EDITORIAL: Problems for startups

Ten years have passed since Japan's first stock market for startup companies began operations.

These markets are designed to offer fund-raising opportunities for young and small businesses by adopting less rigorous listing standards. The policy focus is on the future potential of the companies.

The Tokyo Stock Exchange kicked off its Mothers market, the first of its kind in Japan, in November 1999. Now, there are effectively six such smaller bourses, including regional exchanges in Osaka, Nagoya and Sapporo.

Initially, these markets attracted a lot of attention because of the information technology boom. But the collapse of the dot.com bubble and a series of scandals involving startups like Livedoor Co. dampened the interest of general investors in these new markets.

With both the market capitalization and the number of new listings down sharply, the landscape of these startup markets is now bleak.

The genesis of these markets is a story of rash actions and lax planning.

In 1999, reports that the fast-growing Nasdaq market of the United States planned to expand its operations into Japan sent the TSE scrambling to set up its own market for startups. Other local exchanges followed suit, causing a rush of openings of new bourses.

But things didn't turn out as expected.

These new exchanges have indeed nurtured a small number of excellent companies. But the stock prices of most newly listed startups soon fell from their initial highs and remained in a slump, causing heavy losses for legions of investors.

At the root of this grim picture is the poor environment for growth of startups in Japan.

It seems that stock exchanges, brokerages and venture capital firms in this nation have all been focusing on milking profits out of new businesses.

In the United States, venture capital firms play a key role in nurturing startups, thereby creating a favorable financing climate for new businesses through synergies with the Nasdaq market.

But Japan still lacks a conductive environment for new businesses.

Startup companies face many hurdles. It is not easy to build a profitable business based on a new technology. But that is not all. A startup cannot grow into a well-established company unless it keeps reforming its management.

It is necessary for a startup to shift smoothly from one-man management by the founder to collective management by a team of competent business partners based on effective cooperation and a division of responsibilities.

Livedoor and other problem companies, however, failed to make this crucial transformation. They typically collapsed after making a series of reckless moves, causing investors to suffer huge losses.

With the Tokyo Aim market for growing companies, which the TSE set up last year jointly with the London Stock Exchange, the premier Japanese bourse is expecting brokerages to perform the leading role in fostering startups.

This is an approach that has been adopted in Britain and Canada, among other countries. But Japanese brokerages have been shying away from playing ball. Not a single company has been listed on the exchange.

A more effective approach to tackling the challenge might be for stock exchanges to impose additional charges on listed companies for organizing a team of independent professional management advisers to examine and rate the management performances of companies listed on the new markets.

It is probably time for Japanese stock exchanges to resign themselves to the fact that more time and money must be spent to develop well-functioning markets for startups. They apparently need to make greater efforts to establish an effective system to support new businesses.

Jasdaq, the largest among the Japanese markets for startups, is set to merge with the Hercules market of the Osaka Securities Exchange this autumn.

But further consolidation among the exchanges for startups is clearly needed.

--The Asahi Shimbun, Jan. 19