Japan's scientific innovation is not reaching its full capacity, which is a significant factor in the lack of emerging start-ups in the country. However, a new fundraising mechanism could reignite this potential.

For Japanese start-ups to evolve into global entities, they must establish a fresh funding paradigm that enables the creation of multiple unicorns—companies valued at over $1 billion.

Why do researchers struggle to secure funding for their innovative medical therapies? What hinders the success of start-ups? Why have Japanese pharmaceutical firms been unable to leverage the groundbreaking work of Nobel Laureate Dr. Honjo from Kyoto University in developing his Immune Checkpoint Inhibitor therapy?

Japan's scientific sector is in need of increased support and expertise.

This support comes in the form of capital. Numerous promising researchers lack the necessary funding to transition their ideas from foundational research to market-ready products. For instance, an exceptional scientist in Kyushu has identified a potential cancer treatment but is unable to secure the funds needed to establish a start-up that could move this therapy into clinical trials and eventually to patients.

A follow-up article will discuss strategies to enhance Japan's biotech talent. In the meantime, we will focus on the capital aspect.

The statistics reveal a troubling story. In 2022, venture capital investment in Japanese healthcare companies accounted for less than 2% of the amount invested in U.S. healthcare firms, 7% in China, and 6% in the EU, according to iPark, a Japanese research organization.

One possible solution for this funding gap lies in IP-NFTs, or intellectual property non-fungible tokens. Nature magazine has acknowledged IP-NFTs as an emerging alternative research funding model, highlighting their potential within strong scientific communities and advocating for broader adoption.

Why is capital access a challenge for Japanese researchers?

Despite many scientists nearing medical breakthroughs, Japan is deficient in specialized investors willing to fund high-risk, high-reward projects. Many promising therapies and diagnostics fail to navigate the well-documented "valley of death" that exists between basic research and clinical trials or commercialization. Although there are capable science-focused venture capitalists in Japan—such as UTECH, Remiges Ventures, and Kyoto University Innovation Capital—they require additional funding to assist successful start-ups in moving towards product commercialization.

Venture capital is also heavily centralized in Tokyo, which received 80% of all healthcare VC funds in Japan in 2022. Other regions are experiencing sharp declines; for example, Osaka saw only 2% of the VC funding it received in 2018. Researchers in Oita, Nagasaki, and Kyoto are having difficulties connecting with major VCs.

According to iPark, venture capital investment in Japanese healthcare companies in 2022 was just 1.9% of that in U.S. healthcare firms. The organization expressed a bleak outlook, stating, "The [Japanese healthcare] investment market is currently in a low risk tolerance stage, and this trend is expected to persist for months or even years due to rising interest rates and uncertainty in financial markets."

Encouragingly, two Japanese government agencies have made significant co-investments in science-related venture capital firms. The Japan Investment Company has partnered with firms like Miyako Capital, Atomico Venture, and AN Ventures. Additionally, the Ministry of Economy, Trade, and Industry (METI) has allocated nearly $1.8 billion for co-investments in biotech ventures, set to be distributed over several years. While these initiatives are promising, the infusion of more private capital is essential to stimulate the scientific sector and enable biotech start-ups to grow, allowing for the emergence of more success stories.

What are the limitations of traditional venture capital?

Firstly, venture capital deals in Japan are often insufficiently large to support the scaling of start-ups, particularly in the biotech sector. A venture capitalist in Tokyo noted in March 2024 that "many Japanese start-ups secure early-stage funding, but it frequently falls short of the levels required to reach critical value inflection points necessary for further investment." Another investor in Osaka remarked that "most Japanese start-ups still lack the maturity needed for VC investment, indicating that VCs are unable to nurture strong startups."

Secondly, domestic venture capitalists often lack the specialized scientific or biotech experience, coming from conservative banking backgrounds. Unlike typical foreign VCs who employ staff with biotech PhDs, Japanese VCs often do not connect their invested companies with specialized biotech networks that could facilitate growth. Thirdly, organic venture capital funding is on the decline in Japan. Overall VC transactions in Japan amounted to roughly $4.2 billion in 2023, a 21% decrease from the $5.3 billion reported the previous year, according to Pitchbook. Foreign venture capital's share of total Japanese VC investments has plummeted by 60% from 2021 to 2023, as reported by the data company INITIAL.

