent
entrepreneurs develop their skills and expertise, and incubates Start-ups.
102
Figure 8-3 Cooperation between large companies and ventures
Policies for university-originated ventures and TLOs
Technological seeds Development Business
University/Public Venture Emerging company
labo
Existing company’s Existing corporate Existing corporate
research dpt. development dpt. new business
Large-enterprise-originated venture
Technological seeds Development Business
University/Public Venture Emerging company
labo
Existing company’s Existing company’s Existing company’s
research dpt. development dpt. new business
(2) Current state of large companies in the use of ventures
An increasing number of private-sector companies recognize how important effective use
of academic institutions, such as industry-academics cooperation, and open innovation is,
while few have actually participated in corporate venturing. Some companies have made
minor investments in Start-ups based in Japan or overseas to collect information. But
strategic venturing, or spinning off part of a company’s own resources to tackle new
business with risks, has just made a beginning.
Figure 8-4 Support for external ventures
Supporting now Not supporting
Source: Adapted from data produced by the Japan Techno-Economics Society
Listing/Growth
Absorbed
Cooperation
Technical
transferring
spin-out
Industry-academics
cooperation
103
Figure 8-5 Whether large enterprises have a system to support spin-offs (spin-outs)
Yes No
Source: Japan Research Industries Association
(3) Background to the current situation
(i) Challenges concerning the awareness of large enterprises and their governance
The management method of corporate venturing, where external ventures are effectively
used in a strategic way, poses risks, but also brings about a diversity of benefits as
mentioned below. Large enterprises overseas, especially in the United States, have
adopted the strategic use of ventures as part of their business management. In Japan,
companies that have introduced advanced management of technology (MOT) are trying
the method mainly by bringing in external ventures.
? Effect of fusing knowledge and people from different fields to induce innovation;
? Enhancement of profitability (focusing on core segments for higher efficiency of
business, and putting unused in-house resources to profitable activities);
? Quicker decision-making in the management;
? Use of external resources for reducing investment risks and costs;
? Spinning-off for slashing fixed costs;
? Effective use of in-house human resources (baby boomers, etc) (prevention of
unintended outflow of engineers);
104
? Reform of corporate culture, and improvement of corporate image (more diverse
career paths)
Yet, for all these benefits, Japan has only a relatively small number of large enterprises
taking advantage of ventures. A factor pointed out as lying behind the current state of
things is that while more people are recognizing how critical the open innovation is and
some companies have indeed made attempts, such as acquiring technologies from other
companies or selling theirs to others, ventures are yet commonplace and enterprises have
accumulated only a small amount of know-how in management of corporate venturing.
Some point out that corporate governance works as another factor. Large enterprises could
set up a venture (large-enterprise-originated venture), to aggressively spin off some of
their technologies they couldn’t fully exploit because of lack of resources in the company
to obtain external resources to put the technologies to commercial use more quickly. But
technology assets (patents, etc) they have themselves are left off the balance sheet in the
first place, so they are less visible. As a result, there are few positive attitudes towards
attempts to spin off technology assets and set up ventures by management, and the
disadvantages by not doing this are hardly recognized explicitly either.
(ii) The problem of risks people have to assume when leaving a large enterprise and setting up
a new business
Some point out that it is easier for people in the the U.S. and other countries to leave a
company set up a venture because the environments there offer more opportunities to take
on another challenge should they fail. In the U.S. talent, including engineers, are quite
mobile in general, and angels willing to support start-ups can be found. In Japan, the
general perception is that if people fail in a business they started after leaving a company,
they are exposed to great risks. When an engineer who has been working in a big
company that guarantees a stable means of living leaves the company to set up a
large-enterprise-originated venture, the engineer is assumed to lose a significant part of
the stability of his or her life after going independent. To encourage people to pull out
from big companies and create ventures, systems should be designed in a way that
features of such ventures, such as partnerships with a large company, can be taken
advantage of, as well as improving the general social environment toward risk-takers.
Especially, large companies should examine how their personnel systems could be
redesigned to allow, for instance, people who have departed from them and set up a
large-enterprise-originated venture to continue to work for them. A factor lying behind the
rapid increase of university-originated ventures to 1,590 as of the end of the March 2007
is that universities permit their teachers who set up a venture to keep on working for them,
105
which helps them secure more economic stability.
