Six Considerations for Early-Stage US AI Startups on Japan Entry & Expansion (Part 1)
US startups navigating the Japanese market landscape undoubtedly face multifaceted challenges, encompassing geographical distances, linguistic barriers, nuanced cultural intricacies, and distinctive business practices. However, for those startups motivated to put in the effort, the country presents attractive revenue and partnership opportunities with Fortune Global 500 Japanese companies in Japan.
Where to start
In Fall 2023, Geodesic Capital, in collaboration with Mitsubishi Corporation, hosted the “Energy Transformation (EX) Trek” in Tokyo. This Trek was designed to connect leading and like-minded North American and Japanese companies that shared goals to provide zero-emission energy systems and technology solutions in the EX/Climate tech space. The event served as a platform for engaging with startup founders and CEOs, discussing the immense potential and complexities of the Japan and Asia Pacific market. Mike Kim, President of Gradient Consulting, spoke to a group of startup founders and CEOs on Japan market entry and expansion. Founders and CEOs considering Japan are faced with these pivotal questions:
Should I enter and invest in Japan?
What are the major considerations for a startup when it comes to business in Japan?
The first question is dependent upon many variables but instead of providing a simple ‘yes’ or ‘no’ answer, I present a framework of considerations which can be a useful guide for those considering the market. Here are six key considerations for CEOs/CROs/Heads of Sales when it comes to Japan market entry and expansion. This is a quick flyover on each of the six points.
Six Considerations on Japan entry for your startup
Consideration #1: Do I have any current revenue from Japan? If not, do I have any Japan leads/opportunities?
If you already have Japanese companies self-selecting and raising their hands to say they are interested in your company, that is one indication that the Japanese market may be ready for your solution.
Consideration #2: How will I approach Japan partnerships to capture that revenue?
While on the one hand, Japan is actively seeking US AI startup technology (see article on Top 20 Japanese Companies for US AI Startups to Watch in 2024), Japanese companies can be insular with a high premium placed on relationships and trust. As a result, partnerships can be a strategic way to accelerate relationships and build trust with the Japan market. The next best step is to develop some of your inbound Japan leads into strategic partnerships. If you don’t have strong Japan leads, then you can leverage the relationships of a consultant or advisor to help you set up partnerships based on your target industries. I recommend considering a three-pronged approach by pursuing one partner for each of the key industries that your technology serves (e.g. one partner for the financial services industry, one partner for the manufacturing industry, and one partner for the government).
Consideration #3: Once I have a few initial revenue generating partners/customers ($400,000-500,000 USD per year for software startups), what are my next steps and how should I invest?
Once acquiring initial customers, partners, and revenue, the next steps are to:
Setup a Japan entity (for US startups, this is usually wholly owned by the parent company).
Open a Tokyo office.
Hire 1-2 Japanese people to be the first Japan team members.
Continue to make your Japanese partners successful.
Continue to acquire Japanese customers while delivering excellent client service for your existing customers.
Introduce yourself to the Japanese market via press release.
Introduce yourself to the Japanese market through an event.
Consideration #4: When should I have my "Launch Event" and what might that look like? (A “Launch Event” in Geodesic Capital’s terminology is an event in Japan to formally introduce your company to the market once you have enough traction.)
A well-executed event in Tokyo can be highly effective in generating revenue. I recall one person I highly admire for his Japan market expertise telling me after he attended one of these events, “Mike, you should be signing $2,000,000 USD coming out of this event. It’s an opportunity to invite the deals and leads in your pipeline to hear your customers and partners speak on stage about how they are using your solution. Then they can enjoy good food and drinks while exchanging business cards with Japanese peers (whom they may otherwise never meet but now have the opportunity to thanks to you), and have conversations with like-minded people all of whom are evaluating your solution.
Consideration #5: How much revenue do I want from Japan? How much am I willing to customize my business to get it?
It is possible to close large deals with Japanese companies. I’ve experienced this firsthand. However, it requires some level of customization or additional features since some of the customer requirements will be different. There will be a decision to make on how much you are willing to customize in order to capture the revenue and large opportunities. To some degree, a large deal for any startup will require customization irrespective of where in the world your customer is headquartered, whether that is the US, Europe or Asia.
Consideration #6: How will your head of Japan get budget/resources? How will he/she handle aligning Japan with the US company, solution, and leadership?
