Funds Startups Establishes 10 Billion Yen All-Stage Deep Tech Debt Fund

Funds Startups Co., Ltd. (Headquarters: Shibuya-ku, Tokyo; Representative Director: Hirofumi Maekawa; hereinafter referred to as "the Company") is pleased to announce the establishment of "Funds Venture Debt Fund 2" (hereinafter referred to as "Fund 2") and the completion of its first closing.

Fund 2 is designed as an "All-Stage Deep Tech Debt Fund" to consistently support startups in the deep tech domain from their early stages through their growth and expansion phases, with a target total fund size of 10 billion yen. With The Bank of Mitsubishi UFJ, Ltd. (Headquarters: Chiyoda-ku, Tokyo) serving as the anchor investor, and with additional investments from existing LPs and the participation of new banks, we have become the GP with the largest number of participating banks in Japan through Funds 1 and Fund 2. We will lead the venture debt market together with financial institutions across Japan.

Building on the track record of Fund 1, this fund comprehensively addresses the funding challenges faced by deep tech startups. We have newly established a system capable of providing integrated, tailor-made support from seed to later stages by combining subsidy bridge finance, convertible bonds (hereinafter referred to as "CB"), and venture debt.

◾️ Background: Fundamental Improvement of Startup Financing Structure through Modern Industrial Finance Development When startups in Japan raise funds, the practically available options are limited to equity and senior debt, with a limited number of providers, creating a financial environment with uniform dynamics. Consequently, startups have often been unable to make the choices they would ideally prefer due to the constraints of this financial environment. However, in recent years, finance that fills this gap, led by venture debt, has been developed and popularized in the market, significantly increasing the depth of the startup financing environment compared to the past.

On the other hand, startups themselves have also diversified rapidly. While the 2010s saw a focus primarily on software, recent years have seen the rise of startups challenging heavily industrialized sectors using research and technology known as "deep tech," partly due to the rapid increase in university-originated ventures. Compared to the software industry, deep tech involves a process of invention, research, and commercialization of core technologies and products, requiring larger capital and longer periods until exit. Therefore, it is practically difficult to support this sector solely with an equity-biased financial environment, leading to fatal dilution of management and shareholder equity, deterioration of capital efficiency, and a short-term focus constrained by exit timelines. This hinders startups' focus on research and development and makes sustainable support difficult for participating financial players, presenting a structural challenge.

Several years have passed since the "Five-Year Plan for Startup Development" was announced. Under the current administration, startups are expected to play a role as engines of innovation that execute national strategies and solve socio-economic issues, particularly in 17 strategic fields. Deep tech startups are at the center of these industrial fields, and their development and growth are extremely important. One of the bottlenecks in this field is considered to be the financial environment. Based on these backgrounds, we will tackle this issue head-on with the theme of "modern industrial finance development" in collaboration with financial institutions across Japan.

◾️ Features of Fund 2 1 Fully Supporting Deep Tech — Japan's Premier Deep Tech Specialized Debt Fund "The Valley of Death," "The Chasm," "Darwin's Sea." These are three major barriers that stand in the way of commercializing research and technology and establishing them in the market, and most deep tech companies struggle to overcome them. Continuing from Fund 1, we maintain our unique position in the industry of "supporting deep tech with venture debt," dedicating ourselves to building the necessary team, track record, and financial instruments. As a result, deep tech constitutes the largest portion of our cumulative sourcing in Fund 1. We will leverage this expertise to the fullest to eliminate the challenges faced by deep tech. *However, the investment targets of this fund are not limited to deep tech.*

2 All-Stage Support — Integrated Support from Early to Late Stages

<We aim to solve challenges at each growth stage through a combination of diverse investment methods and collaboration with financial institutions.>

3 Diverse Investment Methods Possible — Fully Tailor-Made Support According to Funding Needs

The funding needs of deep tech companies vary significantly from the research and development stage to the commercialization and mass production stages. We provide optimal funding tailored to each company's business phase and technological development status by combining subsidy bridge finance, CBs, venture debt, and other instruments. By offering multiple financing methods from a single fund, we can flexibly respond to the funding challenges that arise as startups grow.

