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An increasing number of foreign companies are entering the Japanese market or establishing subsidiaries. Securing appropriate funding is crucial for business expansion and long-term growth in Japan.

This guide provides a comprehensive overview of funding options, their characteristics, and strategies beneficial for startups.

1. Overview and Importance of Funding in Japan

Funding is a key component of a company's growth strategy in Japan. Foreign companies establishing subsidiaries can consider the following capital procurement methods:

Bank loans
Investment from the parent company
Venture capital (VC) and private equity (PE) funds

Beyond securing funds, businesses must build creditworthiness, form strategic partnerships, and choose flexible financing options that align with market conditions. While bank loans are a traditional choice, government support and startup funding options are expanding. Companies should tailor their financing strategy to their growth stage.

2. Bank Loans in Japan: Stability and Limitations

Bank loans in Japan have long established themselves as a reliable means of corporate financing. Financial institutions place importance on a company's creditworthiness, collateral, and the soundness of its business plan, and provide loans based on certain screening criteria.

Stability

Bank loans are attractive because the amount procured is large, interest rates are often relatively low, and long-term repayment plans are easy to formulate.

In addition, for companies with established creditworthiness, a track record of transactions with banks has a positive impact on future business development and leads to the establishment of trust relationships.

Limitations

On the other hand, for startups and new businesses, banks tend to adopt a risk-averse stance, often imposing strict screening criteria and high collateral and guarantee requirements.

Since repayment obligations are certain to occur, the risk of tight cash flow during economic fluctuations or business deterioration must also be considered.

Japanese banks tend to emphasize traditional business models, and it may be difficult for them to respond flexibly to innovative business models or startups aiming for rapid growth.

Thus, while bank loans are highly stable, their careful use is required in today's business environment, which demands flexibility according to a company's growth phase and risk-taking.

3. Funding from Parent Companies

Parent company funding aligns with overall corporate strategy and is a popular method for foreign firms expanding into Japan.

Advantages

Investment or loans from the parent company can avoid the strict screening of external financial institutions, enabling rapid funding.
The ability to utilize the parent company's management know-how and network is a significant plus for the subsidiary's business operations.
In addition to providing funds, certain management support and strategic advice can be received, which is effective in building a business foundation in the initial stages.

Challenges

Funding from the parent company is highly likely to affect management control and decision-making processes between the parent and subsidiary, making it challenging to secure independence.
There is a risk that the subsidiary's autonomy will be impaired because the parent company's management policy and investment intentions are strongly reflected.
If the equity ratio is high, it may become difficult for external investors to participate in future capital policies and restructuring of the shareholder composition.

How to maintain and develop the relationship with the parent company is directly linked to the success of parent company investment as a funding method, so careful strategic planning is required.

4. Venture Capital and Private Equity Funding

VC and PE investments are increasingly common in Japan, especially for startups with innovative business models.

Advantages

Funding and growth support: Funds generally provide comprehensive support, including not only funding but also strategy formulation for management improvement and market expansion, and network building.
Rapid decision-making: Negotiations with external investors enable rapid and flexible funding, supporting rapid market development and technological innovation.
Optimization of capital costs: Although there is a risk of dilution of management rights due to investment, the burden on cash flow is less compared to borrowing, enabling a funding strategy that looks to long-term growth.

Challenges

When receiving investment, it is necessary to carefully adjust the balance of influence on management with investors.
Sufficient discussion and consensus building are required in advance regarding the valuation method of the company and the construction of an EXIT strategy.

This method is ideal for high-growth companies seeking capital and market expansion opportunities.

5. Favorable Funding Schemes for Startups

Startups require flexible and risk-diversified funding strategies. Key methods include:

Equity Financing

Funding through issuing shares reduces the burden on cash flow because there is no repayment obligation.

While investors participating in management can be expected to support business strategy and network building, dilution of the shareholder composition and adjustment of management rights are necessary.

Convertible Notes

In the initial stages, it is treated as borrowing, and future conversion to shares is possible, enabling capital policies that match business growth.

There is flexibility in the company valuation at the time of funding, and conditions can be set according to the growth speed of the startup.

Accelerator Programs

Accelerator programs led by the government and private sector provide multifaceted support, including not only investment but also management know-how, market access, and network provision.

These schemes enable startups to secure funding while maintaining growth potential and adaptability.

6. Case Studies: Successful Unicorn Companies in Japan

Unicorn companies refer to unlisted companies with a valuation of over 1 billion dollars, and are attracting attention as companies that have achieved rapid growth.

Japan has seen a rise in unicorn startups leveraging innovative technologies and strategic funding approaches. Two notable examples include:

Preferred Networks (AI & Robotics)

Preferred Networks, which focuses on artificial intelligence (AI) technology, is attracting attention in advanced technology fields such as industrial robots and autonomous driving.

Centering on equity financing, it has accelerated technological development and market expansion by receiving strategic investment from major companies such as Toyota Motor Corporation and Fanuc.

In particular, partnerships with major companies are a significant strength in terms of technology demonstration and commercialization.

Flexible capital policies and partnerships with strategic partners are the pillars supporting rapid growth.

SmartHR (HR Tech SaaS)

SmartHR, which provides cloud-based human resources and labor management services, is a company that has had a significant impact on improving the operational efficiency of companies by digitizing traditional paper-based operations.

From the initial stage, it implemented equity financing from multiple VCs and quickly secured the funds necessary for business expansion.

In addition, it introduced convertible notes during the growth stage, establishing a flexible capital procurement system.

Riding the wave of digital transformation demand from Japanese companies, it quickly grasped market needs and maximized the management support and network provision from investors, establishing its reputation as a unicorn company along with rapid sales growth.

Key Takeaways:

Flexible capital policy: Combining funding methods that match corporate growth, such as equity financing and convertible notes, reduces initial funding burdens while accelerating growth.
Building strategic partnerships: Collaborating with major companies and government support programs establishes a favorable environment for technological development, commercialization, and market expansion.
Accurate understanding of market needs: Each company leverages its strengths and responds quickly to customer needs, achieving rapid user expansion and increased valuation.

These examples offer valuable insights for foreign companies planning market entry in Japan.

7. Key Considerations for Funding in Japan

Foreign companies should keep the following factors in mind when raising funds:

Cultural and Business Norms – Japanese financial institutions are risk-averse, requiring businesses to build credibility.
Regulatory Compliance – Financial transactions are strictly regulated by the Financial Services Agency.
Governance and Control – External funding may impact decision-making authority and ownership structure.

8. Conclusion

This guide outlines key funding methods available to foreign companies expanding into Japan, including bank loans, parent company investments, and VC/PE funding. Understanding the advantages and challenges of each method is crucial to developing an optimal financing strategy aligned with business growth and market conditions. A well-structured funding approach is essential for long-term success and competitiveness in Japan.