Can Japan finally become a start-up power?

Long viewed as a relative laggard, Japan’s start-up ecosystem is beginning to come into its own. Investor Paul McInerney sheds light on the evolving environment for entrepreneurs.

In this episode of the McKinsey on Start-ups podcast, McKinsey senior editor Daniel Eisenberg speaks with Paul McInerney, a General Partner at Incubate Fund, a leading seed-stage investor in Japan. An edited transcript of their conversation follows.

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Can Japan finally become a start-up power?

Daniel Eisenberg: Hello and welcome to McKinsey on Start-ups, I’m Daniel Eisenberg.

Once known for technology innovations such as the Walkman, gaming systems and bullet trains, Japan has long been a laggard when it comes to venture capital and start-up success. The world’s third-largest economy has produced just a handful of tech unicorns, and funding for new businesses has been a relative pittance compared to the massive flows in the US, Europe or other parts of Asia. It’s not that the country doesn’t boast its fair share of creative tech entrepreneurs, but the regulatory and market culture has tended to limit their global ambitions and push them to cash out early via IPOs or M&A. A dearth of developer talent hasn’t helped.

More recently, however, there have been encouraging signs of change in Japan’s startup ecosystem. Several major western VCs and other institutional investors, as well as a growing number of domestic players, have been funneling money into new ventures. At the same time, the government has been taking a more active role, through tax breaks and other measures, to encourage start-up activity.

To help understand the evolving environment in Japan, today we are joined by Paul McInerney, a general partner at Incubate Fund, a leading seed-stage investor in Japan with over $840 million in assets under management. Paul joined Incubate Fund earlier this year after an 18-year career at McKinsey & Company, where he was a senior partner leading the consumer sector in Asia.

Paul, thanks so much for being with us today.

Paul McInerney: Thank you, Daniel, it’s a pleasure to join the podcast.

Daniel Eisenberg: Let’s start talking about Incubate Fund and your work in Japan. Tell us about what attracted you to your current role.

Paul McInerney: As you noted, Incubate Fund is a seed-stage investor. I joined the fund in March this year, so I’m the new kid on the block. But my colleagues established the fund in 2010, and there are four of them. Collectively they have 95 years or more of experience in investing in seed-stage companies, which is a very specific skill set.

What’s distinctive is the fund’s focus on actually creating companies. There aren’t many parallels in Japan of funds of our scale that are focused on the seed stage. Since its inception, Incubate has invested in about 175 companies. We’ve had six IPOs to date, but we’re excited that, over the next three years, we have a pipeline of roughly 20 portfolio companies ready for IPO. And we’ve also had about 26 M&As as well.

Part of what attracted me to Incubate Fund specifically was when I was at McKinsey I always told colleagues that if they were going to leave McKinsey, they should go on to greater deeds. And I felt like Incubate Fund was the kind of premium fund that would definitely be worth joining.

Daniel Eisenberg: Just talk briefly about Incubate Fund’s approach to working with its portfolio companies.

Paul McInerney: Yes, it’s a very specific approach. We don’t think in terms of a pipeline of companies that we’re looking at. We think in terms of a pipeline of founders that we’re looking to work with. So literally I haven’t seen, to date, anywhere in the organization a list of a pipeline of companies that are going through a set of stage gates.

Each individual general partner has a set of about 15 to 20 ideas of businesses they’d like to create. And they’ll have a whole network of founders who are looking to start a company. It’s really a matching process. So we’ll have a thesis—I’m currently looking at hydrogen, for example. It’s a hugely strategic topic for Japan as a country, and a really fascinating space in terms of technology. I’ll deepen my understanding of that space, and at the same time will have my feelers out for interesting founders in the space. We match them up. We often create the companies together. Or we, at a minimum, invest, pre-seed or seed stage.

Then, to your question, we literally meet with our founders weekly for as little as 30 minutes, if there’s nothing really on the agenda, to as long as half-a-day or a day, if necessary. But on average I’d say it’s about 30 minutes now a week. We’ve had companies go public where we’ve been meeting with them weekly for eight to ten years. It’s a very hands-on approach. We internally have a team of headhunters, and we have marketers, tech support.

