We recently met with Takao Inoue of the newly formed Innovation Network Corporation of Japan (INCJ) in Tokyo. Formed through the support of Japan’s government, INCJ aims to encourage development of emerging technologies, as well as the adoption of an “open innovation” model among Japanese corporations. The vision is to enable industrial giants from Sony to Toyota to develop new products more rapidly by accessing inventions from universities, start-ups or other large corporations. Inoue explained that INCJ has been given 90 billion yen ($1.0 billion) to invest, with commitments for up to 900 billion yen ($10.2 billion) over the next 15 years. The Japanese government committed to providing 90% of the funds, with the balance coming from private firms, such as domestic leaders like Panasonic and Tokyo Electric Power, and overseas player like General Electric. INCJ plans to pursue investments in “environment and energy, life sciences, electronics, machinery and components and advanced materials,” with additional areas possible in the future.

As part of its role, INCJ will serve as an early-stage venture capital (VC) or angel investor. It will provide funds to secure promising intellectual property from universities and government labs, and back start-ups and spin-outs – filling a gap in which traditional Japanese VCs have been unwilling to invest more than small sums. However, Inoue-san noted, INCJ’s mission isn’t limited to early-stage investments. It will also provide larger investments to fill capacity expansions and project finance needs – a role that’s missing in the West as much as Japan. Such projects require larger sums than VCs are willing to offer, or impose too much technological risk to entice traditional private equity investors.

It’s still early days for INCJ. The firm was established in June, and won’t make its first investments until early 2010. But clients should watch to see if it can maintain its political and private support, and succeed in bridging gaps in Japan’s existing financing model, which make the country poorly suited to fund emerging technologies in energy, environment and materials.

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