What exactly is a startup?

The term "startup" is increasingly heard in the media.
While it still feels distant to the general public, we increasingly see large-scale funding rounds and advertising campaigns. Furthermore, support systems are being established as key initiatives for Japan's economic revitalization, such as the Abe administration's "Japan Revitalization Vision" aiming to "become the world's leading entrepreneurial nation" and the enactment of the Industrial Competitiveness Enhancement Act. Concrete actions have emerged, including Fukuoka City's designation as a "Startup Special Zone" in March this year and the Ministry of Economy, Trade and Industry's creation of the Prime Minister's Award for Venture Development in September. Furthermore, the Ministry of Economy, Trade and Industry (METI) and the Ministry of Education, Culture, Sports, Science and Technology (MEXT) are preparing to establish a venture capital fund worth approximately 100 billion yen to commercialize cutting-edge technologies developed at universities.

The sectors of startups are expanding beyond internet services to hardware, healthcare, biotech, and more, demonstrating diverse business alliances and exits (strategies like IPOs or sales). Expansion from Japan to North America and Asia, as well as from other countries into Japan, is also increasing. Weekly conferences and pitch events (presentations for investors) gather startups ranging from small teams to companies with hundreds of employees, alongside venture capital firms and corporate entities. These gatherings have boomed in recent years, and I strongly feel that touchpoints with advertising agencies are gradually increasing. However, widespread understanding of this situation is still in its early stages.

Therefore, this series aims to introduce the current landscape and leading players, viewing startups not merely as new ventures but as part of a broader challenge to revitalize the entire business ecosystem. This includes the involvement, participation, and reform efforts of established large corporations, the energy driving the emergence of new economic ecosystems, and the movements creating circulation. We want to increase mutual understanding and interaction between startups and large corporations, not just through startup advertising campaigns, to foster business revitalization.

Personally, I work on business development and investments for my own company and clients. I also participate in conferences and events as a speaker, judge, or sometimes as a pitch presenter with my team. From this perspective, I'd like to share insights on the current state of startups from the viewpoints of advertising agencies and business companies.

"I don't really get what startups are all about..."

I often hear this sentiment even within my own company. The terminology surrounding startups often blends internet industry jargon with fundraising terms, making it difficult to understand not just for the advertising industry, but for the general public as well.

For this first session, as an overall introduction,

1. Startups and Their Background
2. Startup players and the ecosystem
3. Startup Growth Phases and Business Challenges
4. The relationship between startups and large corporations, and open innovation

will be covered.

In Japan, roughly 200,000 companies are founded annually. Of these, about 1,000 to 1,500 receive venture capital (VC) investment, and 70 to 80 companies reach an initial public offering (IPO). While an IPO isn't the only goal, let's examine the overall growth path companies take to reach that point.

1.Startups and Their Context: "A Startup is a Team Aiming for Rapid Growth"

Startups and venture companies are often used almost synonymously. Both can be described as emerging companies driven by entrepreneurial spirit, taking risks to challenge value creation in new business domains. Among these, startups are particularly characterized by their pursuit of innovation, short-term dramatic growth, and exit strategies – as symbolically expressed by Paul Graham, founder of the renowned US incubator Y Combinator, who equates Startup with Growth. The energy driving these companies—their desire to change the world and achieve rapid growth—is creating a new global economic growth ecosystem, generating new jobs and enormous market capitalization.

The backdrop for startups' emergence includes global megatrends: recent advancements in internet technology, device evolution, low-cost cloud services, international capital flows, labor and talent mobility, social networking, heightened environmental awareness, and increased health consciousness. These trends fuel business cycles, generating challenges, successes, and renewed attempts. You can likely name several startups fitting these trends.

Let's examine the situation within Japan. Events hosted or sponsored by VCs and the Ministry of Economy, Trade and Industry, attracting hundreds to over a thousand participants, are showing significant momentum. Funding methods like crowdfunding have emerged, and the formation of new funds ranging from tens to hundreds of billions of yen, along with the establishment of corporate venture capital (CVC) by large corporations, is also thriving. Consequently, while large funding rounds of several hundred million yen were the norm just a few years ago, funding rounds in the tens of billions of yen are now making headlines. Initial public offerings (IPOs) on the stock market are also increasing, with 58 companies going public in 2013, 70-80 in 2014, and projections suggesting the number could reach triple digits in 2015. VC investment amounts have also surged sharply, from approximately ¥100 billion in 2012 to about ¥180 billion in 2013 (simultaneously, Japan's VC investment remains only one-twentieth the size of the US and one-third that of the EU, indicating significant room for growth). In Japan, IT-related investments account for about 60% of the total, which is higher than in the US, but investments in biotech, healthcare, industry, and energy are also increasing. Even large corporations are increasingly holding hackathons and ideathons (events where participants create services within a short timeframe around a set theme) in collaboration with startups. Accelerator programs aimed at supporting, collaborating with, and investing in startups have also emerged.