I’ve found this to be one of the biggest challenges for US startups doing business in Japan. When you get to the point of having a dedicated head of Japan, that person will have the very challenging job of ensuring alignment with US leadership, conducting sales in-line with US revenue expectations, clearly communicating the opportunity so leadership can make the call on dedicating product or engineering resources, and managing the delivery of the solution to the Japanese company in line with their expectations. This is not an easy task and this role is definitely not for the faint of heart.
Do I have revenue (or viable leads) from Japan?
In the rest of this article, I’ll cover in greater detail Consideration #1: Do I have any current revenue from Japan? If not, do I have any Japan leads or opportunities?
Perhaps you’re in a position where you don’t have any current revenue from Japan but you have inbound leads trickling in that can be explored. My first inbound lead from a top 10 Japanese company budded into a multi-year relationship where they became a partner and investor. It blossomed from a cold inbound email to becoming a meaningful relationship that has been with me for nearly 10 years. We’ve done a lot of business together, shared many meals, exchanged many gifts, talked about families and our personal lives, helped each other out when needed and as we could. We still keep an eye out on projects to collaborate on to this day.
It can be intimidating to open a subsidiary in a foreign country, open an office, hire staff, deal with the local labor laws. Before diving in 100%, one approach is to first have a few contracts signed remotely. This approach will not only give your CFO or head of finance more confidence, but you'll have the numbers to back the investment when time comes to put your own boots on the ground.
One approach to Japan is to aim to have a few contracts signed remotely, which will provide the confidence/data to invest further.
Here’s a sample timeline that may work for your company:
Months 1-5: Gather and nurture initial inbound contact from Japan (first set of Japan leads).
Month 6: After you’ve developed some inbound leads, visit Japan with the person who would be taking the lead on Japan and ideally at least one of your key c-level executives who is excited about the Japan opportunity.
Months 6-10: Cultivate those inbound leads into customers and revenue-based strategic partnerships.
Month 10-12: Achieve 2-3 signed contracts with customers/partners with $400,000-$500,000 USD of annual revenue (for software startups).
Here are the resources you will need to achieve the above:
One sales or BD person to take the lead on Japan: You will need one person to own the development of Japan deals/leads. Consider the necessary travel for one person to achieve the goals. I believe initial goals can be achieved with this one person based in the US with 15-25% travel time to Japan (for me it was 25% travel time to Japan). In addition to the 25% travel time, their time will be needed when stateside to support/advance the deals with calls, internal coordination, hosting for US visits, developing of proposals, and other tasks.
One executive to support/sponsor: You will need at least one executive to provide “air cover” who believes in the vision of Japan and is willing to fully support you.
US resources: You will need US resources to advance/support the deals with calls, technical exchanges, and development of proposals. Depending on how your teams are structured, it could be one sales person + one sales engineer or sometimes one sales engineer alone could drive the opportunity if you are running more lean or if a sales person is not available. I’ve also seen product, data science, and engineering get involved depending on the opportunity.
Budget: You will need the budget required to support the above. In addition to the cost of employee resources described above, I would recommend committing to at least two trips to Japan in the first 12 months. The main costs for this will include flight, hotel, transportation, hotel, including employee meals, meals for customer and partner prospects. If you have demonstrated interest from Japan and reason for some initial confidence in the market , then after 12 months you could very well have 3 revenue generating customers and partners which should cover the cost of these expenses (not including salary expenses).
This approach applied to different businesses and teams will vary in detail, which is okay. This is just one model that can work.
The potential rewards for pioneering market entry into Japan are undeniable. As a next step, consider designating a resource to spearhead Japan exploration. This will provide you with some physical presence in-country with travel to Japan and signal an initial commitment to the market. If you are successful at achieving the $400,000-$500,000 mark in revenue within 10 months, it will provide needed revenue to your startup and impressive logos (recognizable to your board/investors which could also be used as helpful reference logos to acquire more early adopter customers).
If you are a US-based early to mid-stage tech startup, I hope this series helps remove fears and hesitations for expanding into Japan. We’ll dive deeper into the other five considerations above in future articles. Please reach out if you’d like to better understand the Gradient Consulting approach or want to learn more about revenue opportunities in Japan and the larger Asia Pacific region.