TOKYO — Japan's emerging breed of entrepreneurs was dealt a serious setback by the sudden downfall of Internet startup Livedoor over alleged securities laws violations — but the blow was far from fatal.

Take Noriyuki Yamazaki is former IT chief at Livedoor, whose founder Takafumi Horie was convicted and sentenced to 2 1/2 years in prison last week for breaching securities laws. Yamazaki has moved on, founding Zero Start Communications, which runs the new "posh me!" social networking site for aspiring actors and musicians.

"The Livedoor incident really squeezed the venture business environment here," said Yamazaki, dressed casually in a T-shirt and leather jacket instead of the traditional shirt and tie.

"It also spurred me to strike out on my own," Yamazaki said. "I learned a lot at Livedoor, like the need to move fast. But I now work based on my own thinking."

After an initial blow, the entrepreneurial spirit in Japan is still thriving. Venture-capital spending has rebounded, and the Tokyo Stock Exchange's Mother's index — home to the country's top high-tech startups — is showing a recent resurgence of listings.

"I truly believe the old Japan is shrinking, while a newer Japan is taking strength," said Yoshito Hori, CEO of the Tokyo-based Globis Group, which oversees venture funds worth more than $342 million.

Horie's fall was a powerful cautionary tale.

A brash celebrity who had riled Japan's staid corporate world with buyout attempts and an in-your-face attitude, Horie's slide began with his arrest in January 2006.

The judge said he masterminded a network of decoy investment funds, and sentenced him to 2 1/2 years in prison. Horie, who had pleaded not guilty, immediately appealed and posted bail at $4.3 million.

The Mother's index tumbled 50 percent the year after Horie's arrest. The index lost another percentage point the day after Horie's guilty verdict, to 1,010.37.

Particularly bruised have been individual investors, whose ranks have been growing with the arrival of electronic trading from PCs and mobile phones to make up more than 75 percent of trade on the Mother's market.

More than 1,600 shareholders filed a lawsuit against Livedoor and Horie last year, seeking more than $85.6 million in damages incurred when Livedoor shares plummeted over the firm's alleged wrongdoing. They have since been delisted.

The so-called "Livedoor Shock" threatened to stifle the emergence of an entrepreneurial class tired of the "Japan Inc." model of recent decades in which the cream of the crop of younger workers flocked to cushy, stable jobs at established corporations rather than risking it with new ventures.

And traditional barriers to unorthodox business methods are still strong.

The closed culture of corporate Japan remains hard to crack for many young entrepreneurs, said Masahiro Ito, 23, founder of 3-D imaging software venture Yappa Corp.

Ito founded Yappa at 17 as a high school student in western Japan — and though his company now handles imaging projects for big clients like Japan Airlines and Nissan Motor Corp., he says he has hit plenty of brick walls.

Tokyo is a huge city, Ito said. "But at the same time, everybody knows everybody else, a very closely knit society with a small-town mentality."

He added: "there's also Japan's heritage and culture of honoring your ancestors ... it's very difficult for new entrepreneurs."

Ito also blamed what he said was a less-than-ideal financing environment for startups, including immature investors and irresponsible venture capitalists.

"People buy as if they were betting on horses: you bet on one today, and you want to get the money back tomorrow. This is not investing," Ito said.

There are signs of change, however. Recent deregulation measures have made it possible to launch venture businesses with relatively small amounts of capital.

Venture-capital spending, which dipped after the dot-com bust in 2001, is on the uptrend amid a resurgent economy. The amount of capital invested in emerging Japanese companies surged 46 percent to $2 billion in 2006, according to the Tokyo-based Venture Enterprise Center — though that figure is still minuscule still compared with the U.S. and Europe.

Meanwhile, new listings on the Mother's market for emerging companies, which dipped 35 percent in 2005, have rebounded to 41 companies in 2006. Especially active have been startups based on Japan's advanced broadband infrastructure and mobile phones, like Mixi, the social networking site that launched a highly publicized IPO last year valued at more than $51.3 million.

Analysts also say wider changes like the breakdown of lifetime employment practices, as well as troubles at some of Japan's electronics giants like Sony, are causing some of the country's best and brightest to set up their own ventures.

"Whatever the effects of Livedoor, they will be short term," Hori said. "There's still some skepticism surrounding Japanese entrepreneurs. But the future is very bright."