Daniel Eisenberg: How does it compare to your prior role, working as a management consultant in Asia? Are there skills that you’ve brought that really apply?

Paul McInerney: So that was the fascinating part. As you can appreciate, it’s rare to go from consulting, in the sense of professional services, directly to the GP of a fund.

I think there’s probably a reason for that in terms of the skill set you build over time. But for Incubate Fund specifically, because you’re meeting with the founder literally weekly, through all phases of growth of the company, I think what’s translated most are probably two things.

One is counseling skills, the ability to help people think through where they are in terms of their aspirations, whether or not current strategy is going to enable achievement of those aspirations. Obviously with venture companies, there’s a lot of up and downs on a week-to-week basis.

The other thing is just classic problem-solving within that context. One reason I was invited to join the team here at Incubate Fund is their aspiration to create a 100-year institution. They look at a professional services firm like McKinsey, that’s been running for 95 years, and they felt something could be learned from that.

One thing I have started with our associates and our new joiners is just problem-solving, teaching them the basic consulting fundamentals. What’s fascinating is it seems like it’s extremely helpful in their day-to-day roles. I would emphasize, though, that there’s a specificity to the way Incubate invests and supports their portfolio companies that makes it a good fit.

Daniel Eisenberg: Had you been thinking about this kind of move for a while, or was it quite sudden?

Paul McInerney: There was a history there. My first job out of university was to work with a company called Recruit, a publishing company that made the shift to digital quite successfully. A couple of friends left Recruit and founded an online golf reservation company. I stayed at Recruit, but I served on the board of the start-up. And one of the lead investors was actually one of my fellow GPs now, Akaura-san [Tohru Akaura]. I’ve known him for 22 years now, and he’s the chairman of the Japan Venture Capital Association (JVCA), and a very larger-than-life figure in Japanese venture capital.

So there was always that seed from having met him back then. When I was at Recruit, I did do corporate venture investing. And then, over time, I’d run into Akaura-san periodically, and we’d talk about how I’m doing and my aspirations. I’d always wanted to get back into investing in some way. But a little bit randomly, really, last September I ran into Akaura-san again, and he said, “Let’s catch up.” And he had a discussion with his fellow GPs, because I’d invested in one of their subsidiary funds a few years back. They all agreed that it’d be a really interesting move.

They’re four Japanese colleagues, very well-known, obviously, in the Japanese market. They’re also quite famous for not wanting to add any GPs. It caused quite a splash when they suddenly brought in this Japanese-speaking Australian from McKinsey. I was having a wonderful time at McKinsey working with clients across Asia in the consumer sector. So it was much less about actively searching, and more about serendipity, and an opportunity.

What it came down to for me is an opportunity over the next ten to 15 years to learn a whole new craft from some of the very best in the industry. The performance of the team that I work with over the last ten years is in the top quartile globally.

Daniel Eisenberg: Let’s talk about the environment in the Japanese start-up ecosystem. The popular narrative is that the ecosystem is still playing catchup versus China, the U.S., and Europe. Is that largely accurate? And if so, why do you think that is?

Paul McInerney: I think it’s fair. I can give you a couple of numbers: The amount invested in Japanese venture companies last year was just south of $4.5 billion. Now, admittedly, that’s over 7X from about a decade ago. In the U.S. last year, it was $164 billion; and in just the first half of this year, it was $150 billion.

I don’t think you could even call it “catchup.” It’s just a totally different league in terms of scale. What I would say that’s fascinating, though, is it’s growing very rapidly. The nature of that growth is interesting in that the average Japanese IPO in 2020 was $200 million. That’s market cap, not funds secured. In 2020, the average fund secured through an IPO in the U.S. was $300 million. So you’re already at a totally different scale in terms of the IPO size.

