Big Rounds Raised by IPO Postponers

The JPY 416 billion (USD 3.39 billion) invested in H1 2022 was equivalent to 50.6% of the total value of all deals made in 2021. This is a promising figure, given that the 2021 value itself represented a ten-year high. Considering the amount of funding that has yet to be disclosed, it is safe to say that, as of H1, investment in Japanese startups for 2022 is on pace to surpass that of the previous year.

This influx of capital into startups has come as a bit of a surprise, however, given the strong impression that growth stocks in the public market have been losing steam since the end of 2021.

In May, conversational commerce company ZEALS announced that it had raised JPY 3.5 billion (USD 28.48 million) from Z Venture Capital and other investors. The company had actually intended to go public via an IPO but ended up delaying those plans until March of the following year. Large funding rounds such as this raised by companies that have postponed their IPOs are one reason behind the apparent strength of startup funding in Japan.

Although not included in the total value of startup funding deals made in H1 2022, another IPO postponer, AnyMind Group, announced on July 19 that it had attracted approximately JPY 4 billion (USD 29.24 million) in its own funding round.

Fundraising efforts through last year have left venture capitalists (VCs) with a surplus in terms of available investment capital and, according to Takumi Kojo (Investment Manager at Japanese VC STRIVE), “they don’t necessarily seem to be in a rush to cut their losses and pull out of deals.”

To make up for a decline in funding from investors in the public market, startups are increasingly focused on raising funds from VCs, who are more likely to have the financial leeway to make investments.

Spiber, a developer of innovative materials, made the decision to kick off a funding round in October last year before the stock market corrected and actually succeeded in raising funds through March this year. In this way, total startup investment in Japan has, in some respects, been boosted by the momentum left over from the startup funding bubble that inflated in previous years.

Investors Becoming More Selective

Despite an increase in the total value of deals, the number of Japanese startups that received funding in H1 2022 stood at just 1,058, less than half the total for the whole of 2021. This suggests a continuation of a trend that started in 2019, whereby the value per deal is growing while the number of deals declines.

The average and median values per deal in H1 2022 were approximately JPY 480 million (USD 3.93 million) and JPY 150 million (USD 1.22 million), respectively. While the final values for both are expected to be slightly lower, as the disclosure of smaller deals tends to be delayed, those amounts are still likely to represent increases over the previous year.

“Even amid a weakening stock market, we have put together a solid growth strategy and have done the utmost to defend our valuation.” – Takanobu Sakamoto, CFO of mediPhone

In June, SaaS-based medical interpreting service mediPhone succeeded in securing JPY 600 million (USD 4.88 million) in funding. It was the company’s first injection of capital since its seed round. The company is already turning a profit in its medical interpreting business, and its new cloud-based health management system is also steadily gaining adoption from corporate customers, which has been well received by investors.

Although VCs and other investors are narrowing the scope of their investment targets, once a startup has been deemed to have promise, they tend to commit a substantial amount of capital. The bottom line appears to be that investors are becoming more selective.

Startup valuations have nonetheless remained strong, with slight increases seen in all but Series C rounds of funding. In fact, the number of startups raising more than JPY 1 billion (USD 8.14 million) has steadily increased to reach 118 companies in H1 2022, roughly 60% of the total for the whole of 2021.

H1 2022 also saw just 15 down rounds, 9 fewer than was observed over the same period last year. While the number of down rounds in 2022 could potentially end up being lower than in an average year, based solely on the data available at this time, this could change as more data comes to light.

At the same time, some investors are concerned about the appearance of funding rounds without valuation data, making it difficult to predict how the future will play out.

Foreign Capital Backing Larger Rounds

As in previous years, startups in the AI, SaaS, and FinTech sectors accounted for a large share of companies securing big rounds of JPY 1 billion (USD 8.14 million) or more. While CleanTech startups did not account for much funding in terms of absolute numbers, their outsized share of large funding rounds specifically suggests an upsurge in investment sentiment surrounding the sector.

VCs played a prominent role in large funding rounds—JPY 1 billion (USD 8.14 million) or more—in H1 2022, contributing 54% of the total capital raised in these. Notably, foreign firms comprised 36% of such VCs, more than domestic independent VCs (24%) and domestic CVCs (8%) combined. In other words, many large funding rounds are backed by foreign capital.

LegalForce Had Largest Round of H1 2022

The recipient of the largest funding round of the year’s first half was Japan’s AI-powered contract review platform LegalForce, which raised JPY 13.7 billion (USD 111.48 million).

Considering the size of the investment, the involvement of foreign capital was unsurprising, with Sequoia China (Chinese subsidiary of prominent US VC Sequoia Capital) joining lead investor Softbank Vision Fund 2.

