So many things that are labeled as “cultural differences” have much simpler explanations. There are perfectly rational (and even mathematical) reasons why we have not seen a lot of entrepreneurship in Japan over the last 50 years, why we are starting to see a lot more of if now, and why we are likely to see an explosion of Japanese startups in the coming decade.

In this episode, we look what happens in Japan when the gatekeepers who stand between the creative people and the broader public are removed. It happened before in movies and anime and it is just beginning to happen now with startups.

The current unleashing of creativity, the changing nature of risk, and the introduction of repeatable, documented startup processes are coming together to change the face of innovation in Japan.

Let me explain how…

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Transcript from Japan

Welcome to Disrupting Japan, straight talk from Japan’s most successful entrepreneurs. I am Tim Romero, and thanks for listening. Now this is going to be a special episode of Disrupting Japan. There will be no guests, no wine, no playful banter with someone speaking English as a second language. Today it’s just you and me.

You see, every ten episodes or so I like to do a deep dive into a topic that I consider to be critically important, hugely misunderstood, and frequently overlooked about Japan. And so for the next 20 minutes or so, I’ll be whispering in your ear about creativity, risk and the importance of formal processes in Japan, and how these three factors are coming together to propel Japan into a startup renaissance.

You know, in spite of the amazing ease and the mind-boggling reach that the internet provides, it’s become surprisingly hard to get out genuinely new ideas or different ways of looking at things. In this world of, 200 words is too long for an article, and clickbait-optimized headlines, taking a look at creativity, risk, and process will not get much attention. It’s kind of the opposite of clickbait, it’s sort of click-repellant. Ah, but this is why we have podcasts. Podcasting is an intimate medium. Listeners are far more patient than readers and far more appreciative of quality.

And, so today I’m going to take you on a bit of a winding journey through the seemingly unrelated topics of Japanese creativity, risk, and formal process. And I promise you that when we reach the end of this winding road, you’ll have a different and hopefully new understanding of how the confluence of these three factors are about to propel Japan onto her third economic miracle. And yes, her third economic miracle.

Now long-time fans understand exactly what I’m talking about, but it’s probably a good idea to review it so this episode will make sense to newer listeners. You see the idea that Japan cannot change, that she cannot reinvent herself economically, is simply wrong. And to prove that to you, let’s take a step back about 150 years where Japan ended centuries of isolation when Commodore Perry sailed into Yokohama Harbor with four frightening American warships. Japan’s leadership knew it needed to change. And, in the coming few decades, they changed every aspect of Japanese society, from the economy, the government, the legal systems.

And in the end, Japan transformed herself from a country that was literally hundreds of years behind the times socially, economically, militarily, into one of the strongest nations on the planet. Within 30 years, Japan transformed herself into a backwater into a nation capable of defeating Russia, one of the world’s great powers.

And Japan’s defeat in the Second World War was total and absolute. In fact, many of the economists working with the American occupation authorities thought Japan would never be able to recover. The damage was simply too great. There was no basis, no familiarity with being a modern democracy. And yet, Japan began the transformation an industrial, military-based economy into a consumer-focused democracy. And within 30 years, Japan had the second largest economy on the planet.

Now, such radical transformations from a nation without any functioning infrastructure to speak of, into a global power is exceptionally rare in human history. And the fact that such economic miracles happened twice in one century, in one country, tells you there’s something special going on here. So there’s no doubt that Japan can make radical changes when needed, and that it has done so in the past. But let’s look at what’s going to propel Japan into the future.

Now creativity. You know, around the world, Japan is viewed largely as a rather uncreative society. And I have to admit that when viewed from the top down, there’s a lot of truth to this view. In creative endeavors that become part of the national consciousness, you really do see minor variations on very few themes. In graphic and industrial design, in TV shows, in business ideas, in movies, in popular music — oh Lord, especially in popular music — there are a handful of patterns that get repeated again and again with minor variations. Almost certainly, anything that rises through the domestic ranks to gather international notice tends to be a rehash of these well-worn patterns.