<Investment Conditions Overview>

4 AI x Venture Debt — Execution Possible within One Month with Our Proprietary Screening Model Since the establishment of Fund 1, we have been developing a "credit rating model for venture debt" and have created a screening model optimized for venture debt based on hundreds of investment review cases. Using these rating models as a core, we have independently developed an AI agent specialized for venture debt review and monitoring. This has resulted in a labor saving of up to 70% compared to the initial review workload, enabling us to provide proposals more speedily than ever before. We have also implemented a system for scientific and patent analysis specialized for deep tech, creating an environment where even highly complex areas can be accurately assessed.

◾️ Comments from Each Bank Mr. Kensuke Nishichi, Head of Startup Strategy Department, The Bank of Mitsubishi UFJ, Ltd.

It is a great honor to participate as an anchor LP investor in Funds Startups' second fund, "Funds Venture Debt Fund-II / All-Stage Deep Tech Debt Fund."

Mitsubishi UFJ Financial Group (MUFG) views startups as central to advancing Japan's industrial development and solving social issues, and we recognize it as a crucial role for financial institutions to support their challenges with the power of finance. With this in mind, we deeply resonate with Funds Startups' "vision for the evolution of the finance market" and, in line with MUFG's purpose of "Becoming the force that advances the world," this marks our bank's first investment in a domestic venture debt fund.

We will further deepen our collaboration with Funds Startups and our LP investors through our participation in this fund, expanding funding options and steadily supporting the journey of startups' challenges.

Mr. Tomoya Okada, Executive Officer, Head of Regional Co-creation & Innovation Department, Ikeda Senshu Bank

We expect this initiative with Fund 2, building on the achievements of Fund 1, to contribute to the comprehensive resolution of funding challenges for startups, including deep tech, by combining diverse financing menus that break free from conventional frameworks.

Through our participation in Fund 2, the Ikeda Senshu Bank Group will further expand our initiatives in the venture debt field and, in collaboration with Funds Startups and other LPs, will contribute to the creation of new industries and the sustainable growth of regional economies by financially supporting the challenges of growing companies.

Mr. Toru Tagaya, Manager, Structured Finance Department, The Joyo Bank, Ltd.

We strongly resonate with Funds Startups' challenge to broaden the possibilities of startup finance and pioneer new markets, and have decided to participate in this fund.

We expect Funds Startups' high level of expertise and their advanced approach, which combines the utilization of AI technology with diverse funding schemes, to powerfully support the challenges of startups with strong growth ambitions, including deep tech companies. Our bank will also support this innovative initiative through our investment in this fund and, in collaboration with participating financial institutions nationwide, contribute to the formation and development of the regional and domestic startup ecosystem.

We will continue to promote the circulation of funds to innovative technologies and business models, leading to the nurturing of next-generation industries and the realization of a sustainable society.

Mr. Yasutomo Imai, Manager, Structured Finance Department, The Chugoku Bank, Ltd.

We are pleased to participate in Fund 2, following our participation in Fund 1. In Fund 1, we engaged in highly meaningful information exchange and accumulated significant know-how through collaboration with Funds Startups and other LPs. We feel it is important to continuously accumulate knowledge in an era of rapid environmental change.

We aim to deepen our knowledge in new investment areas added in Fund 2, such as deep tech support and convertible bond financing.

Through this fund, as the Chugin Group, we will enhance our role as a supportive partner for regional startups and contribute to the sustainable growth of the region.

Mr. Yoshida, Manager, Solution Sales Department, Fukuoka Bank

It is a great honor to be able to participate in Fund 2 as an investor.