Despite being valued at just JPY 26.7 billion (USD 243.22 million) in its previous round of funding, the company’s valuation is believed to have exceeded JPY 50 billion (USD 406.88 million) in this round.

Given that at least 11 of the top 20 most-funded startups in H1 2022 had participation from foreign VCs, foreign investors appear to be particularly prominent in large funding rounds.

The second largest recipient of funding in H1 2022 was Tier IV, a developer of open-source autonomous driving software Autoware. This product originated as an open-source project at Nagoya University and is currently supplied to Taiwan’s Foxconn.

Of the JPY 12.1 billion (USD 99.03 million) raised by Tier IV, JPY 10 billion (USD 81.38 million) was underwritten by existing shareholder Sompo Holdings, with Yamaha Motor and Bridgestone also contributing capital. Sompo has also collaborated with the likes of Tier IV on the development of an insurance policy exclusively catering to providers of automated driving systems.

In third place was Spiber, a developer of a proprietary material made from structural proteins it calls “Brewed Protein”. After launching a funding round last year, as mentioned previously, the company attracted investment from Carlyle and other major global investors.

11 Unicorns Crowning Japan’s Startup Scene

The startup scene in Japan is currently home to 11 unicorns, some of which may go on to seek IPOs.

At more than JPY 170 billion (USD 1.41 billion), SmartHR had the fourth highest valuation of all unicorns in Japan. “In the current climate, IPOs are a wild card. We want to hold off on one until it’s absolutely necessary,” commented CFO Ryo Tamaki.

Coming in at second place is digital fiat currency (i.e. Central Bank Digital Currency) platform operator and newcomer GVE.

In addition, there are currently 14 companies valued at JPY 50 billion (406.88 USD million) or more that are seen as having the potential to become Japan’s next unicorn.

Fewer New Funds, More Picking and Choosing

This section looks at trends in the formation of VC funds and other funds focused on providing startup capital. The total number of 49 funds formed in H1 2022 and their combined value of JPY 185.6 billion (USD 1.51 billion) each represented a slowdown over the previous year.

As many funds struggle to raise capital, investment in startups is likely to become more selective.

One of the most watched funds formed in H1 2021 was Globis Fund VII, the seventh fund set up by Globis Capital Partners. Its investors now include Japan’s Government Pension Investment Fund (GPIF), one of the world's largest institutional investors, which participates as a limited partner.

Ripple Effects Visible in IPOs and Market Capitalization

Exits have been another cause for concern in H1 2022.

Following a wave of postponements and cancellations, H1 2022 saw 47 IPOs, 11 fewer than were recorded over the same period last year. When narrowed down to only those executed by startups (i.e. companies having received VC funding and otherwise meeting the criteria of “startup” as defined by INITIAL), the number of IPOs dropped by 2 YoY to just 26.

This had a major impact on company valuations, with the initial market capitalization of all IPOs totalling JPY 7.69 billion (USD 62.58 million), just over 60% of the level for all of 2021.

Without an exit, investors naturally have a hard time recovering invested funds, thus restricting their ability to fund future investments.

Amid this dearth of IPOs, AnyColor, which manages the virtual YouTuber (VTuber) group "Nijisanji", stood out as an exception.

The company's market capitalization (based on its initial post-IPO stock price) easily surpassed JPY 100 billion (USD 813.76 million), at one point topping the growth market at over JPY 270 billion (USD 2.20 billion). As of July 21, however, it had since settled at around JPY 180 billion (USD 1.46 billion).

Founded by CEO Riku Tazumi during his time at Waseda University, AnyColor went public in just five years and has since expanded overseas, including into China, South Korea, Indonesia, and a number of English-speaking countries. The company is also profitable, reporting net sales of JPY 14.1 billion (USD 114.74 million) and an ordinary (recurring) profit of JPY 4.1 billion (USD 33.36 million) for FY2022 (ending April 2022).

Next, let’s take a look at M&A activity.

Last year, Paidy was acquired by the US company PayPal Holdings for JPY 300 billion (USD 2.73 billion). In the first half of this year, meanwhile, there were 59 acquisitions via stock purchase and 18 asset deals. Given the likelihood that some M&A deals have yet to be disclosed, there does not appear to be much of a slowdown from last year in terms of overall activity.

In terms of deal value, AI inside’s JPY 1.64 billion (USD 13.35 million) acquisition of aiforce solutions, a startup that primarily develops software enabling businesses to implement AI solutions with little to no expertise, was the largest to date.

Looking ahead to H2, DeNA announced in May that it would be acquiring Allm, a cloud-based communication platform for medical professionals, for approximately JPY 29 billion (USD 212 million).

Despite solid activity, the scale of M&As is not yet large enough to overtake IPOs as the predominant form of startup exit in Japan.

