Recently Yinglan was interviewed for a Nikkei piece (in Japanese) on his views of the Japan (specifically the Kansai region) startup ecosystem as well as the synergies that can emerge from a Southeast Asia VC with interest in global outcomes from Japan.

This is a topic we’ve covered in bits and pieces within the context of Southeast Asia trends as well as global market expansion strategies, but for the first time we’ve consolidated the ideas behind what Japan means to a Southeast Asia focused venture capital firm like ours:

(1) Japan’s increasing value as a destination market for global companies coming from Southeast Asia

As we’ve seen with companies like used car platform Carro and mental healthcare company Intellect, Japan can be a valuable destination market for Southeast Asia companies for products and services that customers are willing to pay significantly higher on average compared to most Southeast Asia markets.

This is ideal especially for products and services meeting the needs for Japanese enterprise and organizations to undergo digital and/or organizational transformation, as well as outsource business needs that are more efficient to do with a partner startup. Even for B2C or B2B2C focused companies, a Japan entry could work with the right strategic partners.

In particular, Japan’s socio-economic challenges in aging and low fertility, as well as in energy and food security, lend itself as an ideal destination market for companies tackling these issues. The size of their core industries like financial services and auto also align with companies operating in these spaces, providing a big enough opportunity to contribute to a pan-Asia play even if a player only captures a relatively small portion of the market.

With the right go-to-market strategy, a company could leverage its presence in Japan to complement a global expansion strategy that drives healthy unit economics with scale. With enough cash as well, a company from Southeast Asia could invest in Japanese startups and serve as avenues for local entrepreneurs to scale or even exit.

(2) Capital outflow environment in Japan strengthening long-time interest in the region

The value of Japan as a destination market for Southeast Asia market makes even more sense with increased strategic investor interest from Japan. The country’s current economic situation favors exports and capital outflows (i.e., low cost of funds from Japan), which provide opportunity for Southeast Asia companies looking for partners to make an entry into Japan or even potential customers.

This influx of capital from Japan into Southeast Asia continues an existing trend over the past decade, that goes beyond tech and venture-backed companies into infrastructure and auto industries across the region. It was an influx buckled by the pandemic but has found new meaning because of it, with the country today undergoing reforms in terms of business productivity and digitalization.

For startup investments in particular, fintech has been a key focus for investments and acquisitions. Many follow on investments from Japanese CVCs into our portfolio companies have been for fintech companies or fintech adjacent companies, like Tonik, Carro, Fazz, and Honest.

In 2022, Japanese funding into Southeast Asia fintech reached US$1.4B (roughly 15 to 20% of total fintech funding in the region that year), 80% greater than the year before — this during a time when regional funding began to slide steeply.

(3) Time Machine thesis from Southeast Asia to Japan

While a common thesis in Southeast Asia is the so-called “Time Machine” thesis, taking trends from markets like the US and China as a measure of how Southeast Asia markets may evolve in terms of tech company business models, we’ve seen how the reverse can apply to Japan. For example, our past investments in startups with stock brokerage businesses across India (Groww – exited), Indonesia (Ajaib), and Vietnam (Finhay), informed our decision to partner with Bloomo Securities, an emerging US stock investment app.

Ultimately the goal is to invest in global outcomes. As Yinglan shares on Nikkei, “We’ve previously invested in Bloomo Securities (a US stock investment app) and Nudge (a smartphone-linked credit card) in Japan. We have set a criterion to invest in great companies that can expand globally, so Japanese companies focusing solely on the Japanese market are not our investment targets.”

(4) Cross-pollination across regions with similar specialties and trajectories

There is a key parallel between Kansai region and Singapore in terms of having the infrastructure for deep tech innovation (biotechnology, manufacturing, information, AI and robotics) as well as being home to top technical and research universities.

As Yinglan shares on Nikkei, “In terms of the innovation ecosystem, Singapore and the Kansai region share many similarities. The Kansai region has excellent universities and focuses on areas such as biotechnology, health tech, artificial intelligence (AI), and robotics. It’s a region highly suitable for deep tech. Singapore shares the same characteristics…”

Deep tech startups often have to think about commercialization from a global perspective from day one given how low barriers to entry can be (vs other more mature markets) and enterprise, multinational nature of high revenue customers.