![]() If the VC firm produces extremely high returns on its investments into startups, not only does the firm enjoy vast potential upsides (unlike bank loans, in which the maximum return is the principal and interest), but individual partners in VC firms also generally enjoy certain percentages of those returns. Independent VCs, unlike employees of major corporations’ investment arms or subsidiaries, usually have direct financial stakes in the performance of their portfolios. The next piece in this series will provide a deeper explanation of VC, but several critical differences between independent VCs and traditional financial institutions should be highlighted. So why are independent VC funds so important for a maturing startup ecosystem? Independent funds are the dominant form of VC in Silicon Valley, and their financial incentives are better aligned than those of other forms, such as those owned and operated by financial institutions and corporations. Independent VC funds are now clearly leading Japan’s VC industry, a critical and important milestone of development for its startup ecosystem. Source: “Japan Startup Funding 2020,” Initial Enterprise, February 25, 2021, Table 2: Proportion of Investments into New VC Funds According to Receiving VC Type (% of total) ![]() In almost every year since 2013, investors placed their money into independent VC funds. While table 1 above shows which VCs were doing the investing into startups, table 2 below shows the type of VCs that received investments to create new funds. Source: “Japan Startup Funding 2020,” Initial Enterprise, February 25, 2021. ![]() Table 1: Total Amounts Invested According to VC Types Until 2009, finance-related VCs had led in investment amounts, but independent VC investments grew rapidly thereafter. Table 1 below shows the rise of independent VCs as leaders by the amounts invested into startups. The Rise of Independent VCs and Why They are Critical for Startup EcosystemsĪ critical structural transformation of Japan’s VC industry has been the rise of independent VCs. In terms of international comparison, as noted in a previous piece, the total amount of VC invested in Japan is small compared to that of Silicon Valley or the United States, but it is quite typical of other G7 countries. While there was a drop in the initial pandemic year of 2020, and there is likely to be another in 2022 following a decrease in global VC investing, Japan’s VC industry will not likely revert back to its 2012 levels because important structural transformations have occurred as Japan’s VC industry matured. It grew fifteenfold in less than a decade, from a low point in 2012 at 21.9 billion yen to 329 billion yen in 2021 (see figure 1). The growth of VC investing in Japan over the past decade has been dramatic. That is the challenge and opportunity Japan now faces. For the government of Prime Minister Kishida Fumio, which has made fostering startup a major priority of its economic philosophy, policies designed to accelerate Japan’s startup ecosystem must therefore aim not only to further develop the VC industry but also to target these other components. The good news for Japan is that these components are all developing, although the process has taken a long time because of how different Japan’s predominant economic model is from a startup ecosystem. These other ecosystem components-such as human capital fluidity, large firm-startup symbiosis, robust government-industry-university ties, and ecosystem support businesses-will need to develop as well. More >īut ultimately, getting VC right is just one of multiple components Japan will need to assure a robust and mature startup ecosystem. Kushida is a senior fellow for Japan studies in Carnegie’s Asia Program, directing research on Japan, including a new Japan-Silicon Valley Innovation Initiative at Carnegie.
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