In conclusion, investment in Japanese startups remained strong in H1 2022, even as stock market prices continue to decline in response to interest rate hikes by the US Federal Reserve. That said, the ripple effects of such macroeconomic factors tend to hit the private market much later.

With the impact of such effects looming on the horizon and fears of a recession rising, the bottom line is that the outlook for the latter half of the year does not presently call for much optimism.

As the scope of research for this report is limited to fundraising, as a general rule, the amounts shown herein to indicate the amount of capital raised by individual companies exclude loans.

Author & Researcher: Atsuko Mori
Editor: Takenori Osake
Designer: Eri Ishimaru, Takashi Yamaura
English Version: Cody Branscum, Viktor Makhnutin

In Conversation with the JVCA

Shakeout in the Japanese Startup Market: A Blessing in Disguise for VCs?

As part of this year’s mid-term Japan Startup Funding Report, INITIAL sat down with Tohru Akaura and Shinzo Nakano, co-chairmen of the Japan Venture Capital Association (JVCA), to discuss startup funding trends in Japan in H1 2022, as well as their thoughts on what lies ahead. Two of the leading names in Japan’s VC domain for many years now, Akaura and Nakano provide us with their assessment of the current startup landscape

Shinzo Nakano: JVCA Chairman

After joining ITOCHU Corporation in 1989, Nakano became involved in startup investment at ITOCHU Technology (Silicon Valley) in the early 1990s. He established close relationships with leading Silicon Valley VCs, laying the foundations for the ITOCHU Group's startup investment business, ITOCHU Technology Ventures, which was founded in 2000. As a partner, he invests in and provides hands-on support to startups. In 2012, he was appointed General Manager of the Information & Communication Technology (ICT) Division of ITOCHU Corporation. In 2015, he became the President and CEO of ITOCHU Technology Ventures, as well as being appointed as a board member of the JVCA. He was subsequently appointed as Vice-Chairman in 2017 and assumed his current position of Chairman in 2019.

Tohru Akaura: JVCA Chairman

After founding Incubate Capital Partners, a VC firm specialising in seed-stage investments, in 1999, Akaura went on to form the Incubate Fund in 2010, which he continues to operate today. Throughout his career, he has established funds worth a total of more than JPY 96.4 billion and has consistently engaged in seed-stage focused investment and incubation. A councilor for the Information-Technology Promotion Agency, Japan from 2003 to 2008, he was appointed as a Director of the JVCA in July 2013, Managing Director in July 2015, and Vice-Chairman in July 2017. He assumed his current position as Chairman in 2019. Akaura has been involved in the IPOs of 17 companies, including Cybozu, S-Pool, Carta Holdings, Media Do, Ceres, Aiming, Double

In 2021, as you know, total funding for Japanese startups reached a ten-year high. Now, in H1 2022 alone, Japanese startups have already raised roughly the equivalent of 51% of this amount—but the number of deals continues to decline. What do you make of this trend?

Nakano: Well, given the growing number of investors and the ever-larger amounts of dry powder (i.e., committed but unallocated capital) with which they can work each year, I’d say the total amount of funding raised by startups in H1 2022 is actually a bit lower than could have been expected.

In fact, it seems to me that the impact of recent market conditions has been more pronounced among startups in the middle or latter half of their growth stage, while early-stage startups have yet to really feel the effects.

Akaura: While, to my knowledge, deep tech startups in particular haven’t had the easiest time securing funding in post-seed rounds, they do appear to be managing.

This is because investors are becoming a bit more cautious about putting money into these startups, given that it takes these companies longer to turn a profit, and they require significant capital injections until they can really start growing.

Nakano: Despite the great deal of interest generally shown by corporate investors in deep tech and university startups (those originating from academic research facilities), the fact that these companies are non-traditional backers, meaning that they may be unable to take on such a risk, unless it can be separated as an R&D investment.

How has growth-stage funding been affected?

Nakano: We are not seeing any private equity (PE) or hedge funds anymore. This is nothing strange: they usually appear when there is a bubble growing, as we have seen in the US and other markets in the past.

With the influx of more diversified investors not necessarily specialized in startup funding, companies that had been overvalued may soon find themselves in a difficult situation.

That said, some of these companies actually are the “real deal” and will likely continue to have their funding needs met.

Of course, not all investors focused on growth-stage startups have vanished, either. Some foreign VCs, particularly those with on-the-ground operations in Japan, are not pulling out of their investments. This means that these “real deal” companies are likely to surface as others are weeded out amidst the ongoing shakeout.

It’s looking like more and more startups are opting to postpone IPOs, which are an important exit strategy for investors. What do you think about this?

Akaura: I expect it will take around 2–3 years for the market to recover to the point where startups feel comfortable going public again. In the meantime, we are likely to see more and more companies attempt to grow by raising funds through the private market in the hopes of landing a bigger IPO at a later date.

