Last summer, a delegation of top executives from Silicon Valley Bank circulated in the Tokyo financial district guzzling up all they could about the local venture capital scene and initiating talks with some of Japan’s biggest lenders. A flurry of further trips followed, tie-ups were discussed but, in terms of concrete deals, the west coast visitors left empty-handed.
For all the relief that those cautious Japanese banks will now feel over their reluctance to nail anything down with SVB, this was, in one light, an opportunity missed. In the short term a bullet was dodged, but so was a long-overdue shot at financial revolution.
SVB’s motivations for that Tokyo trip made sense. Until then, the now stricken bank’s expansion in Asia had been skewed towards China. But the logic of that strategy was being pulled apart by worsening geopolitics and the clear need for greater diversity in its business portfolio.
Japan, meanwhile, suddenly looked like an intriguing alternative and a place where SVB’s business model, which was openly friendly to venture capital and start-ups, might find a welcome. A market in which the venture capital industry (outside the corporate VC structure) had long been underpowered and technology start-ups under-loved remained a fraction of the size of its US counterpart. But at least it appeared to be changing for the better.
Data providers on the Japanese start-up industry, such as Initial and the Japan Venture Capital Association, could show the Californian visitors (and there have been plenty of others in recent months) charts that outlined a decade of nearly unbroken expansion in the total value of funding deals for start-ups and in the number of VC funds.
By the end of 2022, start-ups in Japan raised a record $6.4bn in a year while funding deals by counterparts in the US and Europe posted year-on-year declines, though from a very much larger base. At the same time, the government was talking with what could be taken for genuine enthusiasm about the need to encourage start-ups and foster economically vital innovation with a more VC-style approach to risk.
But there were clear limits on all that optimism, centred on the Japanese banking sector and the historic quirks that have tended to make it a drag on start-ups rather than a propellant.
The core problem, say both start-up founders and VCs in Japan, is that despite the very large pools of potential funding that the banking system controls, accessibility to bank debt has always been difficult and shows few signs of easing. At a purely practical level, notes the founder of one financial start-up, the banks take far too long to set up a corporate account. Government efforts to cut red tape have reduced the company registration process to just a few days; persuading a bank to have an account up and running can take more than six months.
But the greater issue is more structural. According to borrowers, Japanese banks — and there are scores of listed lenders — favour lending against tangible assets, property and revenue, rather than the prospect of future growth. For most, the residual trauma of the late 1980s bubble collapse is to blame. Many do not have the capacity to assess any other type of lending risk. Set against the $6.4bn of funding that Japanese start-ups secured last year, economist Jesper Koll calculates, the total new debt they collectively raised was less than $1bn.
Attached very closely to the behaviour of the lending banks is the constrictive ecosystem created by Japan’s investment banks and brokers. Behind the encouraging rise in the overall value of funding deals in 2022 was a 29 per cent year-on-year decline in late-stage funding. Mid- and late-stage funding needs that would be met by VCs in the US and elsewhere tend to be met in Japan by the equity markets. Start-ups are effectively cajoled by necessity to initial public offerings far sooner than many are ready for — and part of the pressure comes because Japanese banks still prefer to sell mortgages and other financial services to employees of listed companies.
The urgency of a change of course was laid out last year by Ryozo Himino, the former financial services commissioner who will become deputy governor of the Bank of Japan next month. To keep up with the huge changes brought about by deglobalisation and other challenges, he told reporters, banks needed to develop loans that could be backed by both tangible and intangible assets, including “expected growth”.
If there ever really was a chance of SVB injecting some of its business model into Japan via a tie-up or some other deal, it is now long gone. It may never have worked. It may be a long time before others attempt anything similar. No one is calling for Japanese banks to become reckless, or to follow a path that would put them at risk of SVB’s fate. But the need for a fresh approach in Japan has, at least, been highlighted.