Deals for start-ups reach record in Japan before listing curbs

A plan to cull the smallest listings on the Tokyo Stock Exchange (TSE) is spurring a record number of buyouts of young companies in Japan, reflecting Tokyo’s push to create more billion-dollar start-ups to better match the country’s global standing in scientific research.

Regulators are ratcheting up pressure on start-ups to gain more scale before debuting on the stock market, warning that the TSE will seek to delist companies that fail to reach a market value of at least 10 billion yen (S$86 million) within five years of going public, starting in 2030.

More than 60 per cent of the roughly 600 companies on Tokyo’s Growth Market for young companies fall below that threshold, representing some US$12 billion (S$15.6 billion) of value.

Dozens of founders are selling their companies rather than pursuing initial public offerings (IPOs) – the traditional path to gain respect from an establishment that still views young firms with scepticism.

The hope is that consolidation would help temper a hyper-competitive domestic market and allow companies with one-of-a-kind technological know-how to attract bigger pools of capital.

“More people are realising that an IPO isn’t always the happy ending you want,” said Mr Takashi Nakagawa, co-founder of health-tech company Kakehashi, adding that his company is prioritising deal-making to gain scale.

“For growth, we’re open to acquiring firms that are bigger than us. All options are on the table.”  

A total of 199 start-ups were bought out in 2024, more than double the number four years earlier, according to market research firm For Start-ups.

In 2025, 92 such deals occurred in the first half alone, while the number of IPOs slumped to just 21, on pace for the lowest in years as brokerages shun small-scale debuts. 

The sheer number of listed companies that may come under scrutiny is making mergers and acquisitions (M&As) more socially acceptable, according to Mr David Milstein, managing partner at Eight Roads. The TSE should not wait five years to implement the rule, he said. “The amount of M&As would skyrocket instantly.”

For decades, heading a listed entity conferred the highest status in Japan’s social hierarchy, a short cut to favourable rates on corporate and personal loans and easy credit rollovers, as well as to invitation-only membership at premier golf clubs.

For many companies, going public may have become an end in itself, rather than a tool for growth, according to Mr Fumiaki Kobayashi, a Liberal Democratic Party lawmaker working with the TSE on the rule changes.  

“It’s crucial to foster a good market for M&As,” he said. “There’s still a lot to be done, and one key task is supporting the M&A market and sharing know-how on how deals are executed.” 

Global venture capital firms have shown increasing interest in Japan, but remain cautious about deploying big sums as many start-ups struggle to accumulate enough scale to deliver strong returns.

The emergence of ambitious entrepreneurs, together with regulations pushing consolidation, may help make Japanese start-ups more appealing to major investors, said Mr Takashi Sano, chief investment officer of MUFG Innovation Partners. “It’s definitely changing – in a good way,” he said. “The message is to grow the company, grow the business, create a business which can scale.”

One sign of change has come in the form of modest forays by big overseas funds into Japan’s start-up scene.

Kakehashi – which develops software to help pharmacists track prescription histories – secured a US$97 million Series D investment in June, led by Goldman Sachs, valuing the company at more than US$400 million, according to research firm Speeda.

In 2024, private equity giant KKR & Co co-led a US$140 million funding round for human resource management platform SmartHR, which is now valued at over US$1 billion.

The pressure on smaller start-ups also comes as Japan’s wealthiest firms look on with growing appetite for acquisitions to help them keep pace with fast-moving technological change.

Interest is strong, despite Japanese accounting rules that force buyers to amortise any goodwill paid – meaning that any premium paid for start-ups eats into post-acquisition profit for up to 20 years.

Mitsubishi UFJ Financial Group, the country’s largest lender, has rubber-stamped at least three fintech deals, together worth well over US$1 billion, over the last three years.

That is while Mizuho Financial Group announced a roughly US$300 million deal to take control of Upsider Holdings to shore up its banking unit’s credit model for small and medium-sized firms. 

“MUFG – our banking group – is usually seen as very conservative and slow moving,” said Mr Sano. But the group today is far more receptive about start-up acquisitions than in the past, he added. “Innovation, new business can be built not only by ourselves, but also in partnering with start-ups.” 

Still, the 2021 sale of buy-now-pay-later start-up Paidy to PayPal Holdings for 300 billion yen remains one of the country’s biggest venture-backed start-up acquisitions to date – a testament to the limited pool of capital in play today.

Japan also struggles to attract and retain foreign entrepreneurs and highly skilled workers. A weak yen is depressing wages while rigid visa extension rules as well as banking and real estate practices can make Japan a difficult place for short-term residents.

“IPO or M&A, you want to have as wide a universe of options as possible,” said Mr Russell Cummer, founder of Paidy and blockchain lab AltX Research. “I’m optimistic about the start-up ecosystem. I think it’s making progress in its own way. At its own pace.”
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