It’s possible that AnyMind Group—which recently raised around JPY 4 billion in a third-party allotment of new shares in July—might be one such example.

So, we’re looking at 2–3 years before we can expect to see a return of IPOs, then?

Nakano: As reported in the news at the end of July, the US economy has been contracting, having recorded two consecutive quarters of negative GDP growth—which some economists might consider the start of a recession. The global economy also remains in turmoil, due in part to the conflict in Ukraine, and the future in general still holds a great deal of uncertainty. It would be reasonable to assume that, even if the economy does recover at some point, it won’t be soon and is likely more than a year away.

Akaura: While it’s true that IPO delays pose a bit of an issue for VCs, when it happens, it happens. Raising additional funds and then shooting for an IPO again in 2–3 years makes sense from their perspective as well.

Any chance we will see a major exit before the return of IPOs?

Akaura: I think there is certainly room for foreign players to penetrate the Japanese market by acquiring local startups, just like PayPal Holdings did when it acquired Paidy in 2021.

At the same time, there are still a few hurdles to overcome before we begin to see any sort of major M&A deals involving domestic players, I believe.

The reason for this is that, in Japan, players in traditional industries usually have the largest amounts of available capital to work with. They have the most resources to become potential buyers, particularly in the market for enterprise services.

Even in the US, where large M&A deals are a relatively common occurrence, primary buyers are tech companies—particularly those who may still have the company founder as their current CEO and maintain their startup-like culture but already have access to enough financial resources for investment.

Of course, I hope this will change, and we will begin to see more Japanese players from traditional industries acquiring domestic unicorn companies in the future.

It appears that fewer VC funds were formed than usual. What do you think is behind this slowdown?

Nakano: Corporate investors make up the majority of limited partner (LP) investors in Japanese VC funds. Since these companies are non-traditional backers, they tend to pull out of investments when the economy starts to show signs of a downturn. This could be influencing the situation with new funds.

So, of course, VC funds want to stabilize the situation by bringing in institutional investors who are not as immediately influenced by changes in the economic climate.

One example of this has been the LP investment made by Japan’s Government Pension Investment Fund (GPIF) in Globis Fund VII, a VC fund managed by Globis Capital Partners.

We also expect to see an increase in funding provided by government-affiliated investment firms.

Akaura: Mitsubishi UFJ Trust and Banking, for example, has been appointed as the gatekeeper for GPIF’s PE investment. The funding provided to Globis Fund VII appears to have been just the beginning, with more VC funds likely to receive funding from it in the future.

Nakano: It’s not all gloom and doom for VCs, though.

Since an economic downturn creates a “buyer’s market”, it’s a great chance for investors who have already raised the necessary funds and now have enough dry powder on their hands.

In fact, while it typically takes 10 years for a fund to recoup an investment, those formed when the economy is not doing well actually do better, statistically speaking.

Akaura: We also have high hopes for the support outlined by the government for startups to develop sales channels (the Basic Policy on Economic and Fiscal Management and Reform 2022 entitled “For a New Form of Capitalism: Achieving a Sustainable Economy by Harnessing Processes to Overcome Challenges to Drive Growth”).

To wrap things up, what are your expectations and what are you keeping an eye on going forward?

Nakano: The situation in Ukraine will need to be watched closely. The longer the conflict goes on, the more it will affect the global economy, particularly in terms of oil prices and food supply.

As a venture capitalist myself, ensuring the survival of the companies in my portfolio is my number one priority right now.

But again, now is a great time to invest.

Akaura: The IPO of AnyColor in the first half of 2022 was highly symbolic, I think.

Although it had an IPO price of JPY 1,530 and an estimated market capitalization of JPY 44.7 billion, after going public, the company's market capitalization surged to JPY 200 billion at one point (Editor's note: JPY 184.1 billion as of July 29, 2022).

For its fiscal year ending in April 2022, AnyColor reported JPY 14.1 billion in revenue and JPY 4.2 billion in operating profit, so it is already performing well. It does seem to me like it was a bit undervalued in terms of its IPO offering and valuation, but this performance is great to see, nevertheless.

Of course, more companies postponing IPOs means less competition for those that do opt for one and that good companies are more likely to be evaluated fairly.

That is why we hope and expect to be able to produce highly-valued startups that truly represent Japan and have the potential to go on to become megastartups—even in this environment.

Interview & Text by Atsuko Mori
Design by Harumi Asano
English Version by Cody Branscum, Viktor Makhnutin

Revised on 09/30/2022: Correctly reflected the INITIAL Series of dotData (D > blank) and LUCA Science (E > B).
Revised on 09/20/2022: Correctly reflected the value of Lovegraph's acquisition by mixi which had been incorrectly reported as JPY 6.56 billion (USD 53.38 million) instead of JPY 656 billion (USD 5.34 million).