International VCs turn attention to Japan

October 2, 2024 (Preqin News) – Investment in Japanese start-ups by overseas venture capital (VC) funds has continued to flow steadily this year, despite a fall in the amount of capital invested by domestic VCs.

Preqin data shows that international VCs have invested $2.5bn in 185 deals with companies in Japan so far this year. The run rate means international investors are on track to match or exceed the $3.0bn deployed in 242 rounds in 2023 and $3.5bn in 282 transactions in 2022.

The steady pace of investment contrasts the global slowdown in VC deals, as reported in the Venture Capital Q2 2024: Preqin Quarterly Update, and a slowdown in investment in Japan by domestic players. Aggregate deal value for Japanese VCs is $11.7bn in the year to date, around half the record $21.6bn invested in 2023. The number of deals is down by a smaller proportion, with 2,405 year-to-date compared with 3,129 in the whole of 2023.

Among overseas VCs, Singapore-based early-stage firm East Ventures has been the most active investor in Japan’s start-ups, with 20 deals this year and 165 over the past five years. US-based DNX Ventures ranks second with 11 investments year-to-date and 87 over the past five years. Singapore’s BEENEXT ranks third with 50 rounds over the past five years.

Last month, Silicon Valley giant Andreessen Horowitz announced plans to open its first office in Japan to invest in tech start-ups. This followed a strategic expansion into the Japanese market by US-based VC Soul Ventures in June 2024.

‘Japan presents a vibrant landscape brimming with exciting investment opportunities,’ Warren Hui, Founding Partner at Soul Ventures, said announcing the move. ‘By opening an office here, we are signifying our commitment to investing in Japan’s tech landscape and helping unlock the region’s remarkable growth potential.’

Venture capital in Japan is an opportunity that has historically not fulfilled its potential, particularly given that many of the building blocks – including a strong education system and academic institutions, innovative technology companies with leadership in many segments, robust investment institutions, and a deep stock market – are in place.

However, that has changed over the past decade, with substantial government support and the emergence of a more entrepreneurial culture (see Preqin Territory Guide: Private Equity and Venture Capital in Japan 2023). Assets under management at Japan-based VC firms increased nearly fivefold between 2014 and 2023, rising from $11.1bn to $50.5bn.

Under the banner of a ‘new form of capitalism,’ the government outlined the goal to increase investment in start-ups tenfold to JPY 10tn ($69.3bn) by March 2028 and create 100 unicorns and 100,000 start-ups in the future as part of the five-year development plan launched in November 2022. There are already positive results, with the Ministry of Economy, Trade and Industry reporting in July 2024 that start-ups had added JPY 10.47trn ($72.6bn) to GDP, and will create an estimated 520,000 jobs.

‘Japan has so much potential,’ Ilya Kulyatin, an entrepreneur who has founded companies in Singapore and New York and is now building products and the AI ecosystem in Tokyo, said at a Japan External Trade Organization (JETRO) event in February. ‘It started from a low base but over the next 5–10 years, it’s here that you need to be in Asia.’

_{The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.}