(iii)Challenges in social systems concerning corporate venturing
Large companies usually have their own rules to manage their technologies and people.
For technologies, they specify rules for employee inventions, confidentiality agreements
with ex-employees or others, and patent licenses. For people, personnel management
policies, rules for employees holding another job and those loaned to another company,
and agreements with ex-employees to prohibit them competing with the company are
established. Such rules and agreements have worked effectively to protect resources. But
in some cases they rather work to hinder companies from proactively spinning out some
of the resources, especially setting out a venture.
Figure 8-6 Barriers reducing mobility of technologies and people
Source: NEDO, “Report of the Large-Enterprise-Originated Venture Study Group” (March 2008)
In the dynamic venture culture of the U.S., venture capitals and technology consultants
make effective use of their ample know-how to work as an intermediary between large
enterprises and ventures, producing business environments where corporate business
resources can be easily matched to those sought. In Japan, however, while venture capitals
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106
for start-ups in general are growing, there are still a small number of venture capitals
dedicated to corporate venturing undertaking partnerships between large enterprises and
Start-ups, by, for instance, an existing company spinning off a venture or an established
company taking in a start-up. At present private sector companies are unable to work
actively to match their demand and supply of external resources. To make “technologies”
more mobile, NineSigma, InnoCentive, Big Idea Group, yet2.com, the Innovations
Exchange, and other platform providers are working as as intermediaries to provide
themselves opportunities for open innovation. Companies committed to open innovation
not only use their own researchers to solve problems in their R&D, but also exploit such
platform providers to take advantage of opportunities to work with other companies,
inventors, and ventures that propose an excellent solution.
2. Challenges
Just as with parents and children, a large enterprise (parent) that works hard to bring up a
group of Start-ups (children) would be well supported by their offspring in future. To
develop a socio-economy which realizes the win-win growth of large companies and
ventures is a policy challenge that must be addressed by society as a whole. For
large-enterprise-originated ventures to be created to develop autonomously, it is necessary
to develop a mechanism which guarantees that efforts made each by companies, people,
and the government receive positive recognition from society as a whole, or a
social-economic system friendly to corporate venturing (an eco-system).
(1) Reformed awareness and management for corporate venturing
(i) Making visible how effectively a company uses its own technology assets (setting an
indicator of the return on technology assets)
To encourage management to take risks such as spinning off technology assets to start a
new business, that is, setting up a large-enterprise-originated venture, it is effective to
“make visible” technology assets that have been left off the balance sheet and invisible,
making an inventory in terms of both quantity and quality, and assessing how potentially
valuable they are for business. The visualization helps the company pay positive
recognition to taking risks and to assess how much they would lose potentially if they
refrain from such attempts. In addition, external assessments, if introduced, are expected
to work as pressure on the management to make more effective use of technology and
other assets.
Some of the progressive companies which commit themselves to MOT have been taking
107
stock of technologies they own, producing intellectual properties reports, and making
other efforts to have their own intellectual properties reflected in investor relations, and
more of such companies are engaging themselves in such activities. What will be
important is for an increasing number of companies to introduce something that should
help “make visible” their technologies and intellectual properties, something objective and
easy to see even for outsiders just like the return on assets (ROA).
For that purpose it would be effective, for the government and the private sector to work
together and examine, for instance, how publicly available data of patents can be used in
an effective way to quantify the level of quality and quantity of patents a company owns
and calculate a new, transparent indicator. An example is the rate of return on total
technology assets (computed by dividing net profits from total technology assets by the
assets (patents)). The issue is also important part of effort to strengthen MOT in Japan,
which, as pointed out, lags behind the United States and Europe.
Figure 8-7 Examination of an indicator that expresses potential value for business of
technology assets a company owns
(Making visible the level of its technology assets being used in an effective way)
Examination on an indicator that expresses potential value for business of technology assets a
company owns (Making visible the level of its technology assets being used in an effective way)
Example: Rate of return on Net profits from technology assets
technology assets
Technology assets Value for business
R&D expenses Technology assets
(The way technologies (R&D management) (Business model)
are used for business)
(ii) Collecting and sharing best practices
For corporate venturing (strategic use by large enterprises of ventures), there are some
best practices which make both large enterprises and ventures more likely to succeed, or
achieve win-win success, in terms of: how license conditions, including those for patents,
should be; what equity position a parent company should have; how a parent company
should be involved; development of marketing channels and support for back-office
operations, such as labor management and legal affairs; how individual employees should
be given an incentive to start-up a new business through, for instance, allowing them to
continue to work for the parent company or granting rewards for success; and how IPOs
and/or repurchase terms and other “exits” for venture capitals should be designed. As
Japan has only a short history of corporate venturing, its government and private sector
Technology assets
108
should work together to collect know-how of the management method, cases of success
and failure, and other information about, what technologies and/or business segments are
suitable for corporate venturing, and have them widely shared by private-sector
companies.
