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Date of Issue:1/July/2008

Final Report of the Study Group on Creating and Growing Venture Firms

Yuki Hayashi
Deputy Director
Office for New Business
Economic and Industrial Policy Bureau

The Study Group on Creating and Growing Venture Firms compiled and released the Final Report of the Study Group on Creating and Growing Venture Firms on 30 April 2008.

The Study Group on Creating and Growing Venture Firms compiled and released its final report on 30 April 2008.

Chaired by Professor Shuichi Matsuda from Waseda Universityfs Business School, the Study Group has met eight times since September 2007 to consider various issues related to venture businesses. After releasing the Interim Report on Capital Procurement by Venture Businesses in November 2007, the group added three new themes to its considerations: (1) finding and fostering the human resources to create venture firms; (2) the growth of venture firms; and (3) venture firms and existing firms. The final report summarizes the groupfs findings.

To promote the further advance of the Japanese economy, it will be absolutely vital to create and grow small and medium-sized venture businesses with new technologies and business models to take on the major business risk of developing new business. The environment for the creation and growth of small and medium-sized venture has improved out of sight over the last few years. In addition to the various support measures instituted by METI in this regard-the abolition of the minimum capital requirement, for example-‚”he establishment of the Mothers stock market for emerging businesses and the growth of venture capital have also prompted the rapid development of the necessary institutional framework. However, while the worldwide IT boom around the year 2000 boosted many IT and service venture firms to prominence in Japan too, an average start-up rate (the current ratio of new start-ups to total companies) of 5.2 percent for Japan as a whole over 2004-2006 fell well under the average exit rate (the current ratio of exiting companies to total companies) of 6.2 percent for the same period. It was also far below the average start-up ratios (2004 data) achieved in the US (10.2 percent), the UK (10.0 percent) and France (12.1 percent). Another cause for concern is the emergence of problems such as deteriorating listing conditions on Mothers.

Given the above situation, the report identifies six key issues and suggests measures to deal with these.

Issue 1: Lack of start-up skills
Some 15.2 percent of Japanese are regarded as possessing start-up skills, placing Japan above only Russia among 42 countries. The report accordingly suggests (1) enhancing start-up education in universities and graduate schools and (2) bolstering start-up support focused on venture start-ups.

Issue 2: Lack of global-class venture businesses
Both major firms and venture businesses tend to spin along comfortably in a market of 120 million people that is also the worldfs second largest economic power, with only one-third of Japanfs venture businesses expanding their operations offshore. The report recommends taking measures to (1) change the mindset of venture businesses toward a more active engagement with offshore markets; (2) actively support venture firmsf offshore expansion; and (3) promote the use of foreign human resources.

Issue 3: Lack of a culture fostering entrepreneurship
Japan lacks the eangelf investors to foster budding entrepreneurs. The report recommends: (1) radical enhancement of the angel tax system and promotion of the use thereof; (2) organization and stimulation of an angel network; and (3) creation of an angel investor fund.

Issue 4: Shortage of venture capital
Japanfs venture capital sector has an investment scale less than a fifth of that in the West. The amount invested in each business is also limited, inhibiting the development of global-scale firms and prompting small-scale listings. The report suggests: (1) expanding the amount of capital input from the government pension investment fund and (2) providing information on venture capital investment.

Issue 5: Lack of institutional investors on Mothers
The lack of institutional investors operating on the Mothers market has meant limited liquidity and unstable stock prices. In emerging stock markets too, if transactions are not undertaken on an appropriate scale and based on rational price formation, the venture capital that uses emerging stock markets as an exit becomes unable to invest in venture stock. The report recommends: (1) developing a market targeting professionals; (2) developing an analyst introduction system and benchmark indicators; and (3) providing information to institutional investors.

Issue 6: Breaking free of IPO fixation
In Japan, all venture businesses are expected to aspire to IPOs. Venture capital too invests on the assumption of an IPO, and where the prospects of an IPO on Mothers are dim, unlisted venture firms find it difficult to procure funds. The report recommends (1) pursuing ecorporate venturingf and (2) improving investment contracts between venture capital and venture businesses.

METI will continue to work to respond to the policy issues identified by the Study Group.


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