Merito: Accelerating Japanese Science Investment

Japan’s science engine could run faster with better access to global capital. That access can come from digitizing science ownership on Merito’s platform. Why?

Promising researchers just don’t have enough capital to power their ideas from basic research to commercial products. If a brilliant scientist in Kobe discovers a potential breakthrough cancer therapy, she often lacks capital to build a start-up to take this new therapy to clinical trials and then to patients.

Fuel could come from companies, medical foundations, and investment groups that discover — and then fund — science teams on Merito’s digital platform.

Why did Nature magazine recognize digital science ownership as “growing as alternative research funding models,” that it had “strong scientific communities” and urged, “we should get on board”? We’ll find out below.

Japanese Researchers Have Struggled to Get Enough Capital

The stats tell the story. In 2022, the amount of venture capital investment in Japanese health care companies was less than 2% of U.S. investment in health care companies, 7% of Chinese companies, and 6% of EU companies, according to the Japanese research organization iPark. The outlook remains gloomy if trends continued, iPark researchers wrote: “The [Japanese healthcare] investment market is currently in a low risk tolerance stage. Because of the increased interest rate and uncertainty of the finance market, this trend will continue for months or years.”

Despite many scientists being on the verge of medical breakthroughs, Japan simply lacks the specialized investors needed to fund high risk, high return ideas. Too many promising therapies and diagnostics fail to cross the well-documented “valley of death” in between basic science and clinical trials or commercialization. The valley of death takes place because of two main reasons:

• Lack of visibility to relevant investors: Scientists struggle to acquire funding from private investors, especially those outside of major U.S. universities. Funding stays local, missing the giant pools of global capital, especially high-risk capital from wealthy crypto investors.

• Difficulty of determining the value of early-stage biopharma assets: Researchers and funders find it challenging to put a number on early-stage research value.

Venture capital is also extremely concentrated in Tokyo, which received 80% of all of Japan’s healthcare VC funds in 2022, according to iPark data. Other regions are declining sharply. In 2022, Osaka received 2% the amount of VC funding that it received in 2018. Researchers in Oita, Nagasaki, and Kyoto struggle to get connectivity to any major VCs.

Chart courtesy of iPark Institute, 2023

Why hasn’t traditional venture capital worked?

One, venture capital deals are often not large enough to enable start-ups to scale in Japan, especially biotech start-ups. A Tokyo-based biotech venture capitalist said in March 2024 that “many Japanese startups receive early-stage funding, which though often falls short of the amount needed to reach a significant value inflection point necessary for securing later-stage investment.” Another Osaka-based venture capitalist said in March 2024 that “most Japanese startups are still too amateur to be invested in by VCs. In other words, VCs lack the ability to grow strong startups.”

Two, domestic-based venture capitalists often lack the specialized scientific or biotech background, coming from conservative banking backgrounds. Thus unlike typical foreign VCs who have biotech PhDs on staff, domestic VCs in Japan often do not plug their invested companies into specialized biotech communities to nurture their growth. Three, organic (non-public supported) venture capital (VC) funding is trending down in Japan. Overall VC deals in Japan totaled approximately $4.2 billion in 2023, down 21% from $5.3 billion in the same period last year, according to Pitchbook data. As a percentage of total Japanese VC investments, foreign venture capital has fallen 60% from 2021 to 2023, Data company INITIAL reported.

Limited University Support for Seed-Stage Biotech Startups

Academic research funding is notably limited, limiting the candidates for drug discovery start-ups in Japan. This contrasts this phase of research receives substantial support in the United States through government grants and university funding (oftentimes from alumni or corporate donations). The two business models are quite distinct. In the United States, universities operate on a self-sustaining model, for university endowments (from donors) heavily support the start of seed state research. The surplus from student tuition and other fees can then finance research activities at U.S. universities. On the other hand, Japanese universities rely primarily on student tuition fees and government support to sustain themselves, thus lacking enough resources for research. This fundamental difference affects funding for academic researchers in each country.

What do Foreign VCs Say?

