The rise of East Asia startups

My first thought when I stepped onto the Tokyo subway was how much better it was than NYC. Trains ran on time, stations were clean, navigating was easy. I felt transported into the future 😂

Granted, the NYC subway is over 100 years old. The bulk of Tokyo's subway lines only got built after World War II. However, every aspect of Japan's system was significantly superior.

The same holds true for cars, electronics, and games. Japan has an eye for design, attention to detail, and the intense discipline to create iconic products. Which begs the question, why hasn’t Japan produced any iconic software tech startups?

I was on the 42Geeks East Asia tour recently, and over the course of ten days, we dove deep into Japan's startup scene, as well as Korea and Taiwan's ecosystems. What we learned is that the startup scene has quickly evolved and there is significant momentum across East Asia!

While we are saying East Asia as a block, it is important to note the vast differences among the three nations:

• Market Size – Japan is the 3^rd largest GDP in the world with 124 million people, whereas Korea is less than half the GDP and size, and Taiwan even smaller. While Japan is large enough for startups to reach venture scale in that market, Taiwan and Seoul startups generally cannot.

• Notable Diaspora – Taiwan produced notably executives / founders such as Steve Chan (YouTube), Kevin Lin (Twitch), Jensen Huang (Nvidia), Lisa Su (AMD), bringing Silicon Valley style entrepreneurship and scaling experience to Taiwan.

• Exit Strategies – Japanese startups rarely achieve unicorn status, but many have exited as acquisitions or going public on the local “Mothers” market. Taiwan and Korea have had less success with exits, but their ecosystems are also relatively younger.

• Cool Factor – Hallyu, or the Korean Wave, as elevated Korea as a global entertainment powerhouse, making their culture cool and bringing more foreign entrepreneurship and investment to the country.

What is interesting however is that the future of Japan, Korea, and Taiwan as thriving startup ecosystems is remarkable similar. To help understand the path forward for East Asia, we looked across six ecosystem advantages and six challenges that could impact ecosystem progress.

Advantages

• Infrastructure – Each of these countries are modern economic miracles, rebuilding after devastating wars. This has enabled them to develop world-class transportation, energy, and telecommunications infrastructure that helps foster innovation.

• Hardware Expertise – Taiwan leads the world in semi-conductors and contract manufacturing, while Japan and Korea have world leading electronics brands (Sony, Panasonic, Samsung, LG, etc.). This provides a strong base for building deep tech and hardware-based startups across IoT, AR/VR, and industrial applications.

• Education Culture – Each of these nations ranks among the top globally for schooling, due to the deep cultural value placed on education. While there is criticism for the rote nature of teaching, the result is a well-balance and capable workforce.

• Collaborative Spirit – There is more emphasis placed on teams rather than individuals, which leads to more loyalty and collaboration, leading to more consistent and predictable results towards building more sustainable and healthy startups.

• Engineering Skills – Where you have builders, you have innovation. These countries graduate a high percentage of STEM educated talent, fueling innovation and startup generation. While most will work for large corporates, more are exploring startups.

• Government Support – Each nation had directed significant resources, capital, and policy creation to bolster their startup ecosystems. Taiwan is luring foreign talent via their Gold Card program, while Japan and Korea launched multi-year startup programs.

Challenges

• Risk Adverse – Whereas Western culture is more forgiving of the solo, maverick style entrepreneurship and failure, East Asia still struggles with the concept of failure, which is a key ingredient in the startup journey, especially for finding product-market fit.

• Work Culture – On the positive, these are hard-working nations. This point is more on the adherence to hierarchical management practices that stifle creativity and learning that often comes from staff in the field and filters up to the organization.

• Language Barriers – India’s startup growth was to a certain degree aided by having English skills to expend overseas to the US and beyond. English however is still a barrier particularly for Japan and Korea, creation friction for global expansion.

• Falling Birthrates – South Korea has the lowest birth rate in the world, and Japan and Korea are not far behind. This will be a huge drain on resources to support an aging economy with fewer resources available and shrinking tax base to support.

• Talent Exodus – The most talented engineers and entrepreneurs are setting their sights on higher-paying locales like Silicon Valley, London, Singapore. While less of a factor in Japan, this is a noticeable trend in Taiwan where engineering salaries are low.

• Geopolitical Concerns – Less of an issue at the moment, but as we have seen with events in Gaza and the war in the Ukraine, innovation immediately halts. With China and North Korea in the region, it is an issue that looms large for the future.

The one area we did not touch on is availability of capital for startups. Across East Asia, a total of $12.5 billion USD was deployed into startups in 2022 ($5.4 billion Korea, $6.2 billion Japan, and $0.9 billion Taiwan). This is a drop in the bucket to the $76 billion deployed in the Bay Area last year. However, we expect to see VC investment to ramp up once the funding winter thaws and more foreign inflows of capital enter the market.

Lastly, while challenges do exist, we are encouraged by the level of activity in the startup ecosystems across Japan, Korea, and Taiwan. Innovation is rising in the East and we fully expect to see iconic, global startups to emerge over this decade.

Mark & Basil

Much of our collective focus has gone to the devasting events unfolding in Israel and Gaza. Our hearts go out to those innocents affected on both sides of the conflict, and hope that peace and understanding can come to soon.

One point that emerged from the conflict was the growing startup and software engineering community that had been growing in Palestine. One of those groups, Gaza Sky Geeks, has been supporting early stage entrepreneurship in Gaza. Another organization, Sawaed19, was helping to advance the impact of volunteer work across the Palestinian community. Then there is the Flow Accelerator, providing a space for startups to launch from.

Now all of this is permanently on pause. It is our sincere hope that the startup community can rebuild and once again rise and bring more opportunities to Palestinian’s. You can read more about the key players and history of the Palestine tech community in this TechCrunch story.

It was an excellent week for community engagement with Mark in Jakarta, Indonesia to attend Tech in Asia. The hype about the Indonesia startup scene is real, as the event was buzzing with activity, demos, talks, and networking over two days.

Meanwhile, Basil was speaking at the UN's World Investment Forum in Abu Dhabi. The AWS team was also in full force at GITEX in Dubai this past week to share more insights and example of building Generative AI applications on AWS!

We are also excited to announce our first guest writer next week out of Singapore, who will share his candid perspectives on what it means to be a startup CTO and his lessons learned from the experience. If you have something that you would like to share in our Founders in the Cloud newsletter, we are open to more guest contributor. Email us or DM us over LinkedIn!