For the Creation of “Expected Future Profits.” Aiming for a Business Model That Balances Social Issues with Company Profits

Today, open innovation co-created with other companies is no longer uncommon. In an era of rapid technological advancement, diversifying customer needs and consumer lifestyles, and other dramatic and unpredictable changes in the world, many major companies are focusing on the establishment of CVCs and accelerator programs to become competitive.

Mitsubishi Estate is no exception. They have locations such as EGG JAPAN and Inspired Lab in the Daimaruyu area (collective name for Otemachi, Marunouchi, and Yurakucho; the same applies hereafter) and are becoming a collaborative platform for major companies and startups.

Mitsubishi Estate has overcome a number of challenges, including the bursting of the bubble economy and the global financial crisis. In this, they knew they cannot survive with hardware alone. What is the meaning of the actions taken by Mitsubishi Estate? We were able to sit down and talk to Michiko Ashizawa, an associate professor at Yokohama City University who specializes in startup ecosystems, and Hiroki Ito, the director of the xTECH management department at Mitsubishi Estate. We asked them about why startups are needed in Japan today and the role Mitsubishi Estate needs to play.

INDEX

・Creating new industries is essential to bridge the gap to the U.S. and China, which has been widening since the 1990s
・The training and business models of entrepreneurs between the 2000s and now are very different
・It is not unrealistic to combine the data of major companies with startup technologies and ideas to create a world-leading industry
・Mitsubishi Estate, which overcame the crisis of the 1990s and embarked on “urban development” as an ecosystem
・Key point in revitalizing the ecosystem is the “stationing of executives of major companies in collaboration offices”
・The only way to increase corporate value is to “grow the company by solving social issues”
・Key points

Michiko Ashizawa
Associate Professor, Yokohama City University
She joined the International Department of the Century Audit Corporation (currently the International Department of KPMG AZSA LLC) in October 1996. After obtaining an MBA in 2003, she was involved in corporate management at IRCJ and Advantage Partners. She has been holding her current position since April 2013. At present, she is mainly engaged in research on startup ecosystem formation. She is also focusing on policy proposals and their realization based on research. She also serves as an external officer of three listed companies (Netyear Group, NEC Networks & System Integration Corp., and NHK Spring Company) and as a member of various committees in Yokohama City.

Hiroki Ito
General Manager of Mitsubishi Estate xTECH Management Dept. (*Title at the time of interview)
He joined Mitsubishi Estate Co., Ltd. in 1992. After working in the Leisure Division, the Sapporo Branch, Ryoei Building Management Co., Ltd., and Mitsubishi Estate Property Management Co., Ltd., he assumed his current position in April 2018.

Creating new industries is essential to bridge the gap to the U.S. and China, which has been widening since the 1990s

“If Japan does not create new industries, the gap between Japan and the U.S. and China will only widen.”
This is what Ashizawa said about why Japan needs startups at the beginning of our conversation.

Ashizawa: If we look at the Global Nominal GDP Ranking/Trends by Country [1] published by the IMF, Japanese GDP has remained almost unchanged since the 1990s. However, the GDPs of the U.S. and China have been rising, with China surpassing Japan in 2010 and the gap only widening after that.
Behind the growth in the U.S. and China is a new digital-based business model that was introduced in the 1990s. Value is gathered mainly by large platformers, and in 2019 the market capitalization of the five “FAAMG” (Facebook, Amazon, Apple, Microsoft, Google) exceeded the aggregate market capitalization of approximately 2,170 companies in the First Section of the Tokyo Stock Exchange [2].
Market capitalization is the point here, and it shows the gap that exists between Japan and the U.S., including not just current profits but also expected future profits.”

Ashizawa explains the difference between the U.S. and China and Japan from a macro perspective. Based on the current situation in which there has been so much difference, she looks back on the work performance of her own generation.

Ashizawa: “Google, Amazon, and Facebook are companies founded after we graduated from university. What were we doing while people of the same generation were doing all this overseas? Our parents’ and grandparents’ generations have simply maintained the industry they created. I do not think we have created anything for the future.
For Japan to bridge the gap with other countries and become globally competitive, we must also create new industries. For this reason, the growth of startups is indispensable.”

Ito, who is the same generation as Ashizawa, also looks back on his work life till date.

Ito: “The 1990s, when we started working, was exactly when the bubble burst. As soon as we got out into the society, the world was desperately trying to stem the economic downturn and dispose of it later. In the 2000s, the rise of IT companies showed signs of a temporary economic recovery, but those in the real estate industry were the last to benefit from the economic recovery. We were starting to see the real estate industry finally recovering in 2006, and the Lehman shock triggered by subprime loans subsequently happened in 2008.
It is often referred to as the ‘lost 30 years,’ but as Professor Ashizawa says, our generation was at the mercy of problems that occurred in front of our eyes and we did not have the means to prepare for the future.”

The training and business models of entrepreneurs between the 2000s and now are very different

Although it lagged behind the U.S., it is not that there was no IT venture boom in Japan. In the “Third Venture Boom,” which occurred in the 2000s, companies grew into the mega-ventures we have today one after another.