Foreign VCs say Japan lacks enough investable biotech start-ups so foreign VC funds are not yet willing to set up an office in Japan, a prerequisite for most investment deals. Japan also has not yet seen success stories that could then create the subsequent waves of entrepreneurs: the so-called “mafia” of veterans from successful biotech start-ups does not really exist yet. To be sure, the recruitment of ex-pharmaceutical people is gradually increasing . Furthermore, because professors (globally) get promoted based on volume and not quality of research or patents, Japanese universities are awash in “junk patents” which foreign investors struggle to filter. These problems are in addition to the language and cultural barriers for foreign investors.

What about Corporate Venture Capital?

While Corporate VC (CVC) size surpasses independent VC in Japan, the same problem persists: not enough capital is available for biotech start-ups, and CVCs have too little risk tolerance. In 2022, CVC capital invested in Japanese healthcare companies amounted to 1.3% of the CVC capital invested in U.S. healthcare companies, according to a survey done by iPark. Remarkably, invested CVC capital in Japan fell 82% from 2021 to 2022.

What about Japanese Pharma Companies?

Japanese pharma companies have not had much success with the “open innovation model” of acquiring biotech startups instead of developing new drugs in-house. This contrasts with the United States or Europe where most pharma companies already use the open innovation model.

To be sure, Daiichi-Sankyo’s TANEDAS and Takeda’s COCKPI-T programs have advanced the open innovation model in Japan. Takeda acquired Millenium (from Boston) and Daiichi-Sankyo acquired Ranbaxy (from India) in 2008. Since 2012, some Japanese pharma companies have partnered with Kyoto University’s Medical Innovation Center. Nonetheless, the scale of Japan’s open innovation remains much smaller than in other advanced pharma markets.

Hooray — A New System Underway

Incremental changes to attract foreign VCs haven’t made much of a difference. Hoping for foreign venture capital to parachute down on Japan hasn’t happened despite well-intentioned policymakers’ efforts. Japanese biotech start-ups are not growing fast or big enough.

The “chicken and the egg problem” remains: the supply of investable startups is missing because the demand by investors (necessary to fuel the supply) is missing. Neither the demand nor supply can emerge by itself.

A new fundraising paradigm is needed.

How can Merito Lead to a Gold Rush in Science Funding in Japan?

Much more funding for science start-ups in Japan could come by expanding the private funding pool from a local crowd to a global crowd. This unlocks greater amounts of funding to develop Japan’s promising therapies and diagnostics.

Merito turns analog, paper-based intellectual property (IP) into a digital, liquid asset that’s tradable. A sleepy, in-person IP market becomes a thriving digital marketplace with sellers and buyers.

IP has been analog since the 1700s. Just a few trillions in transformations has happened when moving from analog to digital, science deserves an upgrade.

How to Upgrade Japan’s IP Funding System?

Japan’s rich IP treasure trove makes it a favorable country for Merito to begin operations. It ranks second globally for resident patent applications per million population in 2022. It ranks third globally for number of patent applications. Of all global companies, Canon Inc. ranked fifth for the number of U.S. patents awarded in 2023, according to IFI CLAIMS Patent Services.

Yet so far, too much of this IP remains stuck in universities or research labs. Merito is unlocking this IP by making it discoverable for corporate partners who can turn the IP into commercial products.

Merito does this by displaying available science products/therapies on its website after the science passes IP assets through a quality filter. For the first time, foreign partners can view all Japanese science verticals on an English portal. IP becomes easy for non-Japanese buyers to find and vet. This surpasses the current process that deters many possible foreign science partners — hiring a Japanese lawyer to sift through voluminous patents on paper in Japanese.

Merito thus connects Japanese scientific entrepreneurs with the world. Investors can fuel Japanese science from anywhere in the world — without needing to make costly in-person visits to meet the entrepreneurs or be among the few who have the language/cultural training to operate in Japan.

Make investment easier, and more investment comes. It’s that simple.

How does Merito Work?

