Welcome to Samurai 2.0; Entrepreneurialism has had a tough time in Japan, but a coterie of Internet startups are reviving the art.

Byline: Brad Stone

Isamu Kaneko hopes to avoid the same grim fate that has struck other prominent Japanese entrepreneurs--not bankruptcy, but jail. A few years ago Kaneko, a 35-year-old former researcher at the University of Tokyo, created Winny, a peer-to-peer file-sharing program that millions of Japanese used to illegally trade songs and TV shows over the Internet. Kyoto police arrested Kaneko in 2004 for abetting mass copyright infringement, and his trial is scheduled for later this year. But while he prepares his legal defense, Kaneko is also building a new company, Dreamboat, which aims to distribute full-length TV shows, concerts and movies--legally--over the Web. "I got into trouble for making a fast car that goes everywhere and breaks the speed limit," says Kaneko of Winny. "Dreamboat is a taxi that responsibly drives you where you want to go."

Kaneko is part of a resurgent wave of Japanese tech entrepreneurs--let's call them the Samurai 2.0. They have seen the consequences of trying to shake things up too quickly in Japan's tradition-bound business culture, but are trying again, this time with a lower-key style and new business models that exploit the nation's cheap broadband infrastructure and advanced mobile phones. Last week, the movement achieved an important milestone: Mixi, a MySpace-style social network, pulled off a gangbuster IPO and saw its shares double on the first day of trading. As of last Friday, the company was worth $1.6 billion.

Another reason for hope: venture-capital spending, which sagged after the dotcom bust in 2001, is back and now exceeds pre-bubble levels. "The idea that there is no Internet innovation in Japan is a stereotypical view from people who represent old Japan," says Yoshito Hori, managing partner of venture-capital firm Globis Capital Partners. "I don't deal with those people. Eventually I think a new Japan will win."

The consequences of the last round of dot-com overenthusiasm are still on display. This month in Tokyo, federal prosecutors began the trial of another high-tech luminary, Livedoor founder Takafumi Horie, who maintains that he's innocent of inflating profits to boost shares in his once high-flying Internet portal. Before his public unravelling, the bombastic Horie was the country's most visible Internet champion, appearing on TV incessantly, running for Parliament and provoking the wrath of the conservative business establishment with a hostile takeover attempt of the country's largest broadcaster, FujiTV. Despite the Mixi IPO, since the Livedoor scandal erupted in January the Tokyo Stock Exchange's "Mothers" index--home to most of the country's high-tech startups--is down 50 percent. In a nation obsessed with reputation and tradition, Horie's failed assault on Japan Inc. tainted entrepreneurialism itself.

Investors and observers burned by the Livedoor fiasco are still easy to find. They argue that Japan will never have a robust entrepreneurial culture, largely because established companies will squash changes that threaten their hold on power, and because the country's brightest students are reluctant to risk their careers on untested firms. Joi Ito, a Japanese venture capitalist who concentrates most of his efforts in the United States, is one VC who remains pessimistic about Japan's prospects. The biggest problem: recruiting. "For startups to find anyone who can do anything is simply too hard," he says.

Yet there are good reasons for optimism. Start with the Mixi IPO. Thirty-one-year old Kenji Kasahara started Mixi in 1999, originally as an online press- release service and job bulletin board. Last year, he remodeled the company after social-networking firms like Friendster, offering users personal blogs and the ability to forge online connections with friends. His Japanese touch: Mixi members can see exactly who visits their page, an important feature for Japanese teens anxious to know how they're perceived by peers. Mixi is now a cultural phenomenon, with 5.2 million users, up from 3.4 million in March.