One fundamental problem in reinvigorating Japan’s entrepreneurial economy is a misapprehension of the nature of entrepreneurship, and the factors that lead an individual to become an “entrepreneur.” While in the last blog, I mentioned how entrepreneurship is a mindset that everyone should embrace, today I will concentrate on the venture-building aspect of entrepreneurship, which Webster’s defines as “one who organizes, manages and assumes the risks of a business or enterprise.” The key phrase in this definition is “assumes the risk.” Entrepreneurship is all about the willingness of individuals to assume risk — and their ability to calculate and mitigate against it. Not the blind willingness to just “take risks” as many tend to associate (incorrectly) with the definition of an entrepreneur.

In evaluating a business plan, although we might be able to discern something of its promoters’ awareness of risk and their readiness to contend with it, no amount of “process” will eliminate it. We must embrace failure as a factor required for success.

As only 18% of entrepreneurs in the U.S. succeed with their first venture (Gompers et al., 2008), many, if not most, only achieve success after repeated failure. Thus, entrepreneurship is as much about failure as success. Its essence is a capacity to accept the fear, the reality and, above all, the lessons of failure. This capacity is required of the entrepreneur and – critically – everyone surrounding him or her: spouses, in-laws, bank managers and peers. Without this capacity to accept failure, a grant from government to become an entrepreneur represents a poisoned chalice.

As an entrepreneur who has started ventures – successful and otherwise – in both Japan and the U.S., in this regard I can testify to a profound divergence in attitudes between the two nations. While Americans tend to have high regard for individuals who succeed by taking risks, there is a corresponding tolerance for those who try bravely but fail. In Japan, by contrast, as Robert Kneller wrote in a July 2000 article in J@pan Inc. magazine:

“Failure is regarded not as a valuable learning experience but as a sign of ineptitude or moral turpitude. Family members are likely to be ostracized. Credit ratings are ruined. Obtaining a housing mortgage or renting an apartment becomes impossible.”

In fact, failure is only such if it is not taken as a learning experience and one builds upon what was ascertained to correct and try again. Since we are born, we have failed continuously at many things (walking, riding bikes) but have eventually learned to overcome them. However, just because we have become adults doesn’t mean the process stops.

From this observation, one might attempt to hypothesize an inherent flaw in Japanese civilization, to say that Japanese somehow lack entrepreneurial DNA. If so, how could one account for two outbreaks of unbridled entrepreneurial vigor in the nation’s modern history?

Both in the Meiji Era (1868-1912) and following Japan’s defeat in 1945, Japan’s development was propelled by surges in entrepreneurial activity that created what are now the nation’s largest companies. Post-1945, due to wartime devastation, even established firms were effectively “restart-ups.”

Even without offering a comprehensive analysis of Meiji versus post-war entrepreneurship, in both instances it is evident that Japan’s established order was disrupted and that the barriers to assuming risks were lowered.

In both periods, disorder created an atmosphere of opportunity. In Meiji, a new-found sense of freedom encouraged entrepreneurs to assume risks. Post-war, it was hunger and desperation that lowered the barriers to assuming risk. Prospective entrepreneurs had nothing to lose. They started with nothing – but nothing stood in their way.

In this hungry environment, people like Masaru Ibuka and Akio Morita, the founders of Sony, were not deterred by the absence of government grants.

Beyond dispute, the Japanese have enormous latent entrepreneurial effort. But set against it is a corresponding societal instinct to smother anything that moves in bureaucratic process; to eliminate anything that smacks of disorder, randomness or risk. The result is unparalleled excellence in manufacturing but stunted entrepreneurial energy.

This gives rise to a disturbing notion that Japan grows like a forest in which new saplings can only emerge once fire releases the seeds from pine cones and allows sunlight to reach the forest floor. Although perhaps an effective mechanism, it requires undue suffering among ordinary people.

So how might Japan learn to grow without burning its entire structure to the ground? In my next post, I’ll look at some practices that need to stop in order to start up a reinvigorated entrepreneurial economy.