However, the problem is not that there’s no creativity in Japan; there is a tremendous amount. The problem is simply that there are few effective ways for their creativity to bubble up into the national consciousness. Creativity is not really rewarded here. But it exists, usually in subcultures too small, too strange to garner national attention. I know musicians who design and build their own instruments, and then compose and perform orchestral pieces for them.

And there are incredible artists in every genre, performance art, in particular. In fact, if you ever get the chance, you should really check out the Design Fiesta event. It’s one of the most interesting art festivals in Japan. The organizers rent out the biggest convention center in Tokyo, and partition out exhibit space in areas as small as about two square meters, and then price them cheap enough so that starving artists, developers, and designers can afford to display there. The tremendous outpouring of creativity you see is just astounding, in every field. Now, of course, most of the exhibits here are inane, but many are brilliant, and a handful are simply too strange, so far out there for me to form any kind of opinion about them at all; and those tend to be my favorites.

The problem is that there is no avenue for all this creativity to bubble up and receive the recognition it deserve, no route to become part of the national consciousness and artistic discussion. The problem is not a lack of creativity, but a lack of ways in which it can bubble up and get used. There are simply too many gatekeepers who will prevent new ideas from spreading. And this is not a new problem, by the way. In fact, it used to be much, much worse.

Today, Akira Kurosawa is adored in Japan. And without question, he is one of the most influential directors in the history of cinema. But it wasn’t always this way. For decades, Kurosawa couldn’t make the movies the way he wanted to in Japan. His scripts, his finished works, everything was picked apart by cinema executives. Again, it’s not that the people in the industry didn’t admire him. Other directors, actors, people who care deeply about cinema, plenty of people recognized his genius. I mean it was kind of hard to miss if you knew the craft.

But for the gatekeepers, those in charge of what the public sees, the various layers of studio executives responsible for deciding what creativity became part of the national consciousness, Kurosawa was really nothing special. Someone they would keep an eye on, and nurture certainly, and in a few decades he might amount to something, but he was certainly not someone who should be given creative control.

Now what changed all this, was when Roshomon won the Venice Film Festival, and Kurosawa received large-scale international acclaim. Now interestingly, Daiei Film, Kurosawa’s production company and distributor, did not want the film entered into the festival at all. They didn’t consider it to be particularly good. It was only submitted, and very reluctantly, because representatives of an Italian film company persistently and strongly insisted. Only after Kurosawa bypassed the Japanese gatekeepers, by appealing directly to an international audience, was he acknowledged and given real creative control at home. Only then was his creativity really allowed to bubble up into the larger Japanese society.

Other Japanese directors have tried to follow in Kurosawa’s footsteps with, well, varied success. But the gatekeepers have remained well-entrenched in Japan’s movie industry. And since the same companies own the production studios, the distribution networks, and the movie theaters themselves, you played by their rules or your movie was going nowhere.

And I know the movie-lovers out there are going to skewer me for this, but the fact is that other than Kurosawa, and Godzilla, the patron saint of this podcast, Japanese films have seen very little success overseas. But anime, ah now here’s something interesting. You don’t need a large production company and a lot of capital to produce anime. A few talented, passionate, dedicated individuals can create an anime film, and they can make it exactly the way they want. And they do.

And with the popularization of VCRs, and then DVDs, and now the internet, the cost of distribution dropped, and it was possible for those creators to bypass those gatekeepers and appeal directly to the Japanese and worldwide consumers. And while Japan’s movie industry remains moribund, anime has flourished in an explosion of creative storytelling and cinematography that has propelled it into a worldwide phenomena, something so different that it is really considered its own art form. The creativity was always here, it just needed a way to bubble up.

So keep this in mind when you see what most of the Japanese V.C.’s are funding. By and large, Japanese V.C.’s are still playing the part of the gatekeeper, deciding what is allowed to bubble up. And that’s starting to change. Startups today require much smaller teams and much less capital. And the internet gives everyone a global reach that lets new companies bypass these gatekeepers completely.

But at the moment in Japan, the gatekeepers still have a lot of power. So when you see the Japanese startups that are being funded by the big V.C.’s here, and you find yourself shaking your head at the lack of innovation, remember that you and I are seeing the startup equivalent of Japanese cinema. You’ll be seeing the startup equivalent of Japanese anime very soon.

