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So is now a good time to start a new business?

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That was the question I asked myself when I started my first business in Japan. I had a good mentor, an African-American male from Los Angeles that had  20+ years in Osaka. I watched how this guy operated. How he dealt with his suppliers, wholesalers and end-users. This guy found a niche and exploited it. He also teased me  about spending too much time on the computer. Back then, he was not a big fan of technology. I just kept my ears and eyes open learning as much as I could from him and the various Japanese salarymen I met. One such salaryman is pictured with me on the Chamber of Commerce magazine cover. He taught me how to do business the Japanese way. I briefly worked for him, quit his company, returned to the U.S. to start my own company, and then partnered with his company. 

When I moved to Tokyo, I was able to start a corporation by having a lawyer front the start-up costs. I repaid him with 10% interest. With the help of two American friends, I received capital to put my first deal together. My product was made in China, imported to Japan and sold to a major Japanese department store. I thought that I  was on track to something big until the store copied my product. Luckily, I was able to unload the rest of my goods and payback my investor by giving him the corporation I started. I then moved to another industry, television.

During that time, I came up with a plan to teach English via cell phone video but 3G technology was not yet available. Years later, I quit the television industry. Later, I would receive a call from a friend that knew of my plan. He knew people that had the money to make my plan a reality. The site was hatched, money started trickling in and I left the group to take a different position. So to answer the question by Terry Lloyd over at Japan, Inc., “So is now a good time to start a new business?” I wholeheartedly say, YES! Starting a business in Japan can pay-off for those with patience. Many foreigners in Japan know what is lacking. Whether it be goods or services, there is always a void to be filled. My advise is to not quit your day job until you have a steady stream of income stream, there is at least 6-months to a year of emergency saving for home and business, find trustworthy business partners, have a back-up plan, and know when to cut your losses. Check out Terrie’s article and be sure to leave feedback!

Lay offs in Japan continue to gather pace, and official statistics show that the unemployment rate moved up 0.2% in November. While this doesn’t sound like much, out of an overall workforce of approximately 68m people, this represents an increase of 136,000 losing their jobs and registering for unemployment benefits (the only way the authorities can know who is unemployed).

We find it strange, then, that the Ministry of Labor is only forecasting 85,000 non-permanent workers to lose their jobs between October 2008 through March 2009. Since you can guarantee the non-permanents get fired in their thousands before the regular employees do — just watch a Brazilian guest worker documentary on TV to see the extent of the problem — then you have to wonder why the government doesn’t coordinate these press announcements so that at least the statistics are believable.

The reality is that the lay-offs of people who actually go to Hello Work to register (versus housewives and others who will simply give up and take some time out) will probably amount to 1%-1.5% of the workforce over the next 6 months. We say this because most certainly December and January are going to be worse months economically than November was, and with Toyota now saying it is going to halve its domestic output of autos, March through May are not looking much better, either. That means 0.2% of the workforce x 7 months = 1.4%.

Not just Brazilian-Japanese, but anyone on the periphery of the workforce is going to feel the effects of these lay-offs more than mainstream workers. Of course this means both the millions of non-permanent Japanese workers as well as many of the approx. 1.7m non-zainichi foreigners as well. It’s probably no coincidence, then that we’ve been receiving a much higher than normal flow of mail from people asking how to start a business in Japan. When you’re looking at losing your job, and yet you’ve invested years of effort into living and assimilating in Japan, maybe you have even bought a house here, it can be hard to have to uproot your family and head back to your home country empty-handed and unhappy.

So is now a good time to start a new business?

We’ll start by saying that there is no particularly good time to start a business, because running one is ALWAYS difficult. For this reason alone, we discourage people who are simply looking for a new income source from viewing the establishment of a new business as some sort of sinecure. Indeed, usually starting a business begins a 3-5 year cycle of financial difficulties and personal privation before it breaks through into profit. Therefore, companies in and of themselves are not a temporary salvation from temporary woes. Much better to take a second job, move to somewhere with more jobs, or get some part-time work as a remote or tele-worker.

However, if you have decided that the recession is not just threatening your job but that you actually want to adopt a new way of life, then starting a business is a very viable option for non-Japanese residents. If you have weighed up the pros and cons, and have saved enough money to cover your first year’s salary, overheads, and marketing (our rule of thumb for minimum capital is at least one year’s salary), then in fact the best time to start a business probably is right now.

This is because in an economic downturn, and particularly if your target customers are larger companies, their middle managers — the people who make buying decisions, are now locked into a very stressful circle of worry. Everything is loaded upon their shoulders at once: reducing costs, improving sales, laying off their friends and staff, and potentially losing their own jobs. In a recession the middle managers are the whipping boy for senior management and shareholders, and this time around they ARE being whipped mercilessly. Therefore, if you can give them something to help alleviate the pressure and improve their lives, then probably more than at any other time since the 1990’s, they are going to be receptive to you. This presents an ideal sales
opportunity for start-ups who normally wouldn’t even get in through the front door of major firms, to get in there and make a pitch.

Remembering Abraham Maslow’s Hierarchy of Needs, remember that these managers are operating on the first or second (and thus very primal) rungs of the motivational ladder, and the way to get their attention and seize the opportunity is to ensure your initial approach gives a very clear picture of how you will reduce their bottom line. Of course, it also helps if you have the traditional personal introduction versus trying to go in through the front door. At very least we recommend any potential new business owner to join the various foreign and Japanese chambers of commerce, so that you have the potential of getting in at the highest levels of your target company.