In a hypothetical expample, a Japanese stem cell researcher, let’s call her Dr. Tanaka, develops a promising research on autophagy cells. The research could become regenerative medicine to slow down the aging process. Dr. Tanaka’s team uses Merito to find a corporate sponsor, such as a biopharma company in India. Both sides use Merito to chat and negotiate the sponsored research agreement (SRA). Once both sides agree on SRA terms, Merito’s platform generates a SRA document, both parties use e-signatures to sign it, payment goes through Merito’s platform, and both sides have a copy of the executed agreement.

Welcome to the future of science financing.

Instead of a modest sponsored research agreement from a local company valued at $20,000, a smart Japanese researcher could bring in more than $200,000 from global corporate partners. Broaden the market, broaden the funds available.

Who will fund Japanese science?

Corporations — both Japanese and global — already fund Japanese science and will continue to do so. Recently, Japanese pharma company Teijin Pharma invested in Jiksak Bioengineering, and Kyoto Fusioneering (KF) has signed a research agreement on plasma heating with the University of Tsukuba. Softbank partnered with the University of Tokyo to form the Beyond AI institute to translate basic and applied research of AI for industrial uses.

On global corporation deals with Japanese science teams, a limited number of examples exist. While U.S.-based Altos Labs funded Kyoto University scientists, given Nobel laureate Dr. Yamanaka’s association with both entities, foreign companies rarely fund Japanese science. Industry insiders say the Novartis scandal with the Kyoto Prefectural University of Medicine in 2011 had a chilling effect on foreign science partnerships — which they say is overdue for a thaw. Huge potential awaits rekindled foreign partnerships.

Corporate funding of academic science rides the wave of open innovation as companies outsource their research and development (R&D) to universities, gaining efficiency from not having costly internal R&D units. Nikon’s array of open innovation funding of universities — University of Tokyo, Osaka University, and Kyoto University. Additionally, Nikon has partnered with SBI Bank to fund science via the Nikon SBI Innovation Fund. Japan’s R&D budgets total $141 billion (in 2022, per OECD data), and an increasing share of this is going to academic science.

Moreover, foreign philanthropic medical institutions continue to fund Japanese research. San Francisco-based Good Ventures has given a $2.5 million grant to Kyushu University’s Dr. Hayashi for reproductive health research. One could envision funding coming to Japan from other medical philanthropists like the Bill & Melinda Gates Foundation, the Juvenile Diabetes Research Foundation, or the Howard Hughes Medical Institute.

Public health bodies also could use Merito to advance health research in their target areas. For example, a public health agency could fund alab discovering cures for a specific neglected tropical disease, like dengue fever. The Global Health Innovative Technology Fund (GHIT), Medical Excellence Japan, and the Coalition for Epidemic Preparedness Innovations (CEPI) are all possible candidates.

Emerging from a small base, internet-based science investment communities — BioDAOs — are also looking at funding Japanese research. BioDAOs fund research in a determined area of scientific research, such AthenaDAO supporting women’s reproductive health research or ValleyDAO supporting synthetic biology. Funding BioDAOs are pharma companies like Pfizer as well as wealthy holders of cryptoassets. As the notable crypto investors Qiao Wang and Imran Khan said on the GoodGame podcast, crypto wealth prefers to stay “on-chain,” and not convert from crypto financial rails back to fiat currency financial rails. Further, new science-based communities in Vitalia and Zuzalu underscore the growing funds going toward DAO science funding.

Merito’s Benefits: Less Legalese, Better Data Access, Replication, Equity

Versus traditional science funding, Merito offers these advantages:

Less Legal Headaches: While a typical IP licensing deal takes 4–9 months, Merito deals can take as little as 3 weeks.

Data Access: Data sharing becomes possible, providing researchers with even broader datasets — and therefore more potential to make breakthrough discoveries.

Replication: Scientific data sets are digitally preserved on Merito’s platform and thus other researchers can use them, saving precious research resources.

Equity: Geography, class, racial, gender, academic affiliation no longer matter on Merito. More funding goes to entrepreneurs outside of capital cities.

The Deep Tech Unlock: Found

With more global capital, a thriving scientific engine can go far to revitalize Japan’s economy. This can ensure more Japanese start-ups scale up to become global companies. The future is here — to those willing to try new approaches to science funding.