Navigating SaaS Investments in Japan

SaaS startup valuations and growth rates have dropped sharply in most of the world, but not in Japan. SaaS startups are growing fast in Japan, and that trend is set to accelerate even more over the next five years. Today Shinji Asada of One Capital explains Japan's still-untapped SaaS potential, his unique SMB and product-focused investment thesis, and the big changes that are happening in Japan's startup ecosystem. It's a great conversation, and I think you'll enjoy it. Show Notes The untapped potential of SMB SaaS Unique requirements for product collaboration software in Japan What is will take for Japanese SaaS startups to go global How One Capital helps its investors with digital transformation Japanese CVCs play a different role than in the US, and that's a good thing Why Japan SaaS valuations will continue to climb What makes a great SaaS company How Japanese founders have changed over the past 20 years How they will change in the next five How Japanese VC will (and will not) change in the next five years What Shinji learned from doing inside sales as a VC Links from our Guest Everything you ever wanted to know about One Capital The SaaS metrics tool, Projection AI Follow Shinji on Twitter @asada23 Friend him on Facebook   Transcript Welcome to Disrupting Japan, Straight Talk from Japan's most innovative founders and VCs. I'm Tim Romero and thanks for joining me. I have always been a fan of Enterprise SaaS. In fact, all of the startups I founded have been enterprise SaaS companies, and some of those were back when SaaS was called ASP. But these days it seems that SaaS has lost a lot of its former shine and sparkle, at least in the US market. Multiples are way down for both public and private SaaS companies. We're seeing a lot of flat and even down rounds. For the first time in a very long time, American VCs just aren't that excited about SaaS startups. But things are very different in Japan. Today we sit down with Shinji Asada, co-founder and general partner of One Capital.  Shinji explains how SaaS in Japan has had a very different history and why it's likely going to have a very different future than it will in the West. And he brings the numbers to back that up. We also talk about why SaaS valuations continue to climb in Japan, how Japanese VCs are changing, and why Shinji spends his spare time doing inside sales for SaaS products. But you know, Shinji tells that story much better than I can. So let's get right to the interview. Interview Tim: So, we're sitting here with Shinji Asada, the founder of One Capital. So, thanks for sitting down with us. Shinji: Appreciate it. Tim: So, Shinji, first of all, let me just congratulate you on your recently closed Fund two, which was just last month, right? Shinji: Yeah. It was a great adventure too, because Fund two is different from Fund one. Fund one is totally, totally new, where you have to talk a lot, about track record and your strategy. And Fund two, you have a little bit of an easier life because you've started your Fund one and you've deployed most of the capital. So, you have a story to tell in a concrete manner. Tim: I'm going to dig into that whole journey in a bit later. But right now, tell me a bit about One Capital. What's your thesis? Who are you investing in and why? Shinji: We are a sector focused early stage Fund, focused on enterprise software. The reason is, I think Japan has a huge problem with the adoption of technology in the workforce. And I've been working at Itochu, which is a great company in a profitable large market cap growing. But the systems that I had to use was very, very old. It's on-prem customized software. You know, even under those IT system circumstances, I think corporate Japan is doing pretty well. And people didn't actually use digital workflows pre-covid because we had this thing called the Hanko, which is stamps. That is a typical corporate Japan. Tim: Are you focused mainly on SaaS providers in Japan or is it enterprise software more generally? Shinji: 80% of our capital will go into SMB SaaS and Enterprise SaaS. But I tend to like SMB targeted SaaS a lot more because those are companies with faster decision making processes. The average revenue per user is smaller than enterprise companies, but these seed or early stage SaaS companies are just launching their new products out there. So, it's not as mature. So, the SMB market is perfect. So, I like that. Tim: That’s really interesting because all of my own startups have been enterprise software. Because normally SaaS is all about scale. You're trying to get the biggest customers with the biggest possible reach and that's almost always the enterprise. What do you see in SMB SaaS and Japan in particular? Shinji: So, if you look at the numbers of companies in Japan, 99% are SMBs. So, it is a big market. So, that's one advantage. And getting the purchase order from these SMBs are faster and a lot more easier than going to an enterprise. Tim: That’s for sure. Shinji: Right. So, you land and expand you try and scale within the SMB. Companies like Notion, of course they have enterprise companies, but majority of those product led growth companies are dominated by SMB customers. Tim: Yeah. Yeah. So, can you give me some examples of either specific companies or specific SMB software niches that you think are really exciting right now? Shinji: Yeah, so we've invested heavily into collaboration software and we've invested in a company called Ovice, which is sort of a combination of Zoom plus a 2D office. So, you have these avatars within these 2D office and you can move around that avatar and go into a medium room, go into a sofa and just talk casually. That company really, really scaled during covid that is mainly targeted for SMBs, but enterprise companies started to pile in and we have a pretty good mix of enterprise customers and SMBs. Tim: No, after Covid, I was skeptical about how much of this remote work was going to stick in Japan because we're fighting. Oh wow. Decades and decades of we've got to do it face to face but I've been really impressed at how much business stays online. Like you mentioned, these are kind of uniquely Japan situations, right? This quick migration from really old school. But how much of this do you think is Japan specific and how much of this do you think will be able to export to the rest of the world? Shinji: I think being remote when working isn't a Japan thing. This is a global phenomenon. It doesn't even have to be the tech industry. So, I don't think this is a Japan specific thing, but I guess Japan really leapfrogged and caught up with the rest of the world. So, pre-covid was probably something that was very Japan centric, where you had to be in the office, get a stamp of approval, and just keep shifting that paper document that is very Japanese-ish. Tim: Yeah. Of the startups that you are investing in, particularly on the SMB scale, where there's a lot more variation in workplace culture than we see at the enterprise level, are the companies you're investing in really targeting a Japan market? Are they targeting the global market? Or is it a mix of both? Shinji: Within horizontal SaaS landscape, the categories that don't belong within the collaboration space has a lot of