Now the second topic I’d like to talk about is risk and reward, why it’s important and how it’s changing. You know, back in school I took a one-semester class in game theory. And, while that hardly makes me an expert in the field, it had a huge impact on the way I look at the world. For those of you that don’t know what game theory is, it is both much less fun and far more useful than it sounds.

Fundamentally, game theory breaks down any decision or series of decisions into simple, quantifiable risks and rewards; and then math can be used to predict how people, or animals, or plants, or computers will behave in those situations. Now this simple breakdown of risk and reward is, in general, not very good a predicting how any individual will behave, but it tends to be very good at predicting how large numbers of people will behave, or how people will behave on average.

No, I submit, that when you take an honest look at it, the lack of entrepreneurship in Japan that is so often attributed to Japanese culture is really much better explained by game theory. People, on average, are making good, rational choices based on the risks and rewards that are presented to them. And far more important, the risk-reward in Japan is changing. And because of that, we are going to see a lot more startups come out of Japan. Vaguely-defined, cultural characteristics really has very little to do with this.

Let me explain. Over the past thirty years in Japan, the risk-reward equation has changed dramatically, and because of that, we are seeing a lot more startups. Not as many as are coming out of America, but that’s also explained by simple risk and reward equations.

So in America today, the risk-reward equation is heavily weighted in favor of starting a company. The risk is minimal. You don’t have to risk your own money, you can draw a salary while you’re running your company, and if it blows up in your face, well, it’s not really a big deal. In fact, that kind of failure is really a badge of honor, and it can make it even easier for you to raise money for your next venture. And even a string of failures is not really too bad. Oh, you might not be able to raise money as a CEO anymore, but your experience will make you a valuable hire. There’s really no downside risk.

At the same time, the reward side of the equation is fantastic. If you do well, you are financially set for life. And if you do very well, your great, great, great grandchildren are financially set for life. In America, the risks are small, the rewards are phenomenal; is it any wonder that so many people make the rational decision, and make the low-risk, high-return choice to pursue entrepreneurship.

The risk-reward equation in Japan is different, and it used to be very different. Twenty years ago in Japan, the solution to the risk-reward equation was simple: You joined a big company, or better still, the government. You’d be guaranteed a job for life if you did your job well, you would be guaranteed steady, large promotions with increasing salary and responsibilities. If your job performance was mediocre, you would be guaranteed small, regular promotions and pay increases. And regardless of performance, there were generous company perks, bonuses and expense accounts. Back then, going into a big company was all reward and no risk.

Starting your own company, on the other hand – and keep in mind, this did not really start to change until about 20 years ago – was all risk and no reward. On the risk side of the equation, startup capital was largely only available by loans that the founder had to personally guarantee. And Japan’s strict bankruptcy laws meant that if you failed, you’d likely be carrying those debts around with you for life. And if you failed, you couldn’t simply give up on entrepreneurship and get a job at a large stable company. No, no. Large stable companies back then hired only new grads right out of university. Hiring someone who had failed in business to help you run your business would have been considered utterly absurd. If your first business failed, it’s quite likely you would’ve been screwed for life.

But what about the reward side of the equation? Well, it was pretty poor. Until the last 10 years, Japanese companies almost never acquired healthy startups. They preferred to create a division using their own employees to challenge and crush any startup that had interesting technology. No, the only successful exit was an IPO. And to be sure, those happened occasionally. But even in the best case scenario, the president of a newly IPO’d company would receive similar monetary rewards and social prestige as someone in the executive suite at one of Japan’s major corporations. So starting a company was all risk and very little reward. So no one should be too surprised that most Japanese made the perfectly rational choice and joined a large company rather than starting their own.

However, over the last 20 years or so, the risk-reward equation has started to change. Japanese companies no longer offer lifetime employment or guarantee seniority-based promotions. Entertainment allowances and expense accounts have been cut to the bone, and university students entering large companies today know they face the very real possibility of being fired in 20 years with no skill that are useful outside of that company. The risks of joining a company have gone up, and the rewards have come down.

