Roundtable on Growth Funding for Startups
In order to further revitalize the startup ecosystem, it is important for each entity involved in funding startups to share a common understanding of the direction the ecosystem should aim for, further strengthen funding for startups, support their growth, and ensure that the benefits are reaped by each entity involved.
To this end, the Financial Services Agency and the Ministry of Economy, Trade and Industry (METI) jointly held a Roundtable on Growth Funding for Startups, bringing together the government and various entities that support the provision of funds to startups, and shared recognition regarding the direction and overall picture of the ecosystem that should be aimed for, as well as the efforts of each entity.
With 14 different entities presenting, this article consolidates the various status updates and recommendations into one policy proposal.
1.0 Introduction: Seizing the Momentum for a New Era of Japanese Innovation
While Japan's progress in expanding the foundational "base" of its startup ecosystem is laudable, this success has revealed a critical strategic vulnerability: the inability to consistently scale companies to global significance. The data shows remarkable momentum—startup numbers are projected to grow by over 50% between 2021 and 2025, and domestic funding has remained stable even as other major economies face sharp downturns. Japan has successfully built the foundation.
However, this proposal argues that Japan now confronts the urgent challenge of fostering "height"—the cultivation of high-value, globally competitive companies, including the unicorns and decacorns that define world-leading innovation hubs. The current landscape is constrained by structural bottlenecks in growth-stage funding, a lack of robust exit strategies beyond small-scale IPOs, and an ecosystem that remains insufficiently integrated with global capital and talent flows.
This proposal is not merely a recommendation; it is a necessary blueprint for addressing the structural deficiencies that constrain Japan's national innovative potential. It puts forth a comprehensive, multi-stakeholder strategy to systematically strengthen the supply of growth capital, activate M&A and secondary markets, and forge deeper global integration, thereby transforming Japan into a premier global hub for innovation. What follows is a detailed analysis of the current ecosystem landscape and a coordinated action plan for all key participants.
2. State of the Ecosystem: A Widening Base with a Constrained Apex
To formulate effective policy, it is crucial to accurately assess the current state of Japan's startup landscape. A clear-eyed diagnosis of both the notable achievements in foundational growth and the persistent structural weaknesses preventing companies from scaling is the necessary first step. This section provides a data-driven overview of the ecosystem's strengths and the urgent challenges that must be addressed.
2.1 Analysis of Foundational Growth
The expansion of Japan's startup ecosystem is evident across several key metrics. Government initiatives and a growing entrepreneurial culture have successfully widened the base of innovation, creating a more vibrant and economically significant sector.
- Startup Creation: The total number of startups has increased significantly, growing from 16,100 in 2021 to an estimated 25,000 in 2025.
- University-led Innovation: The number of university-originated startups has shown consistent growth, reaching a record high of 5,074 in 2024. Significantly, 57% of the recent increase in these startups occurred outside of Tokyo, indicating a healthy decentralization of innovation.
- Economic Contribution: The total GDP impact of startups is substantial, with a direct effect of ¥12.19 trillion and an indirect ripple effect bringing the total to ¥22.33 trillion. This represents approximately 4% of Japan's total GDP.
- Funding Resilience: While global startup funding has contracted, Japan's domestic funding has remained remarkably stable at approximately ¥874.8 billion in 2024. This stands in stark contrast to the sharp declines seen in the United States (-48%) and the United Kingdom (-35%) over the same period.
2.2 Diagnosis of Structural Challenges
Despite this positive foundational growth, significant structural obstacles are preventing Japanese startups from achieving the scale and valuation necessary to compete on the global stage. The data reveals critical gaps when benchmarked against leading international ecosystems.
This stark data reveals an ecosystem at risk of stagnation, producing a high volume of small companies that consume capital without generating the breakthrough value needed for national economic revitalization. Addressing these structural deficiencies is not just an opportunity but an economic imperative.
3. A Four-Pillar Strategy to Cultivate "Height" and Global Competitiveness
Overcoming the structural challenges identified requires a coordinated, multi-faceted approach that addresses the entire lifecycle of a startup. This proposal is built upon a framework of four strategic pillars designed to work in concert to build a globally competitive ecosystem.