109
Figure 8-8 Imaginary issues of best practice of large enterprises and ventures
Technology/Business Management/Operation Intellectual property Equity investment Human resources Eco-system
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;
(iii) More and better “arenas (platforms)” for VCs and others to work as an intermediary and
match business resources between companies
Arenas (platforms) are needed for venture capitals and technology consultants to work as
a moderator or an intermediary on behalf of a large enterprise, a venture, universities or
others, and match needs with business resources, including its own assets, for example,
technologies, or those which someone outside the organization owns with the view to
helping it create new business. In the United States, the Department of Commerce plays a
central role, working in cooperation with the Massachusetts Institute of Technology (MIT)
and others, in promoting corporate venture capitals. In Japan, where corporate venturing
has only a short history, the government and private sector should work together to offer
more and better areas (platforms) for business resources to be matched in and between
companies. Specifically, forums should be set up to promote corporate venturing, and
programs should be introduced to encourage companies to employ traders of technologies,
who support open innovation. Such arenas are expected to be used to encourage
private-sector companies to apply in an effective way achievements of publicly-funded
research programs to solve challenges they encounter in their R&D activities.
110
Figure 8-9 Imaginary creation of arenas for moderators and intermediaries to work
Venture
SMEs companies Universities
Large Publicly-funded
enterprises research institutions
Corporate venturing
WIN-WIN Forum (tentative name)
Functions as a market to Venture capitals To share best practices
trade technologies, products Consultants through such “arenas”
and services. is also useful.
(iv) Creation of open places for Start-ups to meet large enterprises
Not a few start-ups, however, hope to talk directly with large enterprises, especially
without any intermediary between them, for fear that their unique technologies or ideas
might be revealed or leaked to a third party.
But most of such ventures have no channel or opportunity to contact a large enterprise
“they have in mind.” (And not a few large companies have points of contact publicly
available to such ventures.) Some point out that is one of the factors that hinder corporate
venturing from developing as expected.
In the Kansai region, such a state of things led to the creation of Digital Concept Partners
(DCP), which came into operation in 2006. As part of the Industrial Cluster Project, the
open matching system works to support major companies and ventures in corporate
venturing in the home information appliance sector. It has produced results, attracting
entries from ventures overseas, as well as those in Japan. (As of March 2008, 180
proposals from Japanese companies, including ventures, and 60 plans from foreign
companies, or 240 offers in total, were received.)
To spread similar mechanisms to other sectors is necessary as part of measures to promote
corporate venturing in Japan.
111
Figure 8-10 Digital Concept Partners
To complement the mechanism above, regular meetings are held to release and exchange information about technologies
and business plans.
The meetings are attended by Risona Bank, the Kyoto Shinkin Bank, Hanwa, Japan Venture Capital Association, and
other supporting companies that offer financial and marketing aid.
(2) Reforms to reduce risks employees assume when leaving a large enterprise to set up a new
business
When engineers and other employees leave a large company to start up a new business,
they assume a variety of risks. Some measures are needed to reduce such risks. On the one
hand, large companies should take some voluntary actions. For example, they should offer
such employees a guarantee of living, or a parallel means, for a certain period of time;
they could be loaned by the large company to the start-up, or allowed to continue to work
for the big enterprise. Other examples could be large enterprises’ effective use of in-house
training programs, or introduction of a system for in-house quasi-venturing. On the other
hand, more diverse career paths should be offered. For instance, graduate schools for
businesspersons should be enhanced. In this respect, the national government and other
institutions could give more support to graduate schools that teach businesspersons
management of technology (MOT) useful to corporate venturing.
(3) Reforms of systems of the national government for corporate venturing, etc.