Not only is fear driving sales opportunities and making this a good time to start a business, there are four other major reasons as well.

1. Lower costs. Things get cheaper in a recession. Already you can buy office furniture and outsourced services for 20%-30% less than you could a year ago. We imagine that this deflation of start-up costs will continue for most of this year. Certainly at a raw materials level, deflation has once again gripped Japan’s manufacturing sector. The Bank of Japan (BoJ) says that the Corporate Goods Price Index tumbled 1.9% from October to November, 2008,
representing the biggest drop in costs since the index started in 1960.

2. Timing. Most companies start with founder capital, but as they grow they become attractive to outside investors. Since it takes at least a couple of years to become profitable, we can assume that by the time you are profitable and ready to receive that investment, the economy will be much improved. This means better valuations and more options for you to choose from. Further, if you decide that you want to sell out and move back into regular employment, your business will sell for much more on the upward leg of the recovery curve. Our guess is that this initial improvement will be in late 2010 or 2011.

3. Access to Labor. The simple fact is that more and more people are losing their jobs. This makes it much easier for smaller companies who usually struggle to find good employees to find and hire their future management team. What’s more, in a recession, when people are fearful, they respond best to a strong message from the leadership. Thus, your actions and statements will have more impact now than mere salary alone — allowing you to compete for talent.

4. Access to cash. The government has embarked on an ambitious JPY6trn (US$66bn) program to fund small companies by guaranteeing loans and easing collateral regulations for small- to medium-sized firms (SMEs). As of the end of December, about JPY3.22trn of this cash had already been lent out, and demand for the rest is brisk. We believe that the government will likely prepare another similar tranche of cash in late-Q1 or by mid-Q2, after they pass the second supplementary budget.

At the same time as conditions become right for the economical launch of a business, there are also players appearing who want to invest in the future winners. While Venture Capital is typically hard to find at present, none-the-less the CEOs of 6 web companies: CyberAgent, Yahoo Japan, DeNA, Microsoft Japan, Mixi, and Kakaku.com have teamed up to create a funding and incubation operation that will work with up to six newly formed ventures to help them all the way through to public listing. Applications are open to venture CEOs regardless of their nationality, so long as the company is based in Japan. But you’ll need to hurry, applications close on March 11th, 2009.

Of course if you start taking on professional investors such as DeNA and Yahoo Japan, then you’d better be thinking of an IPO, not just a side business to supplement the family income. It used to be easier to go public than it is now. From 2000, more than 100 companies a year have listed on either of the TSE, OSE, JASDAQ, Mothers, or Neo markets, however this year the number of IPOs slumped to just 49 — the lowest number since 2008. This means that there is a backlog of companies wanting to go public and we expect that in 2010 as things start to improve, the volume of new listings will pick up significantly, exciting interest by individual investors in the start-up markets once more and at the same time stimulating more venture investment as well.

FYI, the stock market which was hit the hardest in 2008 was the JASDAQ Neo market, which on its first anniversary had just four listings and none since March. Neo was and still is a good idea, in that it eases the profit requirements for companies wanting to list, in return for those companies possessing superior technologies and leverage-able businesses. But because of the overall risk-aversion by scared individual investors, this market was the first and
hardest hit in the current downturn. At present, it represents only 1% or less of the total JASDAQ trading, a massive drop from some months ago, when on some days it accounted for 30% or more of trading of that exchange.

We think the JASDAQ, and indeed the other markets, could fix their trading paucity problem if they opened up trading to foreigners living overseas, much the same as the NASDAQ and AIM allow non-resident people to trade. Yes, this would mean creating English-language infrastructure, and appointing some brokers to look after foreign trades. However, we know for a fact that a number of online brokers are already capable of hosting foreign-language trades (Chinese is already being done), and would do more if they were allowed to do so. We’re sure that if such a situation came to pass, then the background information providers necessary to help traders with their research would quickly appear out of the woodwork.

Lastly, we note that starting a business is not necessarily the same as starting a company. Although your future customers will be happier to see a properly managed corporate entity, it is not legally necessary to have a formal company structure in order to start a business in Japan. Indeed, many Small Office/Home Office (SOHO) businesses are not incorporated. Instead, the owners simply declare their income to the Tax Office on a yearly basis, the same way that an independently employed professional would.

We suggest this as a good way to get started with a new business. If it starts to grow, then you can incorporate at that time. Especially if you want to employ people, although you can employ them while unincorporated, most Japanese workers want company-provided Social Insurance and the credibility of a proper corporate structure. So when you’re ready, registering a company makes hiring much easier.

Incorporating also lets you limit your liability if things don’t go well. There are many areas of running a business that create liabilities apart from loans. Leases, business contracts, business licences, etc., are among a few of them. They are inevitable commitments, and it’s always good to have some legal protection if things don’t go well.

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If you have decided that starting a business is for you, then you’ll be happy to know that our quarterly Japan Inc. Entrepreneur Handbook Seminar will be back on February 14th. The time, location (Shibuya) and other details can be found at:

http://www.japaninc.com/entrepreneur_handbook_seminar

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