3.1 Pillar #1: Fortifying the Growth Funding Supply Chain
A robust and diverse supply of risk capital, particularly for later-stage companies, is the essential fuel for creating high-value enterprises. Recent policy and regulatory actions have begun to address this, aiming to unlock new pools of capital and expand the investor base.
- Diversifying Investment Vehicles: Recent regulatory easing for investment trusts and listed investment corporations now allows them to hold unlisted shares, creating new channels for capital to flow into promising startups.
- Expanding the Investor Base: Initiatives are underway to expand the pool of professional and semi-professional investors. This includes the development of a "Japan Rule 506" equivalent (J-Ships) and the easing of requirements for individuals to qualify as professional investors, thereby increasing the number of sophisticated angel investors.
- Stimulating Bank Participation: Rules for bank-owned investment subsidiaries have been relaxed, extending the eligible age of a startup from 10 to 20 years. This change allows banks to provide longer-term growth capital to a wider range of companies.
- Activating Institutional Capital: Public-private funds like the Japan Investment Corporation (JIC) and the Development Bank of Japan (DBJ), alongside asset managers such as Mitsubishi UFJ Trust, are playing a catalytic role. They are channeling institutional funds into venture capital through Fund-of-Funds (FoFs) and providing direct support to emerging VC fund managers.
3.2 Pillar #2: Activating M&A and Secondary Markets for Fluid Capital Circulation
A dynamic M&A market and a liquid secondary market are essential components of a mature ecosystem. They provide crucial alternative exit paths, recycle capital and talent, and allow startups to pursue long-term, ambitious growth without the pressure of a "small IPO." A liquid secondary market is a direct enabler of a more active M&A landscape. By providing early investors and employees with liquidity, it reduces the pressure for a premature IPO and allows companies to remain private longer, making them more mature and attractive targets for strategic M&A.
- Incentivize Corporate M&A: The Open Innovation Promotion Tax System must be enhanced and actively promoted. The Keizai Doyukai's proposal to expand the scope of this tax incentive to include a wider range of M&A activities is a key step toward encouraging large corporations to acquire startups.
- Educate Founders: The government's plan to create a comprehensive "M&A Guidance" document for startup management is a vital initiative to help founders understand and strategically plan for M&A as a viable and valuable exit option.
- Strengthen the Secondary Market: Public funds, particularly JIC, must continue to invest in secondary funds. This provides essential liquidity for early investors and employees, as demonstrated in recent transactions involving companies like SmartHR and Kakehashi.
- Position PE as a Viable Exit: As highlighted by the Japan Private Equity Association (JPEA), private equity funds must be recognized and promoted as a crucial exit alternative for later-stage companies, especially in a challenging IPO market.
3.3 Pillar #3: Forging a Globally Integrated Ecosystem
To create world-class companies, breaking the "Galapagos" state of the current ecosystem is non-negotiable. This requires a concerted effort to attract international capital, talent, and expertise while equipping Japanese founders with a global mindset from day one.
- Attracting Global VCs and LPs: Initiatives like the "GLOBAL STARTUP EXPO" are critical for showcasing the Japanese market. Furthermore, JIC's "Go Global" strategy of investing in top-tier overseas VCs, such as NEA and Vertex Ventures, builds invaluable bridges for Japanese startups seeking global partners and expansion opportunities.
- Promoting Global Mindsets: As argued by the Startup Ecosystem Association, Japanese founders must be compelled to "Think Global/Win Globally" from their inception. This requires a fundamental shift in perspective: benchmarking against the best global players, not just domestic competitors; considering the optimal market for a product from day one, rather than defaulting to Japan; and building a global-ready organization from the earliest stages.
- Fostering Global Talent: Direct investment in human capital is paramount. The ¥46 billion Global Startup Creation Support Project, which funds programs to send students and entrepreneurs abroad, is a key initiative for cultivating the next generation of globally-minded leaders.
3.4 Pillar #4: Cultivating Deep Tech and Regional Ecosystems
Deep Tech startups, which leverage significant scientific or engineering breakthroughs, hold the highest potential for creating globally significant "height." Furthermore, sustainable innovation requires fostering strong ecosystems not just in Tokyo but across the entire nation.