(i) Study of incentives for venture investment in R&D
In this age of global innovation, we should examine, referring to cases overseas, what
systems will be appropriate to Japan for investments to be made more smoothly in
ventures set up for research and development, with a view to preventing the country from
being avoided by those who conduct large-scale R&D with higher risks and to exploiting
the mechanism of corporate venturing to use innovations and set up new businesses in
Japan more quickly.
To find
opportunities to
do business or
form a
partnership with
large enterprises,
and raise their
level of abilities
and awareness
Companies offering a
proposal
SMEs
and
ventures
in Japan
and
overseas
(2) Filtering
(1) Consult
(3) The
idea is
polished
up.
DCP secretariat
(In charge of
domestic
businesses)
Kansai Institute
of Information
System &
Industrial
Renovation
(KIIS)
(In charge of
foreign
businesses)
Osaka Chamber
of Commerce and
Industry (OCCI)
Group of experts on
technology, IP, market, etc.
(4) Offer a proposal
(5) Have an interview or
business talks (When the
proposal is turned down, a
report is sent to explain
why and give advice, etc.)
Companies receiving a
proposal
Sanyo, Sharo, Matsushita
Electric Industrial, Icom,
Espec, NTT DoCoMo Kansai,
Osaka Gas, Omron, Kyocera,
silex, Sumitomo Electronic,
Dainippon Screen MFG, Pixela,
Hitachi, Funai Electronic,
Murata Manufacturing
To explore
excellent
suppliers, partners
and business seeds
in Japan and
overseas
112
(ii) Increase of funds that deal with corporate venturing
As corporate venturing has just a short history in Japan and there is only a little record of
investment in the field, some measures should be taken to further increase funds that deal
with corporate venturing, by effective use of public support programs.
(iii)Enhanced support programs for corporate venturing
Some of the current programs of support for SMEs and venture start-ups are also useful
for corporate venturing. But they are unfamiliar especially to people working for large
companies. For programs available for corporate venturing to be used by more people and
companies, they should be bundled into a package. In addition, separate reviews should be
conducted on measures that would be especially effective to corporate venturing. For
instance, as it would be socioeconomically quite inefficient for companies to work
individually to enhance their in-house incubation mechanisms, some programs that can be
jointly used by anyone, such as the Venture Creation Support Program by the National
Institute of Advanced Industrial Science and Technology (AIST), should be developed or
enhanced, so that they will function as a common incubator. In addition, with a view to
encouraging companies to adopt more products and services ventures supply, studies
should be conducted on mechanisms to support public institutions in assessing such
products and services when they take the lead in adopting them for their service.
Corporate venturing should be promoted by such enhanced support programs and policies.
(iv) Reviews of implementation of R&D programs by the government, etc.
Just as technologies that private sector companies keep idle and leave unused should be
spun out to be used in a more positive and effective way for development of the economy
and society of Japan, so should achievements of R&D programs financed with the
national government budget be used in a more efficient manner. At present, the Japanese
Bayh-Dole clause of the Industrial Technology Enhancement Act allows achievements of
research a private-sector company conducted under a contract with the national
government with funds from the government to belong to the contractor, mainly in the
form of patents. But if, for instance, such patents are hoarded by contractors only to keep
them unavailable to others, not to use the achievements themselves, such an action would
not necessarily suit the purpose of the grant. Therefore, some mechanisms are needed to
return the achievements to society and the economy. Studies should be conducted on what
systems should be prepared to allow the government or other institutions to monitor
properly how such patents are used by the contactors they belong to, and, when finding a
patent left unused without any specific reason, to have it licensed under appropriate terms
113
and conditions to a third party who hopes to use it.
When you take an inventory of technology assets private-sector companies and other
organizations own or survey how they are used, providers of patent and technology
information services and other external institutions are useful. Effective use of such
service providers by the national government and other institutions in designing and
planning R&D policies or monitoring of how technology assets assessment is conducted
by private-sector companies and other organizations which hope to join their R&D
projects would be helpful to encourage companies in Japan to use their technology assets
in a effective way.