Our bank also participated in Fund 1 two years ago and highly values Funds Startups' continuous advanced initiatives, such as the development of diverse investment methods and proprietary screening models.

We have great expectations for the success of their current challenge, which is Japan's premier deep tech specialized fund supporting all stages.

Through our venture debt initiatives, our bank will further contribute to supporting startups challenging the resolution of social issues, together with Funds Startups.

◾️ Comment from Hirofumi Maekawa, Representative Director, Funds Startups Co., Ltd. I am extremely pleased to announce the launch of Funds Venture Debt Fund-II / All-Stage Deep Tech Debt Fund. We began discussions with relevant companies regarding this fund's concept about a year and a half ago. During that time, we deeply debated how each element—strategy, concept, financing methods, etc.—could address the challenges in the current startup financing market and, by extension, create an impact on solving socio-economic issues.

What particularly struck me was the lament of a deep tech startup: "We established advanced technology and secured subsidies and grants, but we couldn't secure funds for upfront payments, and even advance payments were unstable. As a result, the scope of R&D investment within a year became smaller, and we ended up falling behind other countries in technological superiority." While the true intentions and causal relationships may differ, I felt a strong sense of urgency regarding the situation where startups with technology and ambition were having their potential extinguished due to a "lack of financial environment."

Based on this and other experiences, since launching Fund 1, we have received funding consultation requests from hundreds of startups, particularly in deep tech. Through this, I have keenly felt that there are many funding needs that cannot be met by the existing financial environment, no matter how meaningful the initiatives are. This has further strengthened my conviction in the necessity of venture debt as a mezzanine instrument that bridges the gap between simple debt and equity. This fund further expands the scope of this mezzanine financing, enabling more "aligned" proposals for each company. Furthermore, by combining optimized financing for each growth stage, we can provide continuous support for growth, and we have focused on creating a structure that allows challenging startups to dedicate as much time as possible to their core business.

However, as the saying goes, "easier said than done," managing such a complex financing strategy as a fund is not straightforward. Planning a fund strategy from scratch, which has no precedent in Japan, refining the strategy, and then building the execution—I strongly feel that this series of tasks was made possible by bringing together members with high challenging spirit, a sense of urgency regarding issues, and financial expertise, and pooling our wisdom. I would like to take this opportunity to express my deep respect to my colleagues.

And above all, I would like to express my sincere gratitude to our anchor LP, The Bank of Mitsubishi UFJ, for their empathetic approach to this challenge and for making difficult decisions that set a precedent, as well as to the financial institutions that have continued to participate since Fund 1, and to the financial institutions joining us in this endeavor.

Naturally, the establishment of a fund is just the beginning. Funds Startups will continue to uphold its mission of "developing a system that enables startups creating social impact to achieve their ideal growth" and, in our own way, expand the interpretation of startup finance and contribute to the market. We look forward to your continued guidance and support.

Fund Overview

Item

Details

Fund Name

Funds Venture Debt Fund 2 Investment Limited Partnership

General Partner (GP)

Funds Startups Co., Ltd.

Target Fund Size

10 Billion Yen

Investment Target

Startups primarily in the deep tech domain *However, not limited to deep tech.*

Investment Target Stage

Early to Late Stage (All Stages)

Main Investment Methods

Venture Debt, Subsidy Bridge Finance, Convertible Bonds (CB)

About Funds Startups Funds Startups Co., Ltd. (Headquarters: Shibuya-ku, Tokyo; Representative Director: Hirofumi Maekawa) was established in December 2023 as a wholly-owned subsidiary of Funds Co., Ltd., with the mission to "develop a system that enables startups creating social impact to achieve their ideal growth." Funds Startups, as the GP of the Funds Venture Debt Fund, focuses on fund management and support for venture debt to financial institutions. Moving forward, while this business will be our core, we also plan to engage in diversifying startup financing methods and improving the environment, acting as a specialized investment banking division for startups. https://social.funds.jp/fsrelease