- Accelerating "Science to Startup": Keidanren has proposed a framework to better translate Japan's formidable research strengths into commercial ventures. This involves actively scouting university innovations and streamlining the path to commercialization. It is noteworthy that while Japan has few unicorns, 3 of its 8 are deep tech companies, highlighting the sector's potential to generate exceptional height.
- Strengthening Regional Hubs: The goal of forming robust regional innovation hubs is critical for nationwide economic growth. This strategy is supported by data showing that over half of the recent growth in university-led startups has occurred outside of Tokyo, demonstrating the potential that exists across the country.
Together, these four pillars create a mutually reinforcing structure designed to systematically elevate our most promising startups, transforming the ecosystem's wide base into globally recognized peaks of innovation.
4. A Coordinated Action Plan: Roles and Responsibilities
The success of this proposal hinges on the coordinated and committed action of every major participant in the ecosystem. Transitioning from strategy to implementation requires clear roles and responsibilities. The following action plan outlines the specific commitments required from each stakeholder group.
4.1 Government and Regulatory Bodies (METI, FSA, etc.)
- Aggressively continue regulatory reform to reduce friction in capital markets, including a formal review of the ¥100 million prospectus exemption threshold to facilitate easier fundraising.
- Enhance and actively promote tax incentives for startup investment and M&A, specifically the Angel Tax System and the Open Innovation Promotion Tax System.
- Deploy public-private funds (JIC, DBJ) as strategic catalysts to de-risk investment in emerging VCs, secondary funds, and strategic sectors like deep tech, thereby crowding in private capital.
- Champion global collaboration through high-profile events, international partnership programs, and policy alignment with global standards to attract foreign investors and talent.
4.2 Venture Capital and Private Equity
- Elevate governance and operational transparency to attract domestic and foreign institutional investors, guided by frameworks such as JIC's support programs and the "Venture Capitals: Recommendations and Hopes" (VCRHs).
- Adopt a "dual-track" (IPO and M&A) exit strategy from the early stages of investment to ensure flexibility and maximize value creation for portfolio companies.
- Provide intensive, hands-on growth support that extends beyond capital, including concrete assistance with overseas market entry, talent acquisition, and strategic partnerships.
- Actively engage in crossover investment to provide the stable, long-term capital required to support companies through the crucial pre- and post-IPO growth phases.
4.3 Large Corporations and Business Federations (Keidanren, Keizai Doyukai)
- Pursue M&A as a core component of innovation strategy, moving beyond minority-stake Corporate Venture Capital (CVC) investments to full acquisitions that integrate new technologies and talent.
- Dramatically increase collaboration through open innovation programs and direct procurement from startups, fully embracing the "venture client model" to become essential early customers.
- Commit to ecosystem-building initiatives such as Keidanren's "Startup Friendly Scoring" to benchmark corporate engagement, and "KIX" pitch events to connect with emerging companies.
4.4 Institutional Investors (Pension Funds, Trust Banks, etc.)
- Increase capital allocation to alternative assets, including VC and secondary funds, recognizing them as an essential component for portfolio diversification and superior returns.
- Utilize professional gatekeepers and Fund-of-Funds to efficiently and prudently deploy capital into the VC asset class, overcoming internal resource constraints.
- Demand higher governance standards from VCs to ensure fiduciary responsibilities are met, fostering a more mature and trusted investment environment.
This division of labor is essential to ensure that all parts of the ecosystem are working in alignment toward a common national goal.
5. Conclusion: A Call to Action for Japan's Innovative Future
Japan stands at a pivotal moment. The foundational work of building a vibrant startup ecosystem has been a resounding success, creating a wide base of new companies and fostering a resilient domestic funding market. The critical task now is to build upon this foundation and cultivate the "height" necessary for global leadership—to create the next generation of world-class companies that will drive Japan's economic growth.
This proposal has outlined a clear, four-pillar strategy to achieve this: fortifying the full chain of risk capital from early-stage to growth; activating M&A and secondary markets to ensure fluid capital circulation; and deeply integrating the Japanese ecosystem with global networks of talent, capital, and ideas. Success is not the responsibility of a single entity but a shared mission requiring the committed and coordinated action of government, investors, and industry. Government bodies, financial institutions, and corporate leaders need to embrace these reforms and collaboratively unlock a new era of Japanese innovation and global economic leadership.
Norbert Gehrke
