When it comes to Japanese investors in European tech, it is no longer just about Masayoshi Son.
Stripping out bets by Son’s SoftBank, Japanese capital was involved in a record 97 funding rounds in 2023, according to Dealroom, up from 55 five years ago. While some are traditional VCs, most are Japanese corporates or their venture arms.
One of 2023’s most high-profile Japan-led deals was SBI Investment, the VC arm of financial conglomerate SBI Holdings, leading Oxford Quantum Circuits’ $100m round in November. SBI is also cornerstoning a new European-focused VC fund based out of Berlin and hired a veteran investor for the team late last year, according to LinkedIn.
The increased Japanese interest comes as North American investors pulled back over the past two years. US investor capital contribution to European tech as a share of the total is half of what it was in 2021, according to the State of European Tech report.
Investors tell Sifted that the Japanese interest stems from a few things. The hurdles to getting in on Silicon Valley deals and funds are too high, and the US ecosystem is too far ahead of Japan’s for learnings to be relevant for local early-stage teams. Europe feels a step closer.
Geopolitical uncertainty surrounding China, as well as potential political instability in the US ahead of the presidential elections, also makes Europe seem a more solid bet, they say.
“There is greater awareness and appreciation of how the European ecosystem has grown — it has become too significant to ignore,” says Yuki Soga, founder of Penrose Japan Ltd, adding that “there is increasing demand in Japan for technologies in which Europe excels, particularly green tech”.
She has seen an increase in enquiries from Japanese CVCs based in Silicon Valley who are looking to invest in the UK and Europe and has bumped into more Japanese corporates visiting European tech events like Web Summit for the first time.
The importance of corporates in linking Japan and Europe
Japanese corporates are leading this charge, both as investors and in their role in bringing tech to Japan. With the Japanese domestic market growing slowly, Japanese companies, many with strong balance sheets, are looking for opportunities elsewhere. A weaker yen also has them looking to spend money before the currency falls even further, investors say.
"Europe is the 'New frontier' global region in which Japanese corporates have become interested after investing in the US, Israel and Asia," says Yoshihiko Ito, director of investment at the Japan External Trade Organization (JETRO) in London.
There are over 50 large Japanese corporations with innovation offices in Europe, according to a 2022 JETRO report, more than double that of a decade ago. These are usually the offices from which those companies gather information on startups and look for investment opportunities. Sustainability was the area of greatest interest for these companies, according to JETRO's research.
Yet JETRO's Ito says it's still early days for some of these outposts.
"While more Japanese corporates are setting up innovation centres in Europe, many of these offices are still not as developed as those in Silicon Valley, which also reflects different lengths of time that Japanese corporates have been operating in the regions," he says.
"In Europe, there may be one person on the ground who collects information on the ground and sends it back to HQ, but they may not have the authority to make decisions on the ground. In the US, many teams have the authority to make investment decisions independently."
Gastronomic science and foodtech university the Basque Culinary Center (BCC) has found success in bringing its activities to Japan in part due to a partnership with real estate company Tokyo Tatemono. Ander López Delgado, entrepreneurship manager, says that this initial connection helped unlock doors to working with other corporates and investors on the ground.
The BCC has hosted two editions of its foodtech accelerator in Japan, participating in foodtech events and trying to bring Japanese foodtechs to Europe. López Delgado travelled to Japan four times last year.
“At least for Japanese foodtech startups, they are more accepted than others from around the world. At least in Europe, we have the perception of Japanese food and technology as being quality,” he says.
Penrose Japan’s Soga cites examples of greentech startups receiving investment from companies in carbon-emitting industries such as steel, petrochemicals and cement. Or shipbuilding companies that need hydrogen tech to meet new international environmental standards.
According to the 2022 JETRO report, roughly a third of Japanese corporates were looking to invest at Series A in European startups.
JETRO's Ito says that the appeal for European startups taking Japanese corporate investment can be an entryway into Japan and Asia, as well as a long-term, steady partner.
Japanese LPs in Europe
Japanese corporates and financial institutions are not just direct investors in European startups, they have also been LPs in European VCs, and have stepped up to back new funds this year.
Again, climate tech is a theme. In November, energy scaleup Octopus Energy announced it was launching an offshore wind farm with a £190m cornerstone investment from Tokyo Gas. The UK company first partnered with the Japanese energy company when it expanded to Japan in 2020.
Sumitomo Mitsui Trust Bank also announced in July it was becoming an LP in Copenhagen Infrastructure Partners’s fifth fund, which is targeting a €12bn raise to invest in renewable energy businesses in OECD countries. Electronics multinational TDK Corporation launched a $150m European/US fund for energy transition startups.
As proof that Japanese investors also aren’t afraid to invest beyond Europe’s main hubs of the UK, France or Germany, the state-backed Japan Bank for International Cooperation (JBIC) created a joint partnership with Polish-American VC ffVC.
The interest goes the other way as well — especially as European investors who are finding it difficult to fundraise look for other sources of capital.
Earlier this year, the French minister for digital transition, Jean-Noël Barrot, organised a delegation of 20 French startups and investors to visit South Korea and Japan. One of the participants was Revaia, Europe’s largest female-led VC firm.
The firm noted in a blog after the trip that these two ecosystems were where the French ecosystem was “six or seven years ago in terms of size”, and that, similar to France at that stage, a lot of startup investment still comes from corporate VCs or VCs spun out of corporates.
“We’re not alone in the tech world in looking more closely at Japan and Korea. Given the global lull in funding, a lot of US VCs now are spending time there to set up shop and invest. The window of opportunity remains wide open for now, but that also means plenty of others are ready to rush in.”