But two things are driving growth right now, and I think you’ll see the Japanese venture capital market grow really rapidly going forward. One is that Japanese venture companies are doing an extra round or two, because there’s much more growth equity available. Also, CEOs are realizing that being public as a $200 to $300 million company isn’t much fun. It’s very hard to do an offering. If you do an offering and there’s dilution, there’s little understanding. You just have people saying, “Well, the stock’s down: What’s going on?”

The available of capital is accelerating rapidly. If you look at recent investments, players like Light Street Capital, KKR, Goldman Sachs, and Sequoia have all invested significant amounts recently in Japanese start-ups. So you’ve got this combination of availability of quality growth equity with companies also understanding that it’s better to do those extra rounds. I think, going forward, you’ll see the scale of IPOs rise fairly significantly.

Daniel Eisenberg: What is changing internally, whether it’s culturally, or in the business sector, that’s starting to move it forward?

Paul McInerney: The founder pipeline is one that’s changed dramatically, probably the biggest single shift. Over the last five to seven years, there’s been this massive shift of people leaving professional services at a younger age; where initially they were heading primarily to private equity, some pharmaceutical, or large multinational companies, now more than 50 percent are moving to venture companies. As you have conversations with people leaving, for example, they’ll be deciding that they want to join a venture company and work at that end of the life cycle. And then they go out and select a company based on fit and purpose, especially.

In Japan traditionally, the big trading houses, the big banks, and the big airlines were all attractive destinations; you have longer careers there. There was a little bit of a shift as people started doing MBAs and then moving into professional services from there. And now, you’re seeing an influx even straight out of university into venture companies. That’s seen as a much cooler, more fulfilling thing to do.

The capital, as I said before, has also changed materially. You literally have some of the biggest pension funds and sovereign funds in the world here, and they’ve been pushed to allocate a little bit more into the venture space.

So you have capital coming from outside and inside. Also the government is starting to understand that creating an environment that’s much more favorable is a big deal. You’re seeing really positive shifts in that dimension, too.

Daniel Eisenberg: In terms of maintaining and moving this momentum forward, are there specific things that need to happen?

Paul McInerney: I think the biggest single thing that has started to shift, slowly, but needs to continue to shift, is Japanese start-ups setting global aspirations from the get-go.

One part of me wanting to get involved with Incubate Fund was that my career’s been built around working regionally and globally. I’ve seen how much fun that can be, and how fulfilling it can be to work with the founders that I invest with, to try to set a global aspiration from the outset, and help them think through how to build a management team, how to build networks, how to invite foreign investors, to enable that.

I think what there might be a shortage of in Japan, going forward, is quality seed-stage investors. Because it’s a very hands-on, a very labor-intensive exercise. We don’t have the history in Japan like the U.S. of venture investing, you don’t have that pyramid, if you will, of investors younger and older, who have a depth of experience. Just trying to deploy the capital effectively in a quality way could be a headache.

Daniel Eisenberg: When you talk about the “global aspirations,” is that something that Japanese entrepreneurs have traditionally not had that much? Have they viewed their businesses, or markets, through a relatively narrow prism, primarily domestically, until recently?

Paul McInerney: That’s fair to say. But we forget that Japan’s the third-biggest economy globally. So I don’t think anyone would complain if a U.S. founder was saying, “I’m focused on the U.S.; I’m going to get that right first, and I’ll think about the rest later.”

Even though it is a quarter of the size of the U.S., Japan is still the world’s third-largest economy, so you can quite happily have unicorn-scale impact by focusing on the domestic market. In fact, if you count it strictly, I think there’s been seven unicorns out of Japan. If you take a definition of just one day after IPO, because in Japan there’s a big pop on the day of IPO typically, you could count up to 25 unicorns coming out of Japan, all largely focused on the Japanese market. So I think just because of the sheer scale of the market, founders have been focused on getting it right in Japan first.

Daniel Eisenberg: Right, so it’s made sense.

Paul McInerney: I think that’s fair. Though, if you really want to talk about creating a $10 billion or $100 billion business—and at Incubate Fund we aspire to co-create the next Toyota, Sony, or Honda—obviously the Japanese market alone is not going to cut it at all.

