Pension wealth is no panacea for Japanese startups

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Japan’s small but growing startup scene has seen deep-pocketed new entrants in recent years, from Sequoia Capital to Softbank Group Corp. Now here comes the entrant with the deepest pockets of all: GPIF, the world’s largest retirement pool.

According to the Nikkei, the Government Pensions Investment Fund is one of the main investors in a vehicle set up by Globis Capital Partners that aims to find unicorns and decacorns among companies. The move appears to be at the behest of Prime Minister Fumio Kishida’s administration, which earlier this year called on GPIF and other pension funds to invest in startups as part of its ‘new capitalism’ economic plans. .

GPIF declined to confirm the report, saying its private equity investments were at the discretion of fund-of-funds manager Mitsubishi UFJ Trust & Banking Corporation. In any case, for a fund with nearly $1.5 trillion in assets under management, the amount of investment is inconsequential.

But the hope is that it will attract other pension funds, and a wider range of investors, to support fledgling companies. GPIF is prohibited by law from making individual stock selections. This could be a blessing in disguise – other investments by adjacent government funds have hardly been successful. Consider the Cool Japan Fund, a well-intentioned effort set up by Shinzo Abe’s administration in 2013 to promote Japan’s soft power. Recent reports suggest it could soon be shut down if results do not improve.

Kishida needs to make sure his support for startups doesn’t follow the same path. Even the GPIF will not make progress unless the larger structural problems of the sector are addressed.

Many of Japan’s best companies, like the people themselves, are old. While in recent years Mercari Inc., Japan’s first unicorn, has blossomed, these billion-dollar startups are now outdated – now referred to as decacorns, startups worth more than $10 billion. The focus should be on creating start-ups that can truly compete on the global stage, much like post-war companies such as Sony Group Corp. and Honda Motor Co. once did. There is no modern Japanese equivalent of Spotify Technology SA or Airbnb Inc., let alone Bytedance Ltd.

For years, one of the biggest ironies of Japan’s startup scene has been that the world’s biggest venture capitalist, Japan’s Masayoshi Son, refused to put his money into a sector he had long shunned. .

“Japan has far too few unicorns in the AI ​​space,” Son said last month at Softbank’s annual shareholder meeting, noting that the country has fewer AI unicorns than Japan. India, the United Kingdom or Indonesia. “The Japanese government, education sector, society and the media all need to recognize this – if Japan continues to lag behind, it will be in trouble in 30 years.”

Kishida talks a lot about encouraging the kind of public-private partnerships that have helped build some of the biggest companies in the past. The GPIF is a good start, but why not get people like Son on board and encourage him to open up his checkbook more to develop precisely the kinds of investments he wants to make?

Support at every stage is needed: more seed funding, yes, but above all attracting more late-stage funding to end the current trend of companies signing up too early. This puts pressure on entrepreneurs to start making profits rather than focusing on growth, and leads to the phenomenon of “hidden unicorns” – young companies which, because they are listed, are not counted in startup rankings.

A potential global recession could be a bad time to launch nonprofit startups. But Japan has some advantages: silver is still cheaper than nothing, and the weakness of the yen further increases its appeal to investors paying in dollars. Crucially, China of Covid zero and tech crackdowns no longer looks like the slam-dunk investment destination it once did.

While SoftBank now has four Japanese investments in its Vision Fund 2, the country still represents less than 1% of its investment portfolio of 475 companies. For Kishida’s plan to succeed, he must change that narrative and make Japan an investment destination that Son cannot shy away from.

More from Bloomberg Opinion:

• Japan’s blurry view of where capitalism is going: Gearoid Reidy

• Curb your enthusiasm for India’s next chip company: Tim Culpan

• Tiger Global’s Judgment Day May Never Happen: Shuli Ren

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Gearoid Reidy is a Bloomberg News editor covering Japan. He previously led the breaking news team in North Asia and was the deputy chief of the Tokyo bureau.

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