The Ministry of Economy, Trade and Industry plans to revise its investment contract guidelines by the end of September to explicitly allow mergers and acquisitions (M&A) as an exit option alongside initial public offerings (IPOs). This marks a significant shift in Japan’s startup ecosystem, where venture capital firms have traditionally emphasized IPOs as the primary path for startups.
Akiyo Iriyama, a professor at Waseda University specializing in corporate strategy, explained that worldwide, startups typically exit through either IPOs or M&A. However, Japan has long relied almost exclusively on IPOs. By contrast, over 90 percent of US startups exit via M&A, with IPOs representing less than 10 percent.
Iriyama noted that this reliance on IPOs has led Japanese startups to go public with much smaller valuations—sometimes only a few billion yen in market capitalization—well before reaching unicorn scale. This partly explains why Japan has comparatively few unicorns, whereas US startups often raise multiple funding rounds and delay IPOs until their valuations reach 1 trillion yen or more.
One structural factor contributing to this trend is the ease of listing on the Tokyo Stock Exchange. Historically, the exchange has maintained relatively lenient listing requirements, allowing young startups with modest valuations to go public. While this approach has provided early returns to founders and investors, it has also given rise to the phenomenon known as “IPO goal”—startups going public early but then stalling in growth.
Many founders, after securing wealth through IPOs, lose the incentive to aggressively scale their companies. Iriyama emphasized that IPOs are not inherently negative, as they have produced visible role models for aspiring entrepreneurs. However, Japan needs more diverse pathways to sustain growth beyond early public listings.
“If listing requirements remain too easy, startups stop growing at an early stage,” Iriyama said, advocating for stricter standards and a broader range of exit strategies.
Another challenge lies in funding scale. Japanese venture capital tends to provide smaller amounts with shorter investment horizons, often pushing startups toward quick listings. In contrast, US startups may successfully raise numerous funding rounds—sometimes up to Series H—without going public.
To compete globally, Japanese startups require not only longer-term domestic capital but also greater inflows of overseas investment. Iriyama expressed cautious optimism, noting that foreign venture capital funds have historically invested in Japan at much larger scales, often an order of magnitude greater than domestic firms. Such capital is essential for the growth of deep-tech companies that need years of development.
However, he also issued a warning about the volatility of overseas funds. “Foreign investors can bring in large amounts of capital, but their exit can be just as fast,” he said, recalling past periods when international funds rapidly withdrew from Japan.
As the government pushes reforms and venture capital practices evolve, the central question remains: Can Japan foster startups that not only go public but also scale into the kind of global giants that increasingly define the modern economy?
https://newsonjapan.com/article/147018.php