Ashizawa: “We have the ‘Third Venture Boom,’ which started with what used to be Livedoor that appeared just before 2000. However, this venture boom was very different from the current “Fourth Venture Boom.” Society has failed to interpret the unique culture of venture companies, and they seem to be viewed as ‘suspicious and sketchy.’
I think that is why even Mitsubishi Estate and other major companies were unable to support startups using their clout at that time.”

Ito: “It is true that compared to the “Fourth Venture Boom,” which has continued since 2013, the situation at that time was significantly different. Quite a few entrepreneurs at the time had a flashy image, including their lifestyles. While this was an expression of status in itself, it was not a familiar presence for university and graduate school students.
However, what I feel when I interact with young entrepreneurs these days is that they seriously consider how to use their technologies and ideas to change and contribute to society. Of course, I think they are also thinking about economic success, but I primarily feel that they are motivated to contribute to the resolution of social issues and to be seen and respected by fellow entrepreneurs.”

Ashizawa: “The third and fourth booms differ greatly in not only the attitudes of entrepreneurs, but also the business models. Specifically, in the third boom, B2C venture companies were the mainstream, but in the fourth boom, most have been B2B businesses. In particular, SaaS businesses, that is, startups that solve corporate issues through tech, are growing in popularity.
When it comes to B2B businesses, startups also often engage with major companies. You do not go to a major company in a Ferrari when conducting business and you also need suits. We must also remember the etiquette unique to each industry, and this may be another reason why we are different from the third boom entrepreneurs.”

It is not unrealistic to combine the data of major companies with startup technologies and ideas to create a world-leading industry

Currently, the “suspiciousness” has disappeared, and the startup’s social status is increasing. Many companies are embarking on startup support. Ashizawa explains the role of major companies in the startup ecosystem.

Ashizawa: “Major companies have resources to support new industries in at least two senses. One is capital. Major companies have not previously had investment opportunities and have accumulated capital. In a mature society, many companies have been worried about how to take risks and invest in growth opportunities, accumulating cash without being able to use it.
The other is networks. Major Japanese companies are deeply rooted globally. The network of major companies will be very useful for Japanese B2B startups to grow in the future. Making good use of big companies has become an important strategy in growing startups.”

Ito: “Mitsubishi Estate, including contact points with about 4,300 major companies such as those with offices in the Damaruyu area, considers it our responsibility to support the growth of startups by utilizing our own resources and as one of the values that we should fulfill. It is not easy to support startups. We have to constantly seek the best approach, while hitting walls as we do this.”

Ashizawa says that partnerships between major companies and startups in Japan will also provide opportunities for Japan to lead the world in the future. What lies behind this is the “super-low birthrate and aging society” that awaits Japan.

Ashizawa: “Until now, digital businesses that are completely online, such as those represented by FAAMG, have been the main battlefield for startups. However, from now on, we will shift to businesses that integrate manufacturing with digital.
Japan, which lagged behind the world in digital business, will be in a different place if manufacturing becomes involved. There remain a lot to be explored in Japan, and we have accumulated a lot of data. It is not unrealistic to create industries that can lead the world by combining the data possessed by major companies with startup technologies and ideas.”

Ito: “Japan is an advanced country in terms of the issues we face. Japan is the first country in the world to become a super-low birthrate and aging society, but this is something that other countries will also face at some point. If Japan can come up with early solutions as a result of cooperation and co-creation between startups and major companies, we will be able to lead the developed countries.”

Mitsubishi Estate, which overcame the crisis of the 1990s and embarked on “urban development” as an ecosystem

Amid the demand for collaboration between major companies and startups, Mitsubishi Estate is promoting open innovation by creating platforms. Now, Mitsubishi Estate has become a representative of “major companies that are proactive in supporting startups,” but the path to reach this point has been long-winded.

“I do not think it is normal for a company as large as Mitsubishi Estate to start something new,” says Ito, telling Ashizawa about what led the company to start supporting startups.

Ito: “As a real estate developer, we have long focused on the ‘hardware’ of office buildings, and we have accumulated this know-how. However, while making full use of these strengths, we recognized from an early stage that hardware alone cannot differentiate us from our competitors.
If we compete only in the number of buildings, we cannot win even in Japan. However, our strength is ‘area development.’ For example, since we own and operate buildings concentrated in the Daimaruyu area, we can take the initiative to ‘cause chemical reactions between a startup in this building and a major company in the next building.’
Until then, we had tried to demonstrate value through individual buildings, but we have shifted our direction to position this ecosystem as an important value for ‘urban development.’”

