Japan has been an economy apart from the rest of Asia for more than a decade. It slid into recession years before the Asian financial crisis delivered a wakeup call to the region. And bureaucracy, politics and hide-bound corporate traditions continued to hamstring its reform efforts, while many of its neighbors undertook more far-reaching restructuring.

But change is coming to Japan. And just as other markets in the region are starting to suffer from the general economic slowdown and tech wreck, a number of VCs are seeing Japan as an emerging market for technology start-ups.

A host of VCs, including H&Q Asia Pacific and Carlyle, have dedicated funds targeted on start-ups and technology. Meanwhile, Walden International, well-known for its technology investment focus and decent returns, is also planning to focus on the Japanese market, dedicating 10-15% of its recently closed PacVen V fund to this sector.

Restructuring brings technopreneurship

Japan, as is well-known, enjoys a huge domestic wireless market and has a well-established tradition of hi-tech innovation. But why are an increasing number of VCs seeing so much potential in Japan?

"I look at Japan [as having] very similar to the United States in the early 80s, when there was a recession resulting a major shift of labor force," says K.O. Chia, Executive Vice President of Walden International Investment Group.

With the continuing recession in the Japanese market, says Chia, most corporations are streamlining their operations and eliminating head count. Engineers that can no longer rely on large corporations for a life-time job, inspired by the successful stories from the US, are more willing to take risks and start their own companies.

"This situation provides talent to young start-ups and that is what built the whole Boston, Silicon Valley phenomena," says Chia. "A lot of these (technology) companies were started by talents that came from the big corporate giants."

The corporate restructuring move is also adding another driver for VC investments in Japan. Traditionally, corporations review their entire business structure at a time of recession and spin-off the non-core businesses to reduce costs. Where this has happened in the US, says Chia, the units being spun-off tend to form their own standalone company. But the cultural practice in Japan creates a different environment for VC investment, he says.

"In Japan, although corporations spin off non-core businesses, they still like to maintain some links. But they don't want [the budget] to be cut down to run those companies, so they bring in venture capital," says Chia.

He says that most of the time, these units develop early stage technologies, which Walden finds have great potential to uncover young talented entrepreneurs.

Home-grown technologists

In addition, Chia notes Japan's existing advantages, including being the second-largest global economy and a pioneer in the semiconductor, wireless, communication device and electronic consumer product industries has brought tremendous opportunities for VC investments.

Chia asserts that the vision of most Japanese entrepreneurs to grow globally also fits well with Walden's cross-border strategy. "Our strategy focuses on how to take Japanese companies beyond its border," says Chia. He says that is the reason why Walden has established a global presence and built partnerships with technology giants worldwide.

Going beyond the border

Although Walden is known for its smaller country-based funds, Chia explains the recent completion of the global PacVen V fund does not mean a change to the company's strategy. In fact, taking the companies to the global market has always been Walden's goal in their investments and the PacVen V is a perfect reflection.

The company plans to dedicate one-third of the $1 billion global fund to Asia companies, one third to the US and the remaining one third for the hybrid companies that operates across the borders. Chia expects the investment in Japanese companies to lie in the last category, as Walden aims to bring synergy for these companies with its global presence.

"It could well be a company in which Japan does the design, they manufacture in China and market in the US. That is interesting, that's really cross-border and really plays to the strength of Walden, since we have a presence in all these places," says Chia.

Chia acknowledges most of the investors of PacVen V are former country-based fund investors. However, based on the previous investment rate for PacVen III and PacVen IV, the company decided to consolidate capital from various investors and raise a larger global fund. Chia expects that PacVen V will run four-to-five years.

IPOs are down

In contrast to last year's glorious track record, when the firm took 20 of its portfolio companies public, the Walden has only announced three exits so far this year. Two of the exits have been IPOs and one a trade sale.

"The public market is definitely not in our favor," says Chia, though he notes this was not why its most recent exit, Newave Semiconductor, was made through a trade sale. The chips manufacturer for telecommunication infrastructure was sold to communications IC provider, Integrated Device Technology, for about $80 million in cash.

"I prefer a trade sale. From the entrepreneurs' viewpoint, he's done a good job and the fact that someone has put a value on the company indicates the company really means something to the market. From a VC point of view, it's satisfying that the company grew from an original thought to actually became that it is and someone really see the value of the company. This is really venture creation."

Chia says Newave Semiconductor is actually a typical hybrid company, maintaining an office in Silicon Valley and selling its products to telecommunication infrastructure manufacturers in China. He says the exit generated about 5x return.

Despite the negative market sentiment for listing technology companies, Chia affirms the company will continue to stick with its strategy of investing in early stage technology companies. "From our point of view, this is the best time to invest, because when we look at projects, we look at companies that have the vision to go from what it is today to the future," he says.