In summary, Japan could attract more biotech funding through private and foreign investment. Such funding would help propel biotech start-ups to achieve successful exits, whether through acquisitions or substantial initial public offerings.

Japanese start-ups would benefit from a more balanced distribution of funding across different investment rounds, as the majority of capital in Japan is concentrated in early-stage rounds. In contrast, funding in the United States is more evenly distributed between early and late-stage investments.

Insufficient University Support for Seed-Stage Biotech Startups

Funding for academic research in Japan is notably limited, restricting the number of candidates for drug discovery start-ups. This situation contrasts sharply with the U.S., where government grants and university funding provide substantial support during this research phase. The two business models differ significantly: U.S. universities operate on a self-sustaining model, largely supported by donor endowments, while Japanese universities primarily rely on student tuition and government funding, leading to a lack of resources for research. This fundamental disparity ultimately affects the level of support and funding available to academic researchers in both nations.

Insights from Foreign VCs

Discussions with foreign venture capitalists reveal persistent challenges. They argue that Japan does not have enough viable biotech start-ups to justify establishing a local office, a common requirement for investment deals. Additionally, Japan lacks successful case studies that could inspire subsequent generations of entrepreneurs; a "mafia" of seasoned professionals from successful biotech start-ups is yet to emerge. While there has been a gradual increase in the recruitment of former pharmaceutical professionals, a systemic issue remains: professors often gain promotions based on quantity over quality, resulting in a plethora of "junk patents" that are challenging for foreign investors to navigate. Language and cultural barriers further complicate matters for international investors.

Corporate Venture Capital: A Double-Edged Sword

While Corporate Venture Capital (CVC) funding surpasses independent VC in Japan, the same issues persist: insufficient capital for biotech start-ups and a low risk tolerance among CVCs. According to iPark, CVC investment in Japanese healthcare companies constituted just 1.3% of the CVC capital invested in U.S. healthcare firms in 2022. Alarmingly, CVC investment in Japan plummeted by 82% from 2021 to 2022.

The Role of Japanese Pharma Companies

Japanese pharmaceutical firms have struggled to implement the "open innovation model" of acquiring biotech start-ups rather than developing new drugs internally, a strategy that has been successfully adopted by companies in the U.S. and Europe. While initiatives like Daiichi-Sankyo’s TANEDAS and Takeda’s COCKPI-T programs have made strides in this direction, the overall scale of Japan's open innovation efforts remains significantly smaller compared to other advanced pharmaceutical markets.

A New System in Development

As demonstrated, the current investment landscape in Japan requires more than just incremental changes; it needs a complete overhaul. The anticipated influx of foreign venture capital has not materialized despite the efforts of well-meaning policymakers. Japanese biotech start-ups are not expanding quickly or significantly enough.

The classic "chicken and egg problem" applies here: the lack of investable start-ups is a consequence of insufficient investor demand, and vice versa. A new fundraising paradigm is essential.

Can IP-NFTs Drive a 1,000% Increase in Funding?

Intellectual property non-fungible tokens (IP-NFTs) could dramatically increase funding opportunities by broadening the investor base from local to global, unlocking far greater financial resources for the development of Japan's innovative therapies and diagnostics.

IP-NFTs transform outdated, paper-based intellectual property into a liquid asset that can be traded on a marketplace. This innovation revitalizes a stagnant, in-person IP market into an active online marketplace bustling with buyers and sellers.

Intellectual property has remained largely analog since the 1700s, and the transition to digital has been minimal. It may be time to modernize the antiquated IP landscape.

Why Opt for IP-NFTs in Japan?

Given that Japan produces 60% of the world's IP, it is well-positioned to adopt IP-NFTs effectively.

An IP-NFT marketplace could simplify the discovery of scientific IP for potential buyers through a platform that rigorously assesses IP assets. By operating in English, such a site would make it significantly easier for investors to navigate the complexities of Japanese patents, rather than relying on local attorneys to sift through mostly trivial claims written in Japanese.

IP-NFTs would facilitate global investment in Japanese scientific innovation. Investors could inject capital from anywhere in the world, eliminating the need for costly in-person meetings and minimizing the need for specialized language or cultural knowledge.

Simplifying the investment process will inevitably lead to increased funding.

