$1B Tech IPO: Welcome to the ($5) Hostel Japonia

Watch out eBay, Japan's Mercari is out to beat you.

What's the first $1 billion startup in Japan? Judging by its national history, you'd say it's some sort of manufacturing firm, but you would be wrong. At a time when globally notable or competitive startups from Japan are quite rare, what you have instead is an e-commerce pioneer from a country largely unrecognized for minting such individuals. Enter Shintaro Yamada of Mercari, who got the idea for his service while finding $5 hostels around the world:

The trip left him determined to start a company that would let people in different countries connect with each other. He saw that even the poorest villages had mobile phones and everyone craved technology for reaching the wider world. That led him to found Mercari Inc., a mobile e-commerce site that matches individual buyers and sellers and this month became the first Japanese startup worth at least $1 billion.

Though the valuation is an accomplishment for Mercari, it also highlights the dearth of major private startups in the world’s third-largest economy. There are 155 so-called unicorns in the world, according to CB Insights, with 92 in the U.S., 25 in China and seven in India. Japan has suffered from a lack of venture capital and a risk-averse culture where the best and brightest strive for stable jobs at big companies and then stay for life.

Yamada thinks the problem isn’t quite as dire as it may appear. Many tech companies in Japan go public well before they reach the $1 billion valuation mark because the country has lenient listing requirements for small, high-growth businesses. The TSE Mothers market requires just $10 million in capitalization and has no income prerequisite; companies going public on the tech-heavy Nasdaq must clear $50 million market cap or $750,000 in profit.

To make a long story short, Mercari is a mobile marketplace app. While eBay and others also have apps of their own, the difference with Mercari is that its native interface is an app. Add this to understanding Japanese consumer habits better and you have a competitive advantage:

Mercari’s edge has been that it’s designed specifically for mobile phones and lets individuals easily browse through items for sale or post their own. People sell everything from clothes and electronics to baseball tickets. While its staying power remains unproven, the app has been downloaded 32 million times and generates 10 billion yen in monthly transactions, Yamada said. Mercari takes a cut of each sale.

“The market for business-to-consumer services is already quite developed, but user-to-user applications still have a lot of room to grow,” said Tomoaki Kawasaki, an analyst at Iwai Cosmo Securities Co. “Mercari is already in the lead in Japan. There are significant benefits for early movers.”

Users of Mercari laud its simpler user interface and not having to compete with big retailing operations in comparison to eBay. As the saying goes, competition improves the (e-tailing) breed.