In 2022, Japan had over 10,000 startups.
You will often hear statistics that "most small businesses fail". According to data from the US Bureau of Labor Statistics, the failure rate for small businesses is:
Roughly 20% of small businesses fail within the first year
Roughly 33% of small businesses fail within two years
Roughly 50%of small businesses fail within five years
Roughly 66% of small businesses fail within 10 years
These statistics may be intimidating for a new entrepreneur, however, it should be said that most businesses make common mistakes that should NOT happen. Avoiding these eight mistakes will greatly increase the likelihood of survival.
In 2023 the Japanese government decided that after the Covid-19 pandemic, and to counter competition from Singapore and China, they would heavily invest in private-public incubation for entrepreneurs and startups and assist with rent, loans, visa and even hiring for industries and segments that can help Japan’s society and economy.
Almost all prefectures in Japan, and even towns (Shibuya for example) within major cities like Tokyo, Osaka, Sapporo, Fukuoka, Nagoya, etc., are competing for start-ups to establish in their areas. There is a wide variety of funding options, from competitive loans, to angel investors, and even government-supported crowdfunding.
Japan is becoming very start-up friendly and has updated its investor's visas and streamlined the process for entrepreneurs to move to Japan. JETRO, which is the government ministry that supports foreign companies entering the Japanese market, has a great explanation of the startup visa and where to contact each area of Japan.
Based on New Frames' experience in assisting and consulting companies to get established and enter the Japanese market, here are the 8 most common mistakes when starting a new business that companies make when entering the hyper-competitive but lucrative Japanese market in 2023.
Mistake # 1: Lack of market research! - research the market and your competitors and "Find the Pain Points first!"
Far too often a startup company will spend huge amounts of time and money building a product that may not solve a useful need in the first place! They fail to study the market, they don’t study what direct and indirect competitors are doing, and they often gloss over how hard their competitors have worked to get to their current position. They then go to market only to find no one wants (i.e. "needs") their product. Years are wasted, dreams are gone, and bridges are burnt. It is much more effective to reverse the process and save money and time in the early stages by focusing on "Market Research". The responsibility of a business owner is to find what the "pain points" are from the beginning, and critically BEFORE you spend your money on the product build. It is vital to "Interview" prospective clients and simply ask; "What are the 3 or 4 biggest headaches you have every day at work?" and "How do you handle these issues?". Look for a repeat of the same problems and answers, that is where the winning product will be found.
Mistake # 2: Not enough cash.
Also known as “money,” capital is what partners, shareholders, or business members contribute in exchange for ownership in the business. Some businesses are capital-intensive — as in a dental practice — while others are capital-efficient — as in a copy editing company — but in every business, lack of money to spend (operating expenses) is the number one cause of failure. Typically the startup capital is only what is needed to start the company and get it established and off the ground. The heaviest cost burdens will likely be the recurring monthly costs like rent, salary, and employee health insurance that cause losses during your start-up phase and slow seasonal periods. See our post "Are you ready to start your own business, do you have enough cash?" for a fuller discussion on this topic.
Note: Japan is an expensive country to operate in, rental fees in major cities are some of the most expensive in the world, although in 2023 it has dropped. Depending on your industry, you may find operating in a smaller city more cost-effective. New Frame K.K. can assist when making these decisions.
Mistake # 3: Taking the wrong shortcuts in 2023
New businesses typically lack cash and funding, and the founders will take shortcuts with spending ostensibly in the interest of the business's survival. It's logical, but be careful, shortcuts can backfire or create irreversible problems down the road. As an example, not incorporating your business could save some time and money however will this affect the image or reputation of your business? Larger client prospects may not want to engage with a client that is not legitimate or not fully licensed. Writing your own contracts without consulting a lawyer? Yes, you'll probably save a few hundred dollars, but what if you get sued because the contract did not protect you from liability? "I'll do that later" may never happen. Please see our article "Taking the wrong shortcuts..." for more on this topic.
Note: New Frame K.K. has extensive experience within the legal industry in Japan, and we can introduce the right lawyers for the right situation. We also offer contract creation and review services.