So one good example is Mercari, which has now become, I think, the second biggest Peer-to-Peer (P2P) marketplace in the U.S. I think their market capitalization’s just south of $9 billion right now. They’ve done very well and they’ve gotten traction in the U.S., and they built the management team in a very deliberate way to achieve that.

That example, as well as a couple of other success cases, have excited founders about the potential for a whole different magnitude of impact. But it is a recent thing, to your point. Historically, the Japanese VC market’s been quite domestic.

And recently, with foreign investors, and foreign LPs as well, getting very involved with the funds, you’re seeing a shift of attention, which I think is going to be exciting for the industry.

Daniel Eisenberg: Another thing that observers have noted is the shortage of digital talent that Japan is still facing. Earlier this year, McKinsey published a report showing the extent of the shortage. I’m wondering why you think this is still an issue, and what the government and the private sector can do to help remedy it going forward?

Paul McInerney: Yeah, I saw the numbers from that report, and they’re quite striking. I think the number was three percent of the U.S. workforce is classified as “digital” in some sense. And taking similar definitions, I think the number for Japan is one percent.

The kicker on top of that is that in Japan about 70 percent of that talent works for systems integrators or professional services firms, with just around 30 percent inside what you might call operating, or regular, companies. In the U.S. or Germany, by contrast, close to 70 percent of tech talent resides in the operating companies. On top of that, if you think about the skew towards systems integrators in Japan, the 30 percent of digital talent that works inside Japanese operating companies tend to be managing projects, as opposed to actually coding.

What all that adds up to is a real dearth of talent available to private companies and start-ups. I don’t think there’s a simple fix at all. But I do think there’s two ways to tackle this.

Because this huge pool of talent in those systems integrators is becoming much more interested in joining start-ups right now, there’s a relatively near-term way to spur an accelerated uptick in talent availability.

But I think the long-term fix is you have to go back to education. I’ll just give you one factoid, which has always struck me. If you were to create an index showing the number of certified SAS [statistics] engineers per dollar of GDP, that ratio in Japan is literally one-tenth of that of the U.S. So when we talk about digital broadly, but in analytics specifically, there is a huge gap. And if you want to get a sense of why that is, there’s just one university department in Japan, it’s at Tokyo University, that has statistics in its name. In other words, there’s one university department focused on statistics and advanced analytics. Whereas I think in the U.S. the number’s closer to somewhere around 90. And even in Korea, I think the number’s about 20 or 30.

You have to go back to education and incentives in that space as a starting point. And that’s one area where I think we’re already seeing movement. I’m encouraged by what’s happening at even the high school and the university level. But it’s going to take time, at least five years, to see that movement pay off.

There’s also a more fundamental fix. With the coronavirus and the humanitarian crisis over the past one and a half years, remote work has become much more broadly accepted. Talking with colleagues in the U.S., more and more companies are now saying, “Hey, look, I can get unknown, absolute top-tier software engineers out of Serbia or Latvia or Vietnam to work at competitive rates and do excellent work.” As a result, the global talent pool for digital becomes accessible.

Having the more global footprint for Japanese start-ups is going to help not only with the business opportunity, but also with the talent bench. And that will require more bilingual management able to build teams.

I’m working with a start-up now, my actual first investment, a company called Store Hero. They have a branch in Cambodia, where they have an IT school. The graduates of that school will be part of our tech bench going forward. Even anecdotally, with examples like that, you’re seeing more and more companies accessing global talent.

Daniel Eisenberg: How much do you think technology, in terms of no-code and AI, can help make up some of the coding and engineering challenges in the country?

Paul McInerney: That’s a really fascinating space. People look at Japan and say it’s an aging population, you’ve got a population decline. It’s easy to paint it in a dark picture if you cherry-pick your lens.

