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Pension Riches Are No Panacea for Japan’s Startups

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

The Government Pension Investment Fund is reported by the Nikkei to be one of the key investors in a vehicle set up by Globis Capital Partners that aims to uncover unicorns and decacorns among the ventures. The move seems to be at the behest of the administration of Prime Minister Fumio Kishida, who earlier this year called for GPIF and other pensions pools to invest in startups as part of his “New Capitalism” economic plans. 

The GPIF declined to confirm the report, saying its private equity investments were at the discretion of the 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 investment amount is inconsequential. 

But the hope is that it will lead other pension funds, and a wider swathe of investors, to back nascent ventures. The GPIF is, by law, forbidden from making individual stock picks. This might be a blessing in disguise — other investments by government-adjacent funds have hardly been a success. Consider the Cool Japan Fund, a well-meaning effort set up by the administration of Shinzo Abe in 2013 to promote Japan’s soft power. Recent reports suggest it may soon be shut down if results don’t improve. 

Kishida needs to make sure his support for startups doesn’t go down the same path. Even GPIF won’t make a dent unless bigger structural problems in the sector are addressed. 

Many of Japan’s best companies, like the population itself, are old. While in recent years the likes of Mercari Inc., Japan’s first unicorn, have blossomed, these $1 billion startups are now passé — now the talk is of decacorns, startups worth more than $10 billion. The focus must be on creating young companies that can really compete on the world stage, just as postwar ventures such as Sony Group Corp. and Honda Motor Co. once did. There’s no modern Japanese equivalent of Spotify Technology SA or Airbnb Inc., much less a Bytedance Ltd.  

For years, one of the biggest ironies in Japan’s startup scene was that the world’s biggest venture capitalist, Japan’s own Masayoshi Son, declined to put his money into a sector he’s long dismissed. 

“Japan has way too few unicorns in the AI space,” Son said just last month at Softbank’s annual shareholder meeting, pointing out the country had fewer AI unicorns that India, the UK or Indonesia. “The Japanese government, the education sector, society and media all need to recognize this — if Japan continues to lag behind, it’s going to be in trouble 30 years from now.” 

Kishida talks a lot about encouraging the type of private-public partnerships that helped build some of the biggest firms in the past. The GPIF is a good start, but why not get the likes of Son on board, and encourage him to open his checkbook further to grow precisely the types of investments he wants to make? 

Support at every stage is needed: more seed-funding, yes, but crucially also attracting more late-stage funding to end the current trend of firms listing too soon. That puts pressure on entrepreneurs to start making profits rather than focusing on growth, and leads to the phenomenon of “hidden unicorns” — young companies that, because they are listed, aren’t counted in startup rankings. 

A potential global recession might be a bad time to be pitching profit-free startups. But Japan has some advantages: Money still costs less than nothing, and the weak yen further increases its attractiveness to investors paying in dollars. Crucially, the China of Covid zero and tech crackdowns no longer looks like the slam-dunk investing destination it once did. 

While SoftBank now has four Japanese investments in its Vision Fund 2, the nation still makes up less than 1% of its investment portfolio of 475 firms. For Kishida’s plan to succeed, he needs to change this narrative — and turn Japan into an investment destination Son can’t shy away from. 

More From Bloomberg Opinion:

• Japan’s Blurred Vision for Where Capitalism Goes: Gearoid Reidy

• Curb Your Enthusiasm on India’s Next Chip Venture: Tim Culpan

• Tiger Global’s Day of Reckoning May Never Come: Shuli Ren

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

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

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