114
(Reference) Course of deliberations
2007
First Meeting Date: September 28 (Fri.) 14:00 - 16:00;
Place: 1st Special Meeting Room, 17th Floor-West 7, METI Main
Building;
Theme: On Angel Investment;
Second Meeting Date: October 15 (Mon.) 16:00 - 18:00;
Place: Common Meeting Room 526, 5th Floor, METI Annex;
Theme: Issues on Emerging Equity Exchanges;
Third Meeting Date: October 25 (Thu.) 15:00 - 17:00;
Place: Meeting Room G, 6th Floor, Shoko Kaikan;
Theme: Supply of funds through Venture Capitals;
Fourth Meeting Date: November 22 (Wed.) 15:00 - 17:00;
Place Common Meeting Room 526, 5th Floor, METI Annex;
Theme: Discussion on the Draft Interim Report on Financing of Start-ups;
2008
Fifth Meeting Date: January 30 (Thu.) 15:00 - 17:00
Place: 1st Special Meeting Room, 17th Floor-West 7, METI Main
Building;
Theme: Exploration and Development of Human Resources for Venture
Start-ups;
Sixth Meeting Date: February 27 (Wed.) 16:00 - 18:00;
Place: Meeting Room G, 6th Floor, Shoko Kaikan;
Theme: Growth of Start-ups;
Seventh Meeting Date: March 18 (Tue.) 15:00 - 17:00;
Place: 1st Special Meeting Room, 17th Floor-West 7, METI Main
Building;
Theme: Start-ups and Existing Enterprises;
Eighth Meeting Date: April 24 (Thu.) 14:00 - 16:00
Place: 1st Special Meeting Room, 17th Floor-West 7, METI Main
Building;
Theme: Discussion on the (Draft) Final Report of the Study Group for
Creation and Development of Start-ups;
115
Study Group for Creation and Development of Start-ups
Members
Chairperson Shuichi Matsuda Professor, Waseda Business School;
Tetsuya Iizuka President, THine Electronics, Inc.;
Yukio Iura President, Nippon Angels Forum;
Sadakazu Osaki Senior Consultant Center for Knowledge & Creation, Nomura
Research Institute Ltd.;
Hiroyuki Ozaki Professor, Dean of Entrepreneurship Program Graduate School of
Business, Tokyo University of Technology;
Tatsuaki Kitachi Certified Public Accountant Partner/Practice Development Life
Sciences Group Senior Advisor, TMT Group Senior Advisor,
Tohmatsu;
Masatoshi Go Representative Director, President, TSUNAMI Network Partners
Corporation;
Hideki Kono Director , Listing Department, Tokyo Stock Exchange, Inc.
Tsutomu Shida Chairman, SHiDax Corp.;
Hajime Tanahashi Partner, Attorney at Law, Mori Hamada & Matsumoto;
Masayuki Tsukawaki President & CEO, Japan Wind Development Co., Ltd.;
Kahoko Tsunezawa Representative Director, Trenders, Inc.;
Kazuhiko Tokita Chairman, Japan Venture Capital Association/President,
Mitsubishi UFJ Capital Co., Ltd.
Nobuhiro Tokuhara Senior Executive Officer and General Manager, Stakeholders
Unit, Jasdaq Securities Exchange, Inc.
Michio Naruto Chair, Planning Working Group, Committee on New Business,
Nippon Keidanren/Advisor, FUJITSU;
Koichi Nomura former Advisor, ANA Strategic Research Institute Co., Ltd.;
Takamichi Hamada Chairperson, Venture Enterprise Center;
Allen Miner Chairman & CEO, SunBridge Corp.;
Noboru Maeda Professor, Aoyama Gakuin University;
Noriaki Miyano Senior Managing Director, (IPO Division), Nomura Securities
Co., Ltd.;
Taro Yamada President & CEO, Nextech Corporation;
[Observer]
Yoshikazu Goto Director, Organization for Small & Medium Enterprises and
Regional Innovation, Japan;
[Special Member, First Meeting]
Kakutaro Kitashiro Senior Advisor, IBM Japan, Ltd.;
[Special Member, Second Meeting]
Ryuta Kitagawa Executive Officer, Osaka Securities Exchange;
[Special Member, Third Meeting]
Masashi Toshino Senior Researcher, Business Planning Division, Daiwa Fund
Consulting Co. Ltd.;
[Special Member, Sixth Meeting]
Takao Shimizu Director-General, Industry and Technology Department Japan
External Trade Organization (JETRO);
[Special Member, Seventh Meeting]
Satoshi Kabasawa Team Leader, Corporate R&D Strategy Office, Matsushita
Electric Industrial Co., Ltd.;
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