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13 June 2018

Editorial: Japan's and the world’s animal spirits start to soar

Recent deals highlight public markets are catching up with private valuations.

Author: James Mawson, editor-in-chief

The recent flotation of flea market app operator Mercari and e-commerce company Rakuten’s acquisition of US-based peer Curbside feel seismic for the Japanese innovation capital ecosystem. They also reflect the wider catch-up by M&A and public markets to the burgeoning prices paid in private capital markets, validating those later-stage investors who paid up to delay these exits and reap rewards.

Mercari’s initial public offering (IPO) is set to raise up to $1.2bn having been priced above the top of its range in Japan’s biggest such share sale so far this year. The offering will fuel the company’s push into the US and other international markets. Curbside, backed by pharmacy chain CVS Health, mobile chipmaker Qualcomm and media firm O’Reilly Media, has been acquired by Rakuten for an undisclosed amount.

The size of Mercari’s IPO and Rakuten’s purchase of an international peer signals that the cultural change required to deliver on Japan’s innovation and entrepreneurial potential has started to take effect. For context, the median flotation in Japan in 2015 was $3.5m, according to Stanford’s review of the ecosystem.

The international dealmaking comes with an international push since Japan’s prime minister, Abe, visited Silicon Valley in 2015 and reflects a broader push into supporting entrepreneurs and innovation capital through his Abenomics three arrows strategy.

And while Mercari and Rakuten represent a wave of internet-related entrepreneurs, the country’s deep tech innovation is starting to draw attention and global links.

In April’s innovative region analysis for Global Corporate Venturing, Ken Yasunaga, managing director at the public-private investment fund Innovation Network Corporation of Japan, said: “Initially, internet services were the strongest and biggest source of entrepreneurs on the Japanese market.

“We have now started seeing new kinds of opportunities, including in the life sciences space – mostly dedicated to drug discovery – and in IT and software. But most of all, it is the internet of things, artificial intelligence and robotics that always top the list these days.”

In a Financial Times supplement on Japan’s heartland, Kansai – the region that is home to Kyoto, Osaka and Kobe cities – Yutaka Teranishi, who leads the Innovation Hub Kyoto at Kyoto University’s Graduate School of Medicine, said: “Since the advance of medical science absolutely must be global, we are building this centre on the assumption that we must deepen international co-operation.”

The facility, opened in September last year, has sprung up between the structures of a teaching hospital and long-term care units, and hosts medical startups while they explore new avenues of research and find their feet as companies. There is an atmosphere of urgency, the FT said.

Teranishi argued in the supplement that Japan’s reluctance to treat its research ambitions as global projects had for too long held academia back from investing in facilities like this.

Kyoto has built the Innovation Hub around an area of research in which it has achieved global recognition, stem cells and regenerative medicine, according to the FT.

Shinya Yamanaka, the Nobel laureate whose discovery of induced pluripotent stem cells – mature cells that can be reprogrammed to an embryo-like state – in 2006 led him to found the Centre for iPS Cell Research and Application, an organisation devoted to regenerative medicine research.

Japanese startups and listed companies in this field include Megakaryon, PeptiDream, Sosei Group and Healios. They have been aided by longer-established corporations, such as Takeda’s invigorated corporate venturing approach – a move replicated in other fields from electronics and media (Sony) to chips (Tokyo Electron) to communications (KDDI and NTT) and, above all, SoftBank, in any area it chooses.

More broadly, Japan-based startups raised ¥280bn ($2.6bn) in 2017 across just more than 1,100 companies, according to Japan Venture Research published by the FT.

In March, the Ministry of Economy, Trade and Industry said the number of startups founded to commercialise university research had risen 13% in the 2017 financial year to a record 2,093, led by Tokyo University with 245 and Kyoto’s 140, as reported by Global University Venturing in March.

The pulling together of the corporate, university and government support network to venture capital, angel investors and startups has seen a fresh hope that the world’s third-largest economy can play a more important leadership role in the industry.

But the animal spirits are hardly confined to Japan.

In total, 434 startups raised $9.9bn via initial coin offerings so far this year, according to a post by Anuj Khanna, chief executive of consultancy Peak State Consulting.

Tomasz Tunguz, venture capitalist at Redpoint, noted in a blog that 2018 has been a “blockbuster” year for M&A multiples in software, with prices relative to their revenues surpassing any of those in the past seven years.

He said: “Billion-dollar plus acquisitions in 2018 [such as Microsoft’s purchase of GitHub, Salesforce’s of Mulesoft and Workday’s of Adaptive Insights] have commanded a median 17.7-times trailing enterprise value to revenue multiple. Nothing in the past seven years is close. In fact, there is not a single acquisition in that range.

“I expect substantially more acquisitions of the scale and at these multiples through 2018 – the corporate tax holiday, the growing sizes of the software market, the desire for continuing growth, the pace of innovation within software, the increasing competition among incumbents – a vibrant public market that is continuing to price companies aggressively. Forward software multiples have reached eight-year highs at 8.5-times enterprise value to next 12 months’ revenues.

“It is a great time to sell a fast growing billion-dollar company.”

Or, more broadly, as Silicon Valley Bank put in its second quarter review: “The bull market powers on, and money continues to flow into the innovation economy.”

Mary Meeker, partner at VC firm Kleiner Perkins Caufield & Byers, in her annual review of the internet market, noted the $4bn-plus rise in market valuation of the top 20 internet companies over the past five years. At more than $5bn now, these 20 companies alone are worth more than Japan’s gross domestic product. Whether these prices reflect an unwarranted sense of perfect future performance is harder to tell, but the country is certainly more diverse.

Supporting articles: Japan clocks 2,093 spinouts

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