Every entrepreneur has big dreams — and thank goodness for that! But, sometimes things go awry and nothing ever goes to plan 100%. In order to be successful, a new business needs to remain flexible in its processes and develop easy-to-understand contingency plans in case the idea isn’t as big of a hit as expected. A line of credit from your bank, for example, need never be used but it can be critical when you hit a bump in the road or sales are slow. Your budget needs to include a plan for if sales are less than you expect, a key person suddenly quits, or a client doesn't pay a large invoice.
For more on this, see our article "Lack of planning, or "only planning for success" are big problems in startups" for further insights. In 2023, especially after the covid pandemic, crisis planning has become indispensable for any company operating in Japan.
Mistake # 5: Weak sales focus or execution.
Having a great product is not enough. You as the owner (or your lead Sales Manager) have to make sales from day one and set the example for the rest of your team. This makes getting to work EVERY DAY and making sales the top priority. Don't let sales activity come after the other tasks of the day, it’s what should be called an "A" task which needs to be your first priority each and every day. It is very common for new business owners to get caught up in the day-to-day running of the business (especially administration) and lose precious time and energy on “busy” activities that do not add to sales. Focusing on sales, business development, and profitability is key to new business growth, and while it is easy to be distracted, it is the only way to survive.
Note: New Frame K.K. has updated its sales, marketing, and business development services for the post-Covid 19 environment in Japan. 2023 has seen a major shift in how businesses operate, especially for sales and marketing, please contact us for a free discussion on how we can help you develop your sales and strategies in Japan.
Mistake # 6: Choosing the wrong business partners.
Family, friends, and money do not often mix well, and often are the cause of business failure. Sure you would fire an under-performing salesperson if you are a budding entrepreneur, but what if that person is your best friend? Or worse, your wife! You might say these are the people you "trust", but the downsides could far outweigh the advantages. Businesses need to be run with the primary goal that the business survives and prospers, so make sure to separate personal and business relationships as much as possible. Think it through carefully, weigh the pros and cons, and ask yourself "Do you even need a partner?".
Note: New Frame KK can do extensive investigations into your prospective business partners, from phone interviews to face-to-face meetings and full background and legal checks. Do not be afraid to demand proof (in a professional manner) when dealing with Japanese companies. New Frame KK acts as a negotiator and business partner for our clients, to help make the right connections in Japan.
Mistake # 7: Trying to do it all by yourself - not managing stress!
Having an accountant, banker, and attorney with whom you’re on a first-name basis ensures you will build a strong foundation for your business and won’t make mistakes that will cost you more to fix down the line. Build a team of people that can support you, no one has the time or skill set to do everything on their own, and trying to do so will cause incredible levels of stress. See our post "Stress management for business owners".
Mistake # 8: Lack of Commitment, you keep your day job going, but you simply give up.
Finally and perhaps most importantly to remember, businesses that fail usually do so under two main situations. Either the business runs out of cash, or the owner gives up, that's it! Many successful businesses survived and then prospered simply because the founder refused to give up. Keep reminding yourself why you started the business, and what your goals are, and keep at it. If you don't quit, it’s not done, It's not easy but it's worth it. Keep your cash burn rate low and work hard, be humble.
Importantly, with regard to a question that often comes up, "...should I keep my day job until the business is profitable?", let’s be totally clear. Keeping your day job can be a disaster, it means two things. Firstly, by doing so, you are not fully committed psychologically that the business will be successful, and secondly, you are by definition not committing 100% of your time to the new business. These are obstacles you've put in front of yourself from the beginning.
Here are some important links to begin your Startup Journey in Japan.
New Frame K.K. supports Tokyo-based small and medium-sized businesses from startup to scaling, and a potential exit sale. Japan Market Entry, Startup Accelerator, M&A (Buy & Sell Side), Advisory Services & Business Consulting. For more advice, support, and information on ways we can help your business grow,click the link to contact us.
Curtis Mackenzie - MD New Frame KK www.newframe.jp
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