2.Startup Players and the Ecosystem

This diagram illustrates the startup ecosystem. It shows the flow: an idea is born, a business is launched, it grows, then exits or liquidates, potentially leading to re-launching or serial entrepreneurship. The inner circle represents startup growth stages, the outer layer business events, and the outermost layer related players. We'll focus on the parts primarily involved in startup growth.

Foundation Stage (Seed, Early):

The seed stage involves generating ideas, creating prototypes (demos), and preparing to launch the business or establish the company. The early stage refers to the period immediately after the business begins. At this stage, companies typically receive funding from angel investors or participate in several months of incubation or acceleration programs run by investors or incubators. These programs help refine the product, provide mentorship, and prepare for the next funding round or stage. Activities also begin to raise awareness and increase business connections, such as receiving funding from investors targeting seed/early stages or participating in pitch events hosted by venture capital firms and media. Funding raised during the seed stage is called a seed round, while funding raised in the early stage is called Series A, etc.

Growth Stage (Middle):

This is the period when the product stabilizes, business stability and revenue growth become visible, and both the business and personnel begin rapid expansion. Companies typically strengthen their financial position through additional funding from venture capital, begin expanding their product offerings and strengthening business alliances, and intensify marketing efforts. Companies also begin establishing corporate structures by hiring business talent and engaging professional services like lawyers, certified public accountants, and patent attorneys. Funding at this stage corresponds to Series B (and later, Series C).

Maturity Phase (Late Stage):

This is the period when the business has grown and developed, and the company begins considering exits such as an IPO or M&A. Collaborative business ventures with large corporations, aimed at achieving business synergies, also occur. Mass advertising campaigns may be implemented to acquire a large number of users. In cases like an IPO, preparations for listing are also conducted with the assistance of securities firms. The trend of M&A by large corporations also emerges. Funding at this stage is referred to as Series C (and potentially Series D, etc.).

Of course, this growth process is not uniform. Some companies, like recent social game services or news media services, launch large-scale TV advertising campaigns from the early stage. Others achieve international expansion from the seed stage. There is also a trend where companies are sold during the middle phase, and the founders then become serial entrepreneurs.

While these stages are often discussed from the perspective of funding—the lifeblood of startups—the activities of media outlets reporting on and supporting these new movements, as well as large corporations acting as growth partners, are also undeniably crucial. As this cycle expands and circulates, it will likely stimulate economic revitalization.

 

3.Startup Growth Phases and Business Challenges

This diagram summarizes growth phases and business challenges, translating the business events outlined in "2. Startup Players and Ecosystem" into more concrete business tasks. It also includes corresponding advertising and marketing challenges for each startup stage. As mentioned earlier, rapidly growing startups often face challenges earlier than expected, and their journey from seed to late stage can be highly compressed.

4.Startups and Large Corporations: Collaboration and Open Innovation

In the middle to late stages, interactions with large corporations often emerge. At Dentsu Inc., support for marketing activities—such as mass communication and online advertising—for startups in the internet sector has grown rapidly in recent years. Beyond advertising and marketing, examples are emerging of support for early-stage domestic and international marketing, event support, product development assistance, and joint development. As an advertising agency, we strongly sense business opportunities and chances for growth through involvement in the startup ecosystem, particularly regarding cutting-edge technologies and business models.

Furthermore, major corporations—Dentsu Inc.'s primary clients—have a strong demand for innovation suited to this era. We sense a growing momentum toward open innovation, where large corporations and startups collaborate. Dentsu Inc. also offers support programs for this.

While large corporations seek innovation, their focus on strategic business selection and concentration means they cannot sufficiently pioneer new areas with internal resources alone, making the utilization of external resources urgent. Furthermore, decision-making processes inherent to large corporations often become a challenge in terms of business development speed. The presence or absence of an environment receptive to external talent is also frequently pointed out. On the other hand, while startups possess technological capabilities and speed, they face challenges such as insufficient industry knowledge and understanding of practices, as well as a lack of proposal skills and networks. To address these mutual challenges, incubation programs initiated by large corporations are emerging. These programs operate not as client-vendor relationships, but as collaborative ventures where both parties leverage themes and resources to develop businesses and mutually enhance capabilities. In the US, programs hosted by top companies like Disney, GE, Coca-Cola, Nike, and Microsoft, often involving executive participation, are now appearing.

Thus, we view startups not merely as new ventures, but as a challenge to revitalize the entire business landscape—including the involvement, participation, and reform of existing large corporations—and as a movement contributing to the emergence of a new economic ecosystem. In future installments, we will introduce the activities of top players in the startup ecosystem.

References: Small and Medium Enterprise Agency "White Paper on Small and Medium Enterprises," Ministry of Economy, Trade and Industry "Venture Expert Council" materials 2014, Venture Enterprise Center (VEC) News Release, Hirokazu Hasegawa "Introduction to Venture Management and Business Creation" Nikkei Publishing Inc. 2010, among others.