Now with entrepreneurship, we’ve seen the opposite trends. The risks have come down. Now capital comes in the form of equity, rather than founder-guaranteed loans. Some, but by no means most, Japanese companies are willing to hire early career technical and sales staff, even if they’ve been part of a failed startup.

On the reward side, M&A activity has really picked up recently. And M&A has now become a more common successful exit than IPO’s in Japan, and the amounts have gone up as well. An entrepreneur in Japan can walk away from a successful exit with millions or tens of millions of dollars. Now, that’s not the billion or tens of billions they can aspire to in America, but it’s far more than they can earn in a lifetime working at a large company. And it’s more than enough to change the balance of the risk and reward equation.

Since starting a company has become less risky and more rewarding, we should not be surprised that more Japanese are making the perfectly rational choice to start a company today. So-called culture really has nothing to do with it.

Now it’s probably because of my science and engineering background, but the simple math of game theory, the simple balance of risk and rewards has always struck me as a far better explanation of people’s behavior than the vaguely defined cultural factors. Culture always seems to be used as a catchall label to explain differences we don’t really understand. I mean, you can call it culture if you want, but if you want to change culture, all you need to do is change the risk and reward equations.

Now, the last part of the puzzle we need to talk about, and perhaps the most important in terms of generating a true startup renaissance in Japan, is systemization. Now we won’t be able to explore this topic in much depth, because it’s just starting to happen, but I think you’ll see why it’s so important.

Worldwide, until very recently, creating a successful startup has been seen as a chaotic, semi-random process. It involved equal parts genius, luck, risk-taking and bravado. The startup success stories focus mostly on the characteristics of the founder and a few key decisions they made along the way. Of course, these after-the-fact explanations can be entertaining and sometimes motivating to the reader, and they’re certainly ego-boosting to the founders themselves, but there was very little to be gleaned in terms of practical advice.

But, in the last 10 years or so, this situation has changed. Thanks to the work of people like Steve Blank of the Lean Launchpad, Startup Owner’s Manual, and much more; Eric Ries of the Lean Startup; Alex Osterwalder of Business Model Generation; and many people like that, creating and testing innovative products, and starting and growing a company, has become a documented and repeatable process.

Now I grant you, there is plenty of room for debate as to whether these processes are really the best way to grow a company, but that’s not the point. Because on average, following these processes is a hundred times more effective than chaos. But more importantly, for Japan there is now a process. There is a clear, social understanding, acceptance and justification for the steps you need to take to launch a new product and a new company. What used to be failure is no longer failure. It’s the result of an experiment. Look at the process, it’s defined right there. What used to be seen as rejection is no longer rejection. It’s simply part of the customer validation process. If you don’t believe me, just look at the process. It’s documented right there.

You see Japan has always done very well with process. In fact, Japan’s past two economical miracles were largely powered by Japan looking at and adopting the best processes that existed in the world at the time, and then improving them. During the Meiji Restoration, the best global processes were adopted to form the basis of Japan’s new military, educational and legal systems. And in the post-war economic boom, Japan embraced and improved upon processes set down by such luminaries as W. Edwards Demming and Peter Drucker. And right now, starting a company has become systematized, and we’re seeing the rapid adoption of these documented startup processes among new Japanese companies.

Now I have no doubt that in 30 years, Japan will be a global engine, perhaps the global engine of startup innovation. Now I realize how absurd this claim sounds today. It sounds every bit as absurd as someone in 1870 saying that Japan would someday be a great industrial and military power. It sounds every bit as absurd as someone in 1950 saying Japan would rise to be great economic power. At yet, in both those cases, Japan defied the odds and not only managed to defy expert opinion and not merely catch up with the west, but Japan grew to become a global powerhouse. And we’re about to see the same thing happen with startup innovation in Japan.

Now, these one-to-one episodes tend to be controversial. So if you have thoughts about Japanese creativity, risk and processes, please drop by DisruptingJapan.com/show021 and leave a comment. I’d love to hear your opinion. You can also friend us on Facebook or follow us on Twitter @timoth3y, and despite the spelling, it’s still pronounced Timothy. It’s a silent “3.” And most of all, thanks for listening. And thank you for letting people interested in Japanese startups know about the podcast.

I’m Tim Romero, and thanks for listening to Disrupting Japan.