Japan's Unicorn Growth Stalls Despite Record Number of Potential Startups

Japan's pool of potential unicorns, startups valued at $1 billion or more, reached a record high of 14 in 2024, according to a new survey by Nikkei, but the growth of these companies remains sluggish.

The annual survey, now in its eighth year and conducted in partnership with the Japan Venture Capital Association and Kepple, defines "pre-unicorns" as startups valued at 50 billion yen ($340 million) or more, with the potential to reach unicorn status within a couple of funding rounds.

Despite the record number of potential unicorns, Japan is still lagging behind other nations in terms of overall unicorn count. As of September, the U.S. had 676 unicorns, China had 164, and India had 71, while Japan remains in the single digits, according to U.S. research company CB Insights.

One key factor contributing to Japan's slow unicorn growth is the scarcity of domestic investment in startups. Almost half of the startups surveyed reported insufficient funding providers to support their growth.

The Japanese government has set a target to increase annual startup investment from 800 billion yen to 10 trillion yen by fiscal 2027, but this goal has yet to be achieved. This year's investment is projected to remain between 700 billion and 800 billion yen.

Limited funding from domestic venture capitalists is a major obstacle. In fiscal 2023, Japanese VC funds invested a total of 266.9 billion yen in startups, only 1% of the amount invested by their U.S. counterparts, according to the Venture Enterprise Center in Tokyo.

Japanese VCs also face challenges in identifying promising startups. Compared to their international counterparts, they have fewer experts in science and technology, and limited staff with experience in launching new ventures. This has led many startups to seek funding abroad.

While attracting overseas investors is becoming easier, with a 69% increase in investment from overseas VCs in the first half of 2024 compared to the previous year, this still represents only 6% of the overall investment, according to startup information site Speeda. To attract more foreign investors, startups need to improve their communication in English and build stronger track records internationally.

The Japanese government is also working to attract more overseas VC investment as part of its five-year startup development plan. In 2023 and 2024, the state-backed Japan Investment Corp. invested in funds managed by international VC companies, aiming to direct their investments toward Japanese startups and leverage their expertise in identifying promising companies.