Entrepreneurship in Japan: Separating fact from fiction
The Japanese are a polite and humble people. Does that mean they aren’t entrepreneurial? Not according to Robert Eberhart, Director of the Stanford Project on Japanese Entrepreneurship. Now into its seventh year, the project is a joint effort between Stanford University and the University of Tokyo. Eberhart and his team are studying commonly held assumptions about Japanese entrepreneurs. Among the project’s findings: Entrepreneurship is as prevalent in Japan as it is in the US.
Before you are dismissive, take note: Eberhart is a serial entrepreneur who built from scratch WineInStyle, a Japanese company that imports and distributes Californian wine. He founded the firm in 1999, raised about $5 million of (mostly) Japanese venture capital, and then sold the firm to Terada Soko and other investors in 2007. That grabbed our attention. Beacon Reports interviewed Eberhart to learn what he had to say.
The press will have you believe that the Japanese are risk averse. Venture capital in Japan is scarce. The country lacks an active Initial Public Offering market. There are too few mergers and acquisitions. IPO and M&A valuations are too low. The worst of the media even portrays Japanese as grass-eating ‘herbivores’.
Eberhart dismisses these myths. “Yes,” he says, “it is hard to start a company in Japan. It is hard to get financing. And it is hard to get customers and it is hard to meet the payroll. Entrepreneurship is difficult everywhere in the world. It’s not unique to Japan. It’s hard to do and you’re probably going to fail.” Indeed, eighty percent of all entrepreneurial startups fail. He believes it is natural for entrepreneurs to talk about how they couldn’t get enough customers, financial support and so forth. “It does not mean that Japan is not entrepreneurial,” says Eberhart.
Newspapers typically report the startup rate as being 4% in Japan versus 10% in the US. Those figures derive by dividing the total number of new startups against the base of existing firms. Statistically speaking, Eberhart suggests there are too many registered companies in Japan when compared to the US. If so, the comparative startup rates could be misleading.
He looked more closely at the numbers. The US has a population of 316 million people along with 5.5 million registered firms. Japan has 127 million people and 4.2 million companies. Overall, the US has 2.5 times the population but only 1.3 times the number of firms. Eberhart believes the anomaly is the result of higher rates of company dormancy in Japan. He says it is more important for tax reasons in the US to dissolve inactive companies. In Japan, more inactive companies remain dormant on the Town Hall’s company registry. After removing the inactive companies and adjusting for the relative populations the startup rates are about the same (10%) for the two countries.
Number of Startups (10 Year Average) vs. Startup Percentage Rate
What about the often cited Global Entrepreneurship Monitor report of 2007 which suggests Japan has the lowest rate of entrepreneurship among the developed nations? Eberhart points to data in the same report which undermines those statistics. Countries with incomes above $15,000 (those in the horizontal box in the chart below) have startup rates of between 5 – 10%. Countries with incomes below $15,000 (those in the vertical box) have much higher startup rates. On that basis, Japan is not ranked at the bottom. It is ranked in the middle along with the other developed nations including Israel, Belgium, France, the United Kingdom, Denmark, Sweden and the Netherlands.
Global Entrepreneurship Monitor (2007)
Combining those insights, Eberhart infers there is as much entrepreneurship in Japan as there is in the US. “It is just less visible here,” he says.
He believes people are too focused on high-profile US success stories such as Apple, Google and Facebook to recognize Japan’s own successes. Here, there are far fewer high-profile companies. Those that do exist, such as Rakuten, DeNA and GREE often don’t make international headline news when they venture overseas.
“If you look for entrepreneurship in the wrong places, you won’t find it,” says Eberhart. Entrepreneurial Japanese companies support Japan’s foreign trade in capital goods. Others operate in wholesale or industrial channels. Among the firms he refers to are Oyo Corporation, Wavelock Co.,Ltd, Ubiteq, Inc. and Euglena Co., Ltd. Few he suggests are household names.
According to Eberhart, it is not only foreigners who have come to believe that Japanese aren’t entrepreneurial. He believes that Japan itself does not wish to hear about its own success stories. He says the Japanese deride themselves for their own their lack of entrepreneurship, while perceiving the US − especially Silicon Valley, as idyllic.
“There is a mythology in Japan about Silicon Valley,” says Eberhart. “Many talk about it as the land of milk and flowing money, and about how easy it is to fail. They think everyone starts companies, owns a Porsche and is rich.” This he believes is false. Silicon Valley is a difficult place. The unemployment rate is 8% and up to 35% of those who are employed are in temporary or contract work. “We compare Japanese entrepreneurship to a chimera that is not true,” says Eberhart.
That is not to say that he believes that Japan is as entrepreneurial as Silicon Valley. “That would be like comparing any ordinary guitar player to Keith Richards or Jimmy Hendrix,” says Eberhart, adding, “Silicon Valley is where entrepreneurship happens. Period. But compared to the US, I would claim there is not much difference.”
Eberhart remains unconcerned about Japan’s listless IPO market. On the contrary, he frets the US IPO market is overactive, being driven to excesses by Wall Street. The IPO price of social media firms like Twitter, yet to turn a profit, he believes are overvalued (see FT article). He is grateful the game of starting a company to flip without regard to cash flow doesn’t exist to the same degree in Japan. He is convinced that good Japanese companies with good future cash flows can raise the money they need to grow. “There is nothing wrong with the markets here,” says Eberhart, noting that between 2004 – 2006 the number of IPOs in Japan occasionally surpassed those in the US. Eventually, he believes Japan’s IPO market will pick-up.
Asked to comment on the press’s labeling of Japanese as ‘herbivores’, Eberhart had this to say: “People who refer to Japanese as herbivores are painting with a stereotypical broad brush…. ‘I met this one guy in Japan, he’s like this…. Therefore everyone is like that.'”
He added, “If I go to my home town in Jackson Michigan and hang around the Michigan automobile industry, I also find ‘herbivores’ − people stuck in the same 100-year-old industry that think like they did 30 years ago. On the other hand, if I go to the entrepreneurship center here at Stanford, I find people that are not like that. It’s the same in Japan. Some people are entrepreneurs and others are not, like everywhere else.”
Eberhart suggests it is time to revisit our stereotypical notions of the Japanese when it comes to entrepreneurship. Westerners should look beneath Japan’s culture of modesty to separate fact from fiction.