But someone was saying to me recently, “Look, would you rather be a country where—pick a number—like, a half a million to a million people are coming into the workforce every month, and as a matter of national strategy you have to figure out how those people are going to be gainfully employed? Or, in a world where robotics and AI are advancing at an incredible pace, would you rather be a country where you absolutely have to use those technologies to the hilt to drive a lot of productivity?” It was obviously a rhetorical question, but I thought it was an interesting take.

Daniel Eisenberg: They’re more of an opportunity than a threat.

Paul McInerney: Yeah. If you look at analytics, where I was at McKinsey, it used to be that you’d need five to six data scientists and perhaps one data engineer to get a project going. With the advance in tools and analytics on the data science side, the algorithm-building on other platforms, you can spin up amazing stuff in days that used to take months and multiple people.

Obviously, the intensity around data engineering’s come up, because data cleaning and managing complex datasets has become harder. But that’s just one example where the leverage from AI has been like a 4X to 5X factor over time. I think Japan, going forward, because of the tech talent challenge, is going to be really focused on that as an area for investment.

As a country, Japan’s traditionally always been very, very strong in robotics. If you look at some of the robotics giants globally, a lot of them come from Japan. And there’s a productivity piece to that that’s driven, I think you’ll see, similar developments on the AI robotics, and no-coding side as well.

Daniel Eisenberg: You talked about a couple of your investments, or potential investments. When you look at investments that you’re considering these days, what has made them particularly compelling candidates for Incubate?

Paul McInerney: At Incubate Fund, each GP has a running list of theses that tends to guide us. To give you a little bit of color on how we do think about that—because there is a lot of thinking that goes into each individual establishment of a set of ideas—there are a couple of lenses we bring.

One, fundamentally, is a Japan lens. And what I mean by that is it’s “if we invest in this company, and it’s successful, what are the elements of the business and the business model that will be defensible over time?” In start-ups we talk about moats, so we have this imagery of, like, building a moat around a castle.

There’s a couple of areas that come from the Japan lens. One is stuff that’s in the national interest; naturally there’s going to be an impetus to fund local companies and local investors that that can drive that. Incubate, for instance, is a big investor in Space. Our Space portfolio companies now have market cap collectively of somewhere north of a billion. And they’re very early stage, so that’s saying something.

In cybersecurity we’re doing some really interesting stuff in the quantum communications space. One of the implications of quantum computing is that protecting communications has kind of become infinitely harder. And you need to bring quantum computing to bear on that problem. So there are a set of things that come with the national security piece.

There’s a second lens for a subset of the companies, that’s literally just on service-related stuff. The service piece is real and, there’s often some specificity to a country that you need to deal with. Obviously, there will be situations where even a global-size player can’t compete in terms of serving and adapting to the Japanese market.

In the case of Incubate Fund as well, the ultimate potential scale is something we look at fairly carefully. We pay a lot of attention, too, to the dynamics of the market. And another thing that we look at carefully is whether you’re going to have tailwinds as the business matures in a five- to seven-year timeframe.

Also we skew a little bit towards B2B. The B2C seed funding we’ve done has been relatively limited; we tend to look at big, painful problems in the B2B and B2B2C space, and work from there.

Daniel Eisenberg: Just to echo what we were talking about earlier, how much does the issue of digital talent and the supply challenges influence your investing decisions?

Paul McInerney: As we look at investment opportunities, it’d be fair to say it’s roughly a 40/40/20, or maybe 45/45/10, mix of considerations. What I mean by that is, first and foremost, there’s something around the market and the potential, and we’re excited about that. There’s also an awful lot of attention paid to the founder and level of commitment, how excited we are about either their track record or background. We’ll spend up to three to six months, sometimes a year, just playing ball with a founder, trying to understand the market and plan together. So we get very deep on how they act and their footwork, et cetera.

But then the other 10 to 20 percent will be immediate availability of key tech talent that will have the capacity and ability to pull in people. We typically try to invest where the CTO and the CIO are in place, or at least we’ve got a CTO secured. And we use our internal headhunting teams to really drive that. In other words, before we invest we want to ensure that we’ve got a line of sight to building out the tech organization.