Understanding How IP-NFTs Function

IP-NFTs serve as digital receipts that confirm ownership of specific assets. They can be viewed as a versatile technology for establishing property rights in the digital domain. Unlike fungible tokens such as Bitcoin or Ether, NFTs are non-fungible, meaning they cannot be divided into smaller units. These receipts reside on blockchain networks, typically on Ethereum-compatible platforms. When ownership is transferred, the new holder assumes control of the underlying asset.

In the biotech realm, NFTs can encapsulate real-world sponsored research agreements (SRAs). A buyer can acquire an IP-NFT in exchange for the promise of future royalty sharing, with the funds directed to the researcher developing the project. When a pharmaceutical company later acquires the IP, royalties are distributed based on the terms of the SRA, often split 50-50 or 60-40 between the researcher and the IP-NFT holder.

For example, let’s consider Dr. Tanaka, a stem cell researcher at Osaka University, who has made significant strides in research on autophagy cells for regenerative medicine aimed at combating aging. Dr. Tanaka’s team could create an NFT—through a process known as "minting"—to digitally represent a research agreement that sells 40% of future rights to the autophagy therapy. This NFT would then be listed on an IP marketplace hosted on the Ethereum blockchain. An investor from Australia could purchase the IP-NFT, gaining rights to the potential success of the research. If YY Pharmaceutical later buys the therapy for $100 million, the investor would receive $40 million, while Dr. Tanaka would earn $60 million.

This represents a significant shift in biotech financing.

Instead of securing a modest research agreement valued at $20,000, a savvy Japanese researcher could generate over $200,000 through an IP-NFT that attracts global investors. Expanding the support base directly correlates to increased funding—it's a straightforward equation.

Who Would Purchase IP-NFTs?

More crucial than the technology itself is understanding where the demand for IP-NFTs will originate. Once they become a mainstream funding mechanism for scientific research, buyers are likely to emerge.

BioDAOs are prime candidates for early adoption. These decentralized autonomous organizations focus on supporting commercial research in specific scientific fields, such as AthenaDAO for women's reproductive health or ValleyDAO for synthetic biology.

Philanthropic medical institutions are also expected to contribute, similar to Good Ventures, which recently awarded a $2.5 million grant to Dr. Hayashi at Kyushu University for research on reproductive health. In the future, grants could be structured as IP-NFTs, simplifying the process while giving grant-making organizations a stake in the success of the research. Other organizations, like the Bill & Melinda Gates Foundation, the Juvenile Diabetes Research Foundation, and the Howard Hughes Medical Institute, could follow suit.

In the mid-term, public health agencies might buy IP-NFTs to promote research in specific areas. For instance, a public health organization aiming to combat neglected tropical diseases could purchase research rights from a lab focused on discovering cures for conditions like dengue fever. Potential candidates for such initiatives include the Global Health Innovative Technology Fund (GHIT), Medical Excellence Japan, and the Coalition for Epidemic Preparedness Innovations (CEPI).

Moreover, individuals who have gained wealth from cryptocurrency investments could also become buyers of IP-NFTs, particularly those related to longevity science. Many crypto investors prefer to keep their assets on-chain rather than converting back to fiat currency. The rise of science-based communities like Vitalia and Zuzalu highlights the intersection of blockchain technology and advanced scientific funding.

Additional Advantages of NFTs: Streamlined Processes, Enhanced Data Access, and Greater Equity

Compared to traditional science funding, IP-NFT-based financing offers several benefits:

• Reduced Legal Complications: Typical IP licensing deals can take 4 to 9 months, whereas IP-NFT agreements can be finalized in as little as 3 weeks.
• Improved Data Sharing: Researchers can access broader datasets, increasing the likelihood of groundbreaking discoveries.
• Enhanced Replication: Scientific datasets are preserved digitally within the IP-NFT, allowing other researchers to utilize them, thus conserving valuable resources.
• Publishing Opportunities: Decentralized science (DeSci) offers new incentives, open review processes, rapid turnaround times, and better access for researchers.
• Equity: NFT-based science funding transcends geography, class, race, gender, and academic affiliation, providing more opportunities for entrepreneurs outside of Tokyo.

The Potential for Deep Tech Unlocked

With adequate support, a revitalized scientific sector could significantly enhance Japan's economy. IP-NFTs offer the necessary fuel and global connectivity. By attracting capital, IP-NFTs would encourage the international scientific community to provide brilliant researchers with the business management support needed to transform their scientific discoveries into high-growth enterprises.

For those interested in exploring the decentralized science (DeSci) movement facilitated by IP-NFTs, further resources are available.