Why is the sales cycle in Japan relatively slower than in other parts of the world?

One surface-level explanation is "credit management" by companies.

Credit management refers to the process of evaluating and managing the credit risk involved in dealings with customers or business partners. It involves assessing the financial stability and creditworthiness of a company to ensure they can meet their payment obligations. The primary goal is to minimize the risk of non-payment or default, helping businesses maintain stable relationships.

Key steps in credit management include:

1. Credit assessment: Evaluating a potential partner's financial health and business operations to determine their reliability.
2. Credit evaluation: Based on the assessment, the company’s credit risk is determined, often through credit scores or ratings.
3. Setting credit limits: Establishing specific credit limits for each customer based on their evaluation, determining how much business can be conducted safely.
4. Monitoring: Regularly tracking the financial and operational performance of business partners to ensure credit limits remain appropriate.
5. Risk mitigation: In cases of payment delays or defaults, measures like insurance or legal action can be implemented to recover losses.

In essence, credit management helps businesses avoid financial loss by carefully managing the credit risks of their partners or customers.

This may sound like what venture capital firms do, but in fact, regular companies engage in this process frequently. When I worked in a Japanese corporation listed on the Tokyo Stock Exchange with around 3,000 employees, the company had very strict rules about who it could engage with for new deals.

The company relied on external corporate rating tools, such as TSR: https://www.tsr-net.co.jp/ to assess new customers or partners. If those companies didn’t meet the criteria—even if they were potential customers—the company would decline their inquiries. I understood the rationale behind this policy, as it aimed to avoid outstanding receivables, which could pose risks to the company's cash flow.

TSR

Why are Japanese companies particularly reluctant to work with early-stage startups?

The "credit management" mentioned above is, of course, one reason, but there are other factors at play.

Japanese companies tend to be highly cautious when evaluating the risks associated with business transactions. As a result, startups are often seen as high credit risks for the following reasons:

• Financial instability: Startups are typically younger companies with little to no established financial track record, creating uncertainty around their ability to sustain stable revenue and cash flow. This leads to a higher perceived risk of bankruptcy or default.
• Lack of credit information: Startups generally have limited histories with credit rating agencies and lack a reliable record of transactions, making it difficult to assess their risks accurately. Many Japanese companies emphasize past transaction records, so they are cautious when dealing with startups.
• Concerns about stability: Since startups are often in a growth phase, their business models or long-term sustainability may not be fully validated. If things don’t go according to plan, there’s a risk of unexpected bankruptcy or disruption in the business relationship.
• Payment risk: Startups often face challenges in managing their cash flow, increasing the likelihood of payment delays or defaults. In contrast, Japanese companies prioritize stable payment performance and are thus inclined to avoid these risks.

Given these factors, many Japanese companies prefer to engage with more established businesses that have stable financial foundations and proven track records. However, if a startup can secure funding from credible sources, such as venture capital, or offers innovative technology or services, business deals may still be possible.

For startups to expand their opportunities in the Japanese market, managing credit risk and taking steps to boost credibility—such as offering transaction guarantees or forming strong business partnerships—are essential.

Building trust in the Japanese market is not something that can happen overnight, and it’s indeed challenging. The next question, then, is why large Western companies are more willing to work with startups, while Japanese companies tend to be more cautious. What cultural and economic factors drive this difference?

Why do large Western companies work with startups despite the risks?

There are several cultural and economic reasons behind this:

1. Strong focus on innovation: Western companies, especially in the U.S., prioritize promoting innovation. Startups often offer new technologies and business models, and large corporations look to incorporate these to stay competitive. Partnering with startups is seen as a way to quickly adapt to market changes and accelerate growth.
2. Risk-tolerant culture: Western cultures, particularly compared to Japan, tend to embrace risk-taking. In the U.S., the idea that "failure is a part of success" is widely accepted. This mindset allows large corporations to accept a certain level of risk, with the hope of long-term gains from startup partnerships.
3. Investment perspective: Western companies often view relationships with partners as more than just buyer-supplier dynamics. Working with startups is seen as an opportunity for future investment or strategic partnerships. By supporting startups, large companies hope to benefit from their growth.
4. Open innovation strategy: Many Western companies adopt open innovation strategies, which involve actively integrating external ideas and technologies to drive internal innovation. Startups play a critical role in this, as their flexible business models and cutting-edge technologies offer significant value to larger corporations.
5. Collaboration with venture capital and accelerators: In the West, venture capital (VC) and accelerators are well-developed, making it easier for startups to secure funding early. Large corporations often collaborate with VCs and accelerators, helping reduce the risk of working with startups while sharing in the potential rewards.
6. Agile business models: Many large Western companies adopt business models that emphasize speed and flexibility. They value the agility and responsiveness of startups. Collaborating with startups allows large companies to respond more rapidly to market needs than developing innovations in-house.
7. Balancing short-term risk with long-term returns: Western companies often balance short-term risks with long-term returns. While working with startups may present some short-term instability, there is strong belief that successful partnerships can lead to substantial market share gains and technological innovation. This long-term outlook encourages them to engage with startups despite the risks.

In contrast, Japanese companies often prioritize stability and proven track records, making them more cautious when dealing with startups. However, more Japanese companies may adopt Western approaches in the future.

At the core of this difference is how companies perceive and handle risk. There is no right or wrong approach—both perspectives are important for companies. The key is to acknowledge these differences and create feasible strategies when entering new markets.