That said, I don’t think we’d shy away from a relatively tech-talent-intensive business just because of the lack of digital talent. Our view is that our reputation in the community is such that we can attract the right talent if we have the business idea that’s compelling enough to excite people.

Daniel Eisenberg: How big a challenge is scaling up for start-ups in Japan? And is that changing?

Paul McInerney: Historically, as I said before, the classic IPO in Japan was $200 million. I think the real challenge has been early IPOs are much more of a headache than people really understand. Now, as I said, the understanding’s shifted dramatically over the past three to five years. And that’s going to be extremely healthy.

But the primary path was an IPO at a small scale, and that’s where companies struggled. Because they’d go public, they wouldn’t have access to a huge amount of growth equity, and then the scaling issue, in terms of just the capital availability, becomes a real headache.

Now, as you do more and more rounds, if you go public as a $1- to $3-billion company, it’s a very different story in terms of your ability to fundraise, and do secondary offerings. So I think the capital problem’s basically being solved right now. Organizationally, the fluidity of talent and the flow of talent into the VC industry’s improving year to year.

Going forward, the scaling challenge is going to be this global piece. And yesterday, when I was doing this panel we had in the audience a friend of mine who’s the founder of a company. He reflected on his own direct experience in going global, which was just fascinating.

He said, “Look, it’s a three-piece problem. It’s a market problem: Can you get into the markets? Distribution? It’s an organizational problem: Can you adapt your organization to do it? And can you get the capital?” And he said, “In my mind, the capital is solved, but, by the way, that’s the easiest thing to solve.”

As for the market access issue, he said, “With more and more foreign investors investing in Japanese start-ups, you’re talking’ about world-class investors who have incredible networks.” Their ability to help these start-ups get into other geographies is material. That’s good news, and I think the access piece is going to get better over time.

Then it comes to the organization challenge. And I think what we’re starting to understand there is, you start early. He said, “I should have started in year two, like after I founded the company.” If you look at Mercari, for example, right from the get-go, basically, the global management team was in place very early after they started. And so his reflection was, “If you get started early with just one or two senior management team members, who have that global experience, like bilingual-bicultural skills, they have some global experience, that makes a huge difference.” Because from the get-go, then, you can start to build the organization in a global sense.

I think the capital’s going to solve itself. The access will get better over time And I think we’re also starting to understand how to do the people side of it. But that’s the hardest one to crack. Because fundamentally if you are thinking on a massive scale, bilingual, fully bilingual, bicultural speakers aren’t always easily available.

Daniel Eisenberg: I think in a previous conversation you’ve said that that is starting to slowly shift a little, that you’re seeing more bilingual folks available.

Paul McInerney: Yes, and that’s the result of the flow of people from the professional services firms, from the big trading companies, to the VC space accelerating. These are people who have traveled all over the world, worked in all sorts of locations.

Daniel Eisenberg: Are there key considerations that potential investors in Japanese start-ups should be keeping top of mind?

Paul McInerney: There’s obviously going to be a difference between style and stage of investing. For later-stage investors, I think the environment’s already really there. A friend was asking a global investor, who’d made a very significant investment in Japan recently. And they said to them like, “How did you find the company?” To which, they said, “Well, we had a simple first filter. We filtered all of the start-ups over a certain valuation for those that had an English language website.” Oh, okay, that’s a good start.

But seriously, there is an element of partnering or co-investing with a VC firm here—a firm that has the ability to bridge a little bit with a local organization, if the language isn’t perfectly there—that is one piece of the puzzle.

Or indeed just being cognizant that not all startups in Japan are going to have fully bilingual teams. To be very clear, they can be excellent businesses, with wonderful management teams, but they’re not all going to be completely bilingual.

If you’re serious about the Japanese market, understanding how to navigate that, or having at least one individual who can help with bridging that gap, is important. We have LPs who invested out of Hong Kong and Singapore and have one or two team members who speak Japanese. And so when they’ve invested in our firms, they’re able to interact with the management teams, regardless. That takes a lot of the friction out of the system.

