Why Fukuoka is Japan’s most innovative city

Fukuoka is being positioned as Japan's answer to Silicon Valley - a breeding ground of new start-ups.

Sandwiched between the mountains and the sea in Japan’s far-west corner, Fukuoka is a city trying to reinvent itself. In a land long dominated by mega-conglomerates and the inexorable pull of Tokyo, the country’s fastest growing urban centre wants to become Japan’s answer to Silicon Valley.

Despite the country’s reputation for hi-tech wizardry, Japan’s start-up scene remains surprisingly stunted. The world’s third largest economy has only one “unicorn” – a private company valued at over $1bn – compared to the United States’ 127 and China’s 78.

Fukuoka’s charismatic young mayor is determined to change that, and he’s convinced the city has the ingredients to replicate the success of the US’s west coast innovation hubs. In 2011 he declared Fukuoka would become Japan’s start-up city, and since then it’s risen to the top of the country’s business creation league tables.

Whether it can truly rival the capital remains to be seen as funding and talent continues to concentrate in Tokyo, but the city’s leaders have a convincing pitch. A tight-knit start-up community, a young workforce and an affordable city that promises that elusive goal of a work-life balance – something they hope will appeal to a new generation of entrepreneurs keen to avoid the Tokyo rat race.

Shortly after being elected as the city’s youngest ever mayor in 2010, former TV presenter Sōichirō Takashima, 44, visited Seattle and was struck by the similarities to his hometown. Both are compact coastal cities surrounded by nature, with well-developed transport infrastructure and plentiful human resources, he says. In Seattle those ingredients support titans like Amazon and Microsoft, as well as a thriving start-up ecosystem. Takashima believes Fukuoka can replicate that success and help drag the Japanese economy out of a rut it’s been in since the early 1990s.

“The presence of start-ups which create new innovation and value is necessary to break economic stagnation,” he says. “With that in mind, I positioned start-up support as our city’s growth strategy.”

Since then he’s been busy. In 2014 the central government granted his request to designate the city as a “national strategic special zone” for start-ups, which has allowed them to cut corporate taxes for new businesses and create a special visa for foreign entrepreneurs. It’s also allowed them to relax planning rules so they can redevelop the city centre and wireless regulations to create a faster and simpler licensing process for experiments and technology demonstrations aimed at the Internet of Things (IoT), which embeds sensors, communication and computing hardware into everyday objects.

Takashima has also been aggressively promoting the city at home and abroad, leading business delegations and signing cooperation deals with start-up hubs like San Francisco, Taipei and Helsinki which provide support and introductions for Fukuoka start-ups looking to expand abroad or foreign start-ups looking to enter Japan.

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Back in Fukuoka, the government has renovated an old school in the central Tenjin business district to create Fukuoka Growth Next (FGN), a one-stop shop for budding entrepreneurs which opened in 2017. “Simply put, our mission is to raise future unicorns,” says Yasunari Tanaka, director-general of the FGN secretariat.

Facilities include discounted office space, a prototyping lab, a start-up cafe where consultants provide free business, legal and accounting advice, and the Global Startup Centre to help foreign founders set up in Fukuoka or local entrepreneurs expand abroad. There’s also a bar to lubricate the networking process and a regular schedule of talks, seminars and matching events to link start-ups with customers and investors.

While the city’s first unicorn is probably still some way off, there’s been encouraging progress. The initial goal for FGN was for tenants to raise 500m yen (£3.37m) by September 2018, but they smashed that target, raising 7.1bn yen (around £50m). Fukuoka also has the highest new business creation rate (the percentage of companies newly registered in a year) in the country at 7%, well above Tokyo’s 4%.

The city has some strong fundamentals in its favour. Japan’s ageing population and shrinking workforce are causing politicians and economists sleepless nights, but Fukuoka is the fastest growing city in the country, and has the highest proportion of young people. Rent is about 60% of that in Tokyo and the city is closer to Seoul and Shanghai than the capital, leading it to be seen as Japan’s "gateway to Asia".

That combination is what prompted Fukuoka native Yasuhiro Ide to transfer the headquarters of his e-commerce business New World back to his hometown. He’d moved to Tokyo in 2015 in search of business opportunities, but last year he decided his goal of expanding into China would be easier from Fukuoka. “In Fukuoka it's easy to recruit engineers and designers who are low cost and office costs are less,” he says. “And if I want to go to China it’s two hours by plane. From Tokyo it’s four.”

The compactness of the city also means the entrepreneurial community is both tight-knit and diverse, says Hashimoto Masanori, CEO of software company Nulab and a veteran of Fukuoka’s start-up scene. That makes team building and networking much easier. “If I go drinking I will bump into someone at a related IT company,” he says. “In Tokyo I go to community events and it’s only programmers, but in Fukuoka I go to these events and I meet programmers, designers, marketers.”

Another key plank in the government’s pitch is the city’s “liveability”. The international airport is a 15 minute metro ride from the centre and commutes are short, with walking or cycling to work common. You’re never far from nature with mountains looming at the city limits and picturesque beaches a short drive away. “Fukuoka is more laid back,” says Tanaka. “If you want to seek a good work-life balance Fukuoka is a very attractive city.”

