Japanese start-ups see rising interest from banks as government seeks to revitalise tech sector
- Lenders in Japan are planning to increase the staff they allocate to start-up businesses as the government aims to stimulate entrepreneurship
- The government envisions start-up investment will grow to US$74.3 billion in five years, with the goal to make Japan the largest start-up hub in Asia
Just a few years ago, getting a bank loan to finance early-stage ventures was a rare occurrence in Japan. That’s now changing, according to Tokyo-based software start-up Techtouch.
“We even get approached by different branches of the same bank,” said Masaya Nakade, the firm’s chief financial officer. The company is in talks with three megabanks about loans and seriously considering making a deal with one of them, he said.
Lenders including Sumitomo Mitsui Banking Corp (SMBC) and Mizuho Bank are planning to increase the staff they allocate to start-up businesses, representatives say, in a move driven by the government’s plan to stimulate entrepreneurship. Bankers see additional revenue as clients mature.
The shift underscores how Prime Minister Fumio Kishida’s government is seeking to breathe new life into a start-up scene where the number of new entrants lags behind the US and Europe.
“The number of start-up companies is increasing and more are to be created,” said Jun Takahashi, general manager at SMBC's growth business development department. The bank needs to both expand coverage and deepen relationships with start-ups, he said.
The move contrasts with a broader slowdown in the tech industry and a plunge in capital funding in the US, the world’s biggest venture capital market, raising questions about the timing and risks.
Silicon Valley Bank, which helped fuel a venture boom, collapsed last month as central banks rushed to tighten policy in the face of the highest inflation in decades. That caused many funds to sharply mark down their start-up investments.
While start-ups are expanding relative to other sectors in Japan, lending to them carries higher risk and lower margins, said Morishima Yusuke, head of Bain & Co’s financial services practice in the country.
In a plan unveiled last year, the government envisions start-up investment will grow 10-fold to 10 trillion yen (US$74.3 billion) in five years, with the aim to make Japan the largest start-up hub in Asia. It plans a second boom in start-ups, much like the period after World War II when the country’s leading electronics and automobile manufacturers were created.
Start-ups in Japan raised a record 877.4 billion yen in 2022. However, later-stage firms and those close to going public suffered sharp declines in funds raised, according to Initial, which tracks start-up investments in the country.
There will be steady demand from start-ups for bank loans, including from clients that had to reschedule their public offerings, said Junichirou Muranaka, an official for start-up business at MUFG Bank, a unit of Japan’s biggest lender.
What’s more, Japan’s start-up finance has been disproportionately skewed toward equity, in contrast with other countries, according to Kazuki Komura, chief executive of Siiibo Securities Co, a Tokyo-based online brokerage specialising in private placement of bonds by small- and medium-sized companies.
SMBC is planning to double the number of employees covering start-ups by the end of June, from about 20 currently, according to Takahashi. The core unit of Japan’s second-largest bank said it also plans to increase loans to start-ups by up to fourfold over the next three years.
Mizuho Bank, a unit of Japan’s third-largest lender, set up a team for screening start-up lending in April last year to speed up loans to such clients, said Masato Kaneda, general manager at the bank’s innovative start-ups coordination department.
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The world’s third-largest economy trails far behind the US and China by almost every metric, from venture money invested to the number of start-ups worth US$1 billion or more. While the US has more than 600 so-called unicorns and China tops 150, Japan has six, according to market research firm CB Insights.
Now the influx of money from the biggest banks in Japan, where massive monetary easing has continued for about a decade, means the nation is steering a course that is counter to global developments.
US start-ups raised US$37 billion from venture capitalists in the first quarter of this year, the lowest amount in 13 consecutive quarters, according to data from research firm PitchBook and the National Venture Capital Association.
One of the biggest challenges for the Japanese banks is to determine the creditworthiness of young companies, since they lack business history and many are loss-making. Banks said they taking a more flexible approach in loan screening than traditional lending.
“Risks are higher than conventional companies,” said SMBC's Takahashi. “We are asking for returns that are appropriate for risks, and we don’t take up deals that do not match.”
Mizuho Bank will consider loss-making firms, taking into account management quality, the business plan and cash flows as well as opinions from venture capital, Kaneda said. He said few of the bank’s start-up loans defaulted in recent years.
Techtouch’s Nakade, who started his career as a mergers-and-acquisitions banker at Nomura Holdings, said he thinks the success of Japanese start-ups like Mercari and fintech firm Money Forward has prompted lenders to pursue the next ones.
Mercari, the operator of a popular used-goods online marketplace, was established in 2013 and went public five years later. It now has a market capitalisation of about 380 billion yen.
“The situation has changed a lot,” Nakade said.
