Japan stands at the dawn of a new golden age for entrepreneurs. Hidden in the darkness of the current recession, the forces of human creativity, economic necessity, personal ambition and realistic opportunity are beginning to combine. The key dynamics driving post-COVID-19 Japan will be the rise of Japan as a startup nation.
Why? Recessions always create the foundation for recovery. The necessary ingredients for a new venture – land, labor and capital – are being freed up, becoming cheaper, thus making it more opportune to start something new. In Japan, this is particularly true since by far the biggest constraint and obstacle has been the shortage of labor.
Just 15 months ago, for every job offer there were fewer than 0.4 applicants. When even the big brand Fortune 500 companies have problems hiring people, even the most ambitious startup entrepreneur will have to think twice about starting or growing his or her venture. No team, no dream. Japan’s labor shortage has been a tremendous constraint on entrepreneurship; and the COVID-19 recession is starting to fix this.
For most, it comes the hard way: Over the past year, almost 3 million Japanese lost employment outright. Another 2.5 million have been furloughed, i.e. are technically still employed but don’t really work anymore and, most importantly, face huge future job uncertainty. Total employment is now down to just about 60 million people. Japan has therefore seen an increase in the potential supply of labor of almost 10%. In the cold language of economists: Human capital has freed up.
Human capital is the key
This is where the positive dynamics of entrepreneurship come into play. One of the biggest obstacles for growth and expansion has finally disappeared. No matter how small the startup, it can finally hire people, build teams, invest in what always yields the highest returns for any new venture — human capital.
Even the most techy of tech companies, like Google or Amazon, did not grow by the force of their superior algorithm, business model or charismatic leadership vision, but by the sweat equity and the animal spirits of their team leaders, sales managers and back office clerks pulling all nighters. Elon Musk’s biggest problem is not tech, engineering or digital transformation; it is his teams, the people who actually get stuff done.
In Japan, the bar for startups to attract talent has always been especially high because of a strong preference for top graduates to go for established companies. Bigger was supposedly safer. Here again, the current recession may well mark an important turning point. Not a week goes by when we don’t read about establishment companies announcing a restructuring plan. All of a sudden, big-company job security is not what it used to be, which in turn is great news for entrepreneurs.
Young, ambitious engineers or aspiring sales and marketing professionals from the top-brand companies are suddenly beginning to hand out their resumes, ready to explore other opportunities. There is a remarkable pickup in labor market liquidity, with the high number of people let go during the recession now being compounded by a rising number of big company mid-level employees taking their careers into their own hands. For entrepreneurs, this is a positive turn of events.
To be specific, I have the good fortune of working as an adviser and angel investor to a couple of Japanese VC funds. Over the past six months, all of the startups we deal with have grown their staff and partners, with several of them more than doubling their teams; and most importantly, the quality of potential candidates has gone up enormously.
One young woman from a top establishment company who has had no overseas or global experience told me: “Working at my current employer has been great, but now that I know how good I am and what I want, staying there puts me at risk. I don’t want to be reassigned to some random project by some random salaryman superior. I want to create my own destiny and your startup is the best place to do that.”
To be sure, this young woman almost certainly is exceptional, and it may very well be wrong to present her as anything like the new norm of Japanese employees. However, unlike five or 10 years ago, she now does exist and it would be wrong to underestimate the powerful ambitions and awareness of opportunities that Japan’s young talents and employees are prepared to explore.
The leap from exploring to actually quitting and starting a new career at a start-up venture is poised to get easier to make. There’s no doubt that the opportunities will increase, large established companies will continue to stagnate and more young startups will demonstrate sustainable high growth. Opportunities worth watching include: health care and biotech, professional services and process automation, education and deep-tech base materials and anything serving wealthy Japanese retirees. Some will make a fortune building the Louis Vuitton retirement communities of Japan.
Finally, Japan has developed a true and sustainable ecosystem of support for startups and aspiring entrepreneurs. Not a day goes by when the major newspapers are not advertising a startup competition or venture capital symposium. Even Keidanren, the proud sanctuary of Japan’s corporate culture, now fully embraces innovation and entrepreneurship in its strategic vision for Japan.
Most importantly, Japan now has a new generation of successful entrepreneurs, people who have successfully built true going concerns, who successfully commercialized and monetized an original idea, who overcame many obstacles and difficulties to build their dream. Sure, they have money to invest; but more fundamentally, many of these new successful entrepreneurs are focused on creating a positive legacy by giving back, by mentoring and advising the next generation.
Japan has become a hotbed of private initiatives to grow and develop a startup culture — mentorship programs, incubators, accelerators, venture capital funds, daily discussions on Clubhouse, etc. This private sector ecosystem of open discussion, sharing and networking is vital because a sustainable startup culture can only develop if success is celebrated and more importantly if failure is peer-encouraged to become a catalyst for another try. As Japan’s most successful entrepreneur, Yanai Tadashi, founder of FastRetailing, supposedly once said, “I failed about 25 times before I finally succeeded.”
All said, the new Japanese golden age for entrepreneurs is very exciting. If it is truly dawning, we will have to become more optimistic on the overall Japan outlook. For every one percentage point that the number of entrepreneurs increases in the population, the potential economic growth rate rises by about half a percent. Private entrepreneurship, not government handouts, will build future prosperity.
Jesper Koll is the senior adviser to Wisdomtree Investments and is consistently ranked as a top Japan strategist and economist. He publishes blogs at www.wisdomtree.com/blog.
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