That was what drew French entrepreneurs Yasmine Djoudi and Thomas Pouplin to settle in the city.

They first came as part of a student exchange program and when they decided to launch their start-up Ikkai, an online platform for students to find short-term work, they chose to stay in Fukuoka rather than move to Tokyo

“The lifestyle here is really nice,” says Djoudi, adding that the lower costs were also a major boon when starting out. “We didn't regret it, because we realised that the burn rate is way lower. We couldn't have done half of the things we did in Fukuoka if we went to Tokyo.”

The pair were the first recipients of the city’s start-up visa and helped shape the application process. Pouplin admits that language barriers and inflexible regulations still make Japan a tricky place for outsiders but he says Fukuoka is ahead of the curve in making things easier for foreign founders.

The city’s re-branding has generated significant buzz in both the domestic and foreign press, but despite the positive coverage two key ingredients remain in short supply – talent and funding. There’s limited venture capital available in Fukuoka, says Pouplin, so when start-ups grow they generally have to head to the capital for investment and customers. “Fukuoka is a great starting place, but it's not a great growing place,” he says.

One of FGN’s most successful graduates is Skydisc, which uses artificial intelligence to help customers boost factory productivity and has been pegged as a “future unicorn” by financial newspaper The Nikkei. Overseas strategy officer Yoshihiko Suenaga is full of praise for the city government’s approach and says their time at FGN opened a lot of doors. “They gave us cheap rent and a lot of opportunities,” he says. “We actually met one of our partners as well as one of our big clients at a matching event there.”

But he admits they are only staying in Fukuoka because it’s the founder’s hometown. Their operation is now split between Fukuoka and a Tokyo office that opened three years ago because most of their clients’ headquarters are located there. Talent was also a big driver – while it’s possible to find competent developers in Fukuoka, more advanced technical skills are concentrated in the capital. “AI-focused engineers are relatively difficult to find in places other than Tokyo,” he says.

In an attempt to coax this kind of talent to the city the government recently declared itself an “engineer-friendly city” and followed up with recruiting events in Tokyo. But even Fukuoka’s brightest find it hard to resist the pull of the capital, says Suenaga, who spent 15 years in Tokyo himself. He hails from neighbouring city Kitakyushu and only returned due to family reasons. “After graduating you’ve got no choice but to go to Tokyo,” he says. “That’s the regular mindset.”

That’s not to say perceptions of Fukuoka aren’t changing in the capital. Shun Nagao, who runs the Tokyo office of global venture capital firm White Star Capital, says in the last two years there’s been a lot more buzz around the city thanks largely to the mayor’s efforts. It’s still seen as a relatively immature ecosystem though, he adds.

“I don't think there's an understanding about what Fukuoka excels in,” he says. He thinks the city needs to do a better job of branding, pointing to Kyoto, which has developed a reputation as a hotbed for hardware start-ups by building an ecosystem around the world-class Kyoto University and the city’s big electronics companies like Kyocera, Omron and Rohm.

One major opportunity for the city, says Nagao, is its proximity to Asia, which could allow it to attract talent from abroad rather than going toe-to-toe with Tokyo. But in terms of attracting more funding, he thinks there needs to be some clear success stories or big valuations before investors commit serious resources to the city.

That’s something officials in Fukuoka recognise, but they’re also aware that laying the groundwork for that kind of success takes time. Their current target is to create one hundred start-ups worth 1 billion yen (£6.8m) in the next five years, says Naokatsu Matono, director of the city’s start-up department. “To make a unicorn we believe first we need many start-ups,” he adds. “In the future, our goal is to help one of those one hundred companies become a unicorn.”

And the city isn’t resting on its laurels. FGN closed down for a revamp at the end of March and when it relaunches under new management in May it will team up with a well-known international start-up accelerator to mentor and help fund a new batch of start-ups.

The government is also in the process of creating an ambitious new “smart city” – an urban area that uses technology like IoT and data analytics to enable smarter service in areas like transport, utilities and government – on a 124-acre former university campus within Fukuoka, just 2.5 miles (4km) from the centre.

Typically these kinds of projects end up on greenfield sites far from urban centres or layer technology on top of existing infrastructure, says Kouichi Matono, who is leading the project. This smart city will be unique because it will be built from scratch in the heart of the city with the infrastructure and technology developed in unison.

Demolition work has already started, and the government plans to partner with a consortium of companies to create an open source test-bed for advanced technologies like 5G, driverless vehicles and telemedicine. The aim is to spur the creation of many new start-ups, says Matono, and act as a proving ground to show the rest of the country how to use technology to solve Japan’s most pressing problems.

“We are trying to create a new lifestyle not just buildings,” he says. “Japan has a lot of issues. The number of old people is growing and we have a small birth rate so we’re going to have problems with labour and healthcare. That’s why we want to use new technology like AI and IoT to solve these issues.”

Developing the ecosystem of talent, expertise and funding required to support the kind of “living lab” the mayor has previously said he want to turn Fukuoka into will take time. But the city’s unique combination of entrepreneurial energy, quality of life and a supportive government makes it as good a place as any for those trying to build a more liveable future.

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