JAPAN Trends and Developments Contributed by: Sadao Maeda, Yusuke Hayashi and Masato Tanaka, TMI Associates
Introduction In Japan, there has been a significant increase in attention towards start-ups in recent years. The Japanese government has been advocating various studies and policy proposals related to start-ups, including the publication of the “Start- up Development Five-year Plan” (the “Plan” ) in 2022. According to a report from INITIAL, a Jap - anese start-up information platform, the amount of funds raised by Japanese start-ups has been increasing annually over the past decade, and in 2022, the funds raised reached a record high of nearly ten times the amount raised in 2013. Additionally, this report indicates that the funds raised by Japanese start-ups in 2024 amounted to approximately USD5.20 billion (2,869 cases), and once all funding amounts are known for the year,, the total amount raised is projected to be an approximate 3% increase compared to 2023. Furthermore, according to the same report from INITIAL, investments by venture capital (VC) funds, including corporate venture capitals (VC arms of corporate entities) (CVC), accounted for 39.1% of the investment amounts in 2024. Con - sidering that the investments by corporate enti - ties accounted for 21.3% of the second largest investment providers during the same period, it is evident that VC funds play a significant role in funding Japanese start-ups. The following sections will provide an overview of fundraising, venture financing and exits in Japan, including trends, key methods and con - tract terms, as well as noteworthy regulations. Fundraising Trends In Japan, various players are actively raising funds in the VC sector, including independent VC firms, VC arms of financial institutions, CVCs, government and university-affiliated VC firms, as
well as overseas VC firms. Particularly notable is the surge in the establishment of funds by cor - porate entities aiming to invest in start-up com - panies through such funded vehicles, seeking synergies with the existing businesses of such corporate entities. Regarding investment focus, there is a growing trend towards funds targeting investments in the AI, deep-tech, IT, bio, medi - cal, healthcare and environmental sectors. Legal forms of VC VC funds established in Japan typically operate under investment limited partnerships (JLPSs) organised under the Investment Limited Part - nership Act. This is largely due to the Ministry of Economy, Trade and Industry (METI)’s pub - lication of model agreements for JLPSs, which are familiar to both general partners (GPs) and limited partners (LPs). Key characteristics of JLPSs include: • GP(s) managing the operations of a partner - ship, while LPs refrain from involvement in business operations; • GP(s) bearing unlimited liability for partnership debts, with LPs liable only up to their capital commitment; • a cap limiting the acquisition and holding of foreign corporate shares to less than 50% of the partnership’s assets; and • the adoption of a capital call method for capital contributions from partners in model agreements published by METI. Regarding the limitation on the acquisition and holding of foreign corporate shares mentioned above, exemptions have been specified by METI for partnerships contributing to open innovation. Upon receiving certification from METI, these funds can acquire shares of foreign corporations beyond the 50% limit.
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