Eric Haywood: Why Global Investors Are Looking at Japan

Today we are sitting down with Eric Haywood, an investor based in Boston. Eric shares his perspective on Japan’s startup ecosystem, why global investors are increasingly looking at Japan, the country’s untapped technological potential, and where Japanese startups could gain a global competitive edge.

Can you tell us about yourself?

I am an investor with Inner Systems Ventures, which is a corporate venture fund out of Boston. We do $100,000 to $250,000 checks for pre-seed to Series A startups, mostly in the healthcare, AI, supply chain, and fintech spaces.

Prior to this role, I was a founder. I worked on two startups before becoming an investor, and I also lived in Japan for about 10 years.

I think a lot of VCs in the US are very US-focused. It is hard to find people from overseas from the US who are interested in investing outside of the country. But among the investors that are willing to go outside of the country, there are really good opportunities here in Japan, mostly because of the technology that's available. I think it is somewhat undervalued compared to what we've got in the US.

There is also the amazing exchange rate right now, so there are a lot of interesting things potentially happening in Japan.

I also think that for Asia in general, the startup and venture capital landscape is still a pretty new concept. Even five years ago in Japan, there was much less going on than there is now. Antler just came to Japan, and so did Techstars and Plug and Play. Those are all big names in the US, but they've only been here in the last three to four years.

So five years ago, there was really not nearly as much going on as there is right now. I think foreign investors are starting to wake up to the fact that there are potential opportunities here.

How do you evaluate Japan's startup ecosystem from a venture capital perspective?

I think the startup scene here in Japan is seen as a younger startup scene, and there are certainly parts of it that are still developing. But it's matured enough so that there are potentially interesting investments to be made.

I also think there's a really good role for foreign capital to play in Japan because a lot of Japanese traditional investors don't actually have venture experience or startup experience. It's hard for them to effectively operate in this space and see emerging technologies, but also figure out how to commercialize them.

So I think there's a really interesting niche for foreign capital to play in Japan when it comes to helping founders commercialize.

What do foreign investors misunderstand about Japan?

I think there's maybe a lot more to intercultural communication and how markets are set up than people really think about before they get involved with Japan.

One of the big things in Japan is just the relationships and the amount you have to invest in relationships to actually move forward in business.

There are also pretty strong industry organizations in Japan. You might have the auto workers industry or all of these different industry organizations that are actually pretty strong in Japan. Because of that, you'll have politicians actually talking to them and making plans about what the future looks like.

If you don't, as a startup, try and join the existing way the economy is ordered, I think you're going to get a lot of roadblocks thrown up.

The model of disruption in the US that's pretty popular is hard for a lot of Japanese politicians and Japanese corporations to get behind.

I think that's a model that needs to be developed over the next few years: cooperative innovation, something like that.

The standard Silicon Valley playbook is to do this sort of disruptive type of innovation, but I think that's going to be really hard to do in Japan.

Uber tried to come to Japan, and it took a very long time for them to get here. Ultimately, they had to change their service significantly and work with what already existed in the market.

That's an important part about going to market in Japan and commercializing in Japan that a lot of investors and startups don't really strategize for.

What do Japanese startups misunderstand about what global investors are looking for?

I think the one that's surprising for a lot of Japanese companies and investors is just how different the teams are evaluated.

Traction is usually a key word for investors. They want to see how many customers did they get, how much are they getting paid, and what does their business model look like.

But what has really developed as a trend in the US is that the most important thing is the team, the management team, and what are their capabilities and what's their background.

Most startups after a few years end up changing a lot, but the management team usually doesn't. So you want to try and pick the right team.

I think a lot of Japanese investors are kind of more similar to banks. They'll be like, okay, which customers do you have? What do the sales look like? And then based off of these sales, we'll give you your valuation.

It's a very different approach, especially for early stage in the US. There are many US investors who will give money to companies that don't have revenue. I think in Japan that seems crazy, but that's a pretty common practice in the US.

Which sectors in Japan excite you the most today?

I think healthcare is a really good sector in Japan, and life sciences as well.

The reason for that is because it doesn't face as many of the issues with commercialization. If you develop the cure for cancer, people are going to buy that. So you don't have to worry as much about that path to market and how you're going to get a lot of customers on board.

There are some other people who I've talked to who are thinking about that issue with commercialization, because I think in Japan you have very risk-averse companies and it takes a very long time to set up a contract with a company here.

That in and of itself can be very difficult for a startup. A lot of startups only have a runway for one or two years, and if it takes that long to close a client, a company could go out of business trying to get a client.

Japan has always been good with mechanical engineering and healthcare. Robotics and physical AI are places that a lot of investors are looking at right now, ourselves included.

With AI making it easier to develop software, it might have this sort of enabling effect on a lot of other more traditional Japanese businesses, especially robotics.

That's been a missing component for a lot of robotics companies here in Japan: the actual software to make the unit more impactful and viable.

Where does Japan could have a global competitive advantage?

I think healthcare, biopharma, life sciences, and robotics are all places where Japan will probably be pretty strong.

For healthcare specifically, you have the aging population and a lot of different diseases and things that you're going to need to try and solve for that group of people internally.

But there's no reason that the solutions that are built here in Japan wouldn't work in other countries.

I also think Japan could be a really good market for doing clinical trials and drug discovery.

One of the issues with clinical trials and drug discovery worldwide is that a lot of it happens in the US. There are a lot of different ethnicities that are not adequately researched during clinical trials.

Japan has enough technology, a trustworthy government, good IP laws, and enough things in place that it could probably become a pretty big player in that space too.