JAPAN Law and Practice Contributed by: Reid Monroe-Sheridan, Takahito Fujii, Haruya Suzuki, Yutaro Ito and Tomohiro Oshige, southgate
Due to the increase in interest from global inves - tors and the growing maturity of the ecosystem for start-ups in Japan, many observers expect the Japanese VC market to continue developing at a steady clip. Government-backed funds have also entered the VC market in recent years, dem - onstrating a growing awareness and emphasis on the need to support and develop the coun - try’s VC market. In contrast to countries with VC markets that are perceived to be founder-friendly (eg, the United States and Israel), Japan has a reputation for being an investor-friendly market. In terms of financing methods, for start-ups in Japan at the earliest stages, 2024 saw contin - ued popularity of the J-KISS convertible equity instrument for seed round financings (additional detail on the J-KISS is provided in 3.3 Invest- ment Structure ). There has also been a nota - ble growth trend in venture debt financings, including loans with stock acquisition rights and convertible bonds, as alternatives to traditional equity fundraising. 1.3 Key Industries According to the 2024 Japan Start-up Finance report by Speeda, the SaaS and generative AI sectors led in both total funding raised and number of companies securing investments, fol - lowed by the IoT and healthcare sectors. Smart HR, a prominent HR tech company, raised over JPY20 billion in its Series E round, while Saka - na AI, a generative AI start-up, raised JPY30.1 billion, the most funding raised by a Japanese start-up in 2024. Comparing median funding amounts by sector in 2024, the autotech and space sectors stood out, with values more than 1.5 times that of the third-place SaaS sector, according to Speeda’s
2024 report. Notable investments include TIER IV, which develops automated driving software, and ArkEdge Space, which develops nano-sat - ellites, both ranking among the top ten start-up funding rounds in Japan in 2024 in terms of total funds raised. Despite a downward trend in total funding and number of companies raising capital since 2022, the average and median funding amounts per company have increased. This trend appears consistent across sectors, with no significant difference between industries in terms of VC- backed exits or growth in funding rounds. VC funds are often organised as investment limited partnerships (commonly referred to as LPS or, in Japanese, t oshi jigyo yugen sekinin kumiai ) in Japan or similar structures formed out - side Japan due to their tax benefits and flexibility in allocating profit distribution. Ordinary limited liability partnerships (LLPs) are poorly suited as fund investment vehicles because an LLP’s decision-making authority is generally allocated among all the partners in the partnership under Japanese law. Except for certain legal forms, there are no restrictions on the qualifications of the general partner (GP) of an LPS. However, the GP bears unlimited liability for the LPS’s liabilities, and in order to avoid the risk of this unlimited liability being imputed to the GP’s owners and inves - tors, it is common for the GP to be a corpora - tion ( kabushiki kaisha ) or limited liability company ( godo kaisha ). 2. Venture Capital Funds 2.1 Fund Structure
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