Ashizawa: “Normally, it is not easy for major companies to make such a bold shift. New initiatives that are not in the existing framework can be felt as risky and fragile. It may be good for other major companies to take note of how Mitsubishi Estate made such a major change.”
Mitsubishi Estate was able to change the steering significantly because it was in a major crisis. If the business had been going well, they may not have been working on building a startup ecosystem as it is now. Ito continues:

Ito: “At the end of the 1990s, the streets had lost their liveliness so much that major financial newspapers were talking about ‘the twilight of Marunouchi.’ The roadsides of Marunouchi Nakadori were occupied by bank branches, and the shutters were also down after 15:00 on weekdays. Not many people walked the streets on the weekends; therefore, cars could be parked wherever they wished. We saw these headlines and it was like the company was hit by a big earthquake.
With a sense of crisis, we were eager to see how we could regain the bustle of the city. The management team sought the opinions of younger employees to invigorate commerce, inviting people to events and putting effort into organizing them, and seriously engaging in attracting overseas companies. If the business had remained steady in the 1990s, we would only have thought about extensions of our previous business and we would not be what we are now.”

Ashizawa says that the large shift of major companies like Mitsubishi Estate was also attributable to the tolerance of Japanese shareholders.

Ashizawa: “Corporate culture is not the only reason that major companies cannot invest in projects for which profits are not obvious. Shareowners also do not allow it. In the U.S., shareowners have a strong presence and need shorter-term returns. The reason why Mitsubishi Estate changed is probably due to the fact that a broad perspective, as represented by ‘three-way satisfaction,’ has taken root in Japan’s management from a medium-to long-term perspective in a good sense.
Considering this, it can be said that Japan is in an environment that makes it easier to take on challenges compared to other countries. If you are not distracted by immediate sales and provide value for long-term profits, it will eventually show up as figures in market capitalization.”

Key point in revitalizing the ecosystem is the “stationing of executives of major companies in collaboration offices”

Ashizawa saw the efforts of Mitsubishi Estate and told us the important steps in creating an ecosystem.

Ashizawa: “There are several important points for the ecosystem in the district and base to work well. The first is ‘uniqueness that captures the characteristics of the town.’ Looking at Tokyo, we have also created ecosystems in Shibuya and Marunouchi, each of which has its own characteristics. Mitsubishi Estate has successfully created an ecosystem by capturing the characteristics of Marunouchi.
What is needed next is the existence of strongly cohesive persons who become a hub, like Mr. Kamada at TomyK in Inspired Lab of Mitsubishi Estate. This hub must not be an intermediate person. It is important to place people with strong influence at the hub of the ecosystem, because the network concentrates on those with strong influence.
Lastly, you need ‘to station persons who have the authority of the major company.’ I mentioned earlier that open innovation with major companies is important for startup growth, but the impact will be weakened if major corporate managers at this time do not have the authority to make decisions. This is because even if collaboration is likely to arise, it will take time to bring it back to the company and it may not be possible to pass through executives. It is important to create an environment in which those who have the right of approval always reside in the office and collaboration is created at that place.”

Ito: “At Inspired Lab, for example, ENEOS has a Dejima office to create new businesses, including collaboration and co-creation with startups, and a number of executive officers and other members stationed there. The company also holds events to generate ideas for new businesses, but we are also using Lab as a venue. We hope that you will be able to use Lab successfully to engage the entire company.”

Ashizawa: “It will be good to see an increase in the number of companies like ENEOS in the future. If all the major companies that are currently renting space station decision-makers, the ecosystem there would enhance dramatically.”

The only way to increase corporate value is to “grow the company by solving social issues”

At the end of the conversation, Ashizawa talks about what the companies should do in the future.

Ashizawa: “It is to have a stronger awareness of raising corporate value. To this end, please work to resolve social issues. There are two reasons for this.
The first is that new businesses always arise where social issues are resolved. The other is to motivate people. Addressing social issues puts a flame in people’s hearts.
Now that it is difficult to hire young people due to the declining birthrate, what is needed to hire outstanding people to do socially meaningful work? By increasing the number of young employees who are motivated, the minds of the middle class and above will be ignited, and the morale of the entire company will be raised.
However, there is no point in addressing social issues under the subject. As a management strategy, please make efforts that will lead to the growth of the company. Even if we ride the spirit of the times, we must continue to earn profits for the company.
Today, technological advances are increasing the number of options available for action. There are growing opportunities to build a business model that can simultaneously solve social issues and achieve corporate profits. By boldly taking on challenges, we can aim to recover the delays of the lost 30 years.”

Ito: “We believe that it is important not to deprive a person of their chance because of a single failure when starting something new. I hear that many large companies hold people responsible for failing more than they need to or do not give another opportunity. It is only natural to conduct a thorough cause analysis, but you cannot take on challenges even when you become overly afraid of failure.
Even from the perspective of shareholders, rather than getting people who fail to take responsibility, you should want to make use of that failure in your next challenge while knowing your organization. At the beginning, Ashizawa mentioned that market valuation includes expected future profits, and this is precisely the part of that. I believe it is also important to appeal to the stakeholders to make the most of their failures.
In any case, it is important to create a corporate culture that encourages employees to take on challenges and allows them to utilize failures in their next challenge. In that sense, entrepreneurship is a key to developing the human resources necessary for not only for entrepreneurs but also major companies.”

Major companies and startups will take on a range of challenges to solve social issues and lead the world. Such kind of future is spreading to the point where the startup ecosystem is ready.

*1 https://www.globalnote.jp/post-1409.html
*2 https://www.nikkei.com/article/DGXMZO58879220Y0A500C2EA2000/