In a country where a stubbornly stagnant economy has turned the adventurous away from high-risk investment, fundraising has become one of the highest hurdles a startup can overcome. Young Japanese entrepreneurs in dire need of cash, however, are now resorting to “crowdfunding” to take care of their financing needs.

Crowdfunding makes it much easier for entrepreneurs, artists or other creators to raise money if they have a good idea worth investing in. It has also financed projects to support people in the northeast who lost their jobs and homes to the March 2011 Great East Japan Earthquake. Here are some questions and answers on the new micro-financing system.

What is crowdfunding?

It is a method of raising funds from a large number of people, usually via the Internet, for a project that was designed independently.

But unlike conventional fundraising measures, such as loans, stock issuance and venture capital, crowdfunding does not give each investor a financial return. Instead, supporters receive nonfinancial rewards, depending on the amount of money they pledge.

The rewards are unique and can include services or goods. For example, if the person seeking funding is a musician who wants to release a new album, the investor might get a free music download.

Many crowdfunding websites in the United States were developed in the past decade. Well-known Kickstarter, based in Manhattan’s Lower East Side, has helped more than 3.8 million people pledge over $567 million and funded more than 39,000 projects since it was launched in 2009.

In Japan, two leading crowdfunding services, Campfire and ReadyFor, started up in 2011 but developed in a unique manner. They initially gained attention for funding several projects aimed at supporting people in Tohoku displaced by the quake and tsunami. Last year, the two platforms also became popular among young tech-savvy entrepreneurs.

Since its inception in June 2011, Campfire has raised a total of ¥130 million via 220 projects, it said.

How does crowdfunding work?

Anyone with an idea can apply by sending an outline of the project detailing its purpose and financing target to a crowdfunding website.

In Campfire’s case, it takes about seven business days for a project to be judged worthy of picking up and another week or so for it to be posted on the website.

If a project succeeds in achieving its financing target, the crowdfunding operator will take a 10 to 20 percent cut, depending on the platform. The project designer keeps the remainder.

In many cases, it’s an all-or-nothing proposition: If the project doesn’t succeed, it can’t get any money.

What kinds of projects have been enabled by crowdfunding?

Last year, a woman living in temporary housing in Rikuzentakata, Iwate Prefecture, applied for crowdfunding through ReadyFor to fill a local library with books. She received around ¥8.25 million — more than quadruple her target of ¥2 million, from 862 people.

The library was destroyed by the tsunami and all its librarians were lost. Thanks to the money, the library now has 9,500 books and a flock of happy financial supporters.

What moved the backers was the reward: Those who paid ¥10,000 could ask the library to buy specific books and put their names in them.

“I’m full of feelings of gratitude. . . . I feel pleasure that I may have helped someone,” one supporter wrote on the site.

A project organized by Lin Kobayashi, executive director and chair of the board for the International School of Asia in Karuizawa, Nagano Prefecture, sought to raise ¥2.5 million through ReadyFor to fund the school’s summer leadership programs. When the April 7 deadline rolled around, her project had actually raised ¥2.85 million from 78 people.

Meanwhile, on Campfire, a project for generating a conceptual model of the WHILL, a machine that turns a wheelchair into an electric vehicle, gained ¥1.04 million from 156 people, double its ¥500,000 goal, in October 2011.

The project is run by WHILL Inc., which was set up by a group of young engineers who quit Sony Corp., Nissan Motor Co. and other blue-chip firms. The model generated a buzz at the Tokyo Motor Show in December.

How did crowdfunding grow in Japan?

In recent months, young people interested in setting up startups have turned their eyes to crowdfunding because it is hard for nascent companies to raise funds.

Inspired by IT trendsetter Chris Anderson’s latest book “Makers” and the U.S. “maker movement,” an increasing number of Japanese are looking for ways to produce something outside a factory setting, boosting potential demand for seed funds.

“In the second half of 2012, Chris Anderson’s ‘Makers’ was published and it started to prove the superiority of crowdfunding as a way of promoting the Japanese manufacturing industry,” Campfire said in a press release in January.

This method attracts not only entrepreneurs and creators, but also investors.

“It is a very useful way of raising funds,” said Hiroyuki Kuroda, secretary general for Venture Enterprise Center. “A lot of people can easily join the projects (as financial supporters) with low risks, if they agree with the purpose.”

Does Japan have other funding systems for startups?

Currently, there is about ¥124 billion worth of venture capital available in Japan. There is also the “green sheet” system, operated by Japan Securities Dealers Association, where brokerages can trade unlisted shares in companies that are getting ready to go public.

But these are measures to be used once companies attain a certain size.

The government has admitted that Japan lacks the fundraising methods needed to nurture startups. The total amount of investment carried out via venture capital in Japan is merely 5 percent of the level in the United States.

Given this problem, the Financial Services Agency said it will consider whether it can set up a system of crowdfunding to finance the unlisted stock of venture companies.

“When (young) companies try to start business with their own technologies and ideas, they run into the so-called valley of death, in which they cannot get the business on track because of the insufficient supply of money,” said a report submitted by Finance Minister Taro Aso to a government panel in charge of boosting industrial competition on March 15.

The valley of death is a term used among startup companies, referring to the difficulty in raising funds before their new products or services start to generate a profit.

The Weekly FYI appears Tuesdays. Readers are encouraged to send ideas, questions and opinions to hodobu@japantimes.co.jp

In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.