One of the year’s most spectacular startup payoffs isn’t in Silicon Valley or China, it’s in Japan.
Mercari Inc.’s $3.7 billion coming-out party will deliver a 149-times return to early investor United Inc., which engineered a ¥300 million ($2.7 million) round in the flea-market app in 2013. That stake will be worth at least ¥45 billion when Mercari goes public on Tuesday, a major windfall that may galvanize the No. 3 economy’s stunted startup scene.
“The environment is right to see several more unicorns appear over the coming decade,” said Yozo Kaneko, president of the Tokyo-listed investment and internet services firm. “But the real consequence is that we’ll see more experienced entrepreneurs come out of those unicorns, and they’re the ones who could have a really big impact on the entire ecosystem.”
About time. Japan’s first wave of big startups — Rakuten Inc., Yahoo Japan Corp., CyberAgent Inc. — ended with the bursting of the dot-com bubble. The 2006 downfall of Livedoor Inc. and the global financial crisis further damped startup creation, convincing millions of graduates that entrepreneurship was too risky and corporations like Sony Corp. offered better careers.
Mercari founder Shintaro Yamada has emerged as the poster child for a hoped-for startup renaissance. He created his first company in 2001 and sold it to Zynga Inc. nine years later. That experience conferred upon him the relationships and gravitas to attract fellow entrepreneurs and build up Mercari through acquisitions. He may have struck the mother lode: Mercari is already trading 30 percent above its IPO price in the gray market, according to Andrew Jackson, head of Japanese equities at Soochow CSSD Capital Markets in Singapore.
Now, Prime Minister Shinzo Abe’s administration is looking to the technology sector to revive an economy sagging under a rapidly aging population and vested corporate interests. More unicorns will emerge or go public in coming years, said James Riney, head of 500 Startups Japan.
Candidates include its largest cryptocurrency exchange, bitFlyer Inc., potentially worth several billion dollars if its profits are comparable to those of Coincheck Inc. Then there’s synthetic spider silk manufacturer Spiber Inc. and artificial intelligence developer Preferred Networks Inc., which is said to be worth $2 billion.
“Mercari is the icon of success in the startup world in Japan,” Riney said. He envisions a “Mercari Mafia” — a nod to the PayPal Mafia founder-cohort who went on to create Palantir, Tesla and LinkedIn. “I’m hoping the people inside Mercari who witnessed first-hand how to scale quickly and how the sausage was made will go out, start their own companies and replicate that success.”
Japan’s startup scene remains tiny by global standards. But Mercari underscores two trends that may begin to change that: a deepening pool of entrepreneurial talent and the growing patience of investors. The country’s largest venture fund, Jafco Co., two years ago shifted toward fewer but larger rounds, giving founders leeway to evolve their companies.
A more diverse pool of capital helps. Founders now have more options besides the corporate venture firms that dominated startup funding but preferred smaller investments. An influx of private houses, from 500 Startups to Draper Nexus, now complements a growing local investor scene. Less than 10 percent of Mercari’s external investors are corporate.
“Before, companies struggled to raise four or five million dollars, but now they can raise 30, 40 or 50 million,” said David Milstein, head of Fidelity’s Eight Roads Ventures in Japan. “The quality of entrepreneurs is improving, they have better access to capital, and there’s more patience among investors before pushing a company to go public.”
“All of that will drive bigger and bigger IPOs,” he added.
Kaneko, for one, hopes to replicate his success. He said he’s putting United’s winnings back into startups, continuing a tradition of investing in 10 to 20 outfits annually. It’s selling 39 percent of its stake in Mercari.
“I never thought Mercari would become this big,” he said. “But once I noticed users were creating value by themselves — buying and selling things the platform creators never even imagined or intended them to — that’s when I realized the service can become huge.”