The earlier-stage in Japan is not for the faint of heart just because of the hands-on nature it does require. There’s things you need to do to help seed-stage start-ups that require the ability to find and attract people, and sit down with a potential CTO, and convince them that this is a great idea, et cetera. I’d say that the language issue increases towards the earlier investing stages.

But if you are focused on later-stage, coming equipped with a strong value proposition is key, because it’s really heating up in Japan. To come with capital is one thing, but it’s important also to come with a value proposition around market access or talent access or some thoughtful approach to how you as an investor can help. Right now the ante, if you will, is rising in terms of what it takes to really get quality opportunities.

Daniel Eisenberg: If we’re watching the Japanese start-up ecosystem, what are the changes we should look out for?

Paul McInerney: In my own head, as I think about the next five to ten years, and what I hope and expect will happen, a big one will be the scale of capital availability. For Japan in particular, a really important evolution of the ecosystem will be that more and more companies spend more time growing pre-IPO, and going public at above a billion. It’s very much a real issue of ability to attract talent, ability to have access, continued access to capital, post-IPO. That’s one marker that will be really important. How many unicorns are coming, how many companies are able to get that patient capital, and spend the time to grow pre-IPO, is one big piece of the puzzle.

I think a second piece of the puzzle is how many Japanese start-ups are going public and growing with an international footprint. To date, the numbers of large-scale successful cases is two, perhaps three. I think that number could be an awfully lot bigger, especially as you go into deep tech. We have an investment called AI Medical, just an amazing company that does oncology imaging, real-time oncology analytics. And that, by its nature, is a global play. Japan has the world’s third-biggest stock of patents and tons of exciting technology. How a company’s translating its business to the global markets, whether it’s deep tech, healthcare, or whatever else, is the second piece.

And a third thing is the environment. I’m hopeful, and expectant, that you’ll see the Japanese government and the relevant governments at different levels continuing to accelerate the attractiveness of the ecosystem for investors and founders. There’s already steps in that direction through our role at the JVCA; we’ve been working with the government on a number of pieces in that space, and we fully expect that that’ll continue to become even better over time, as well.

Daniel Eisenberg: If you think, on a different level, about your work at Incubate, and Incubate as a whole, where do you see that in five years’ time? And how will you judge your work a success at that point?

Paul McInerney: It’s an exciting time for Incubate. Our newest fund, our fifth and flagship fund, closed last December, at $250 million. The fund before that was $110 million. So you’re seeing that the track record over ten years has paid off to the point where we fully hope and expect that we’ll be closing a billion-dollar fund within that time frame, fund six or seven.

That’s just the sheer capital piece of it, which I think is probably less important than our own personal aspirations. Which, as I said before, is really the next Sony, Toyota, or Honda. In that sense, in five years’ time, our biggest hope would be that there’s, pick a number, five to six companies coming out of our portfolio that show that potential.

I would love to be involved with one of those, a company that scales in that direction. But I would also like to contribute to shifting the number of companies that do think global from the get-go, and providing role models of companies that have thought about the global piece early, and have started to build deliberately in that direction.

There’s an internal piece, too; helping people grow, bringing whatever experience I have. People talk about McKinsey as a leadership factory. I’d love to bring the learning and help build an organization that is a 100-year institution.

Daniel Eisenberg: We’re happy to give you a ten-year timeframe, too, to get some of those big things done. These are really exciting time for changes in the start-up ecosystem in Japan, and it’s great to hear about your experience and your perspective on how things are evolving. I just want to thank you again for joining the podcast.

Paul McInerney: Thank you, Daniel.

Daniel Eisenberg: Well that’s our podcast. I also want to thank our great McKinsey on Start-ups production team—Molly Karlan, Polly Noah, Sid Ramtri, Myron Shurgan, and Katie Znameroski. And finally, thank you, as always, for listening. We hope you’ll return for future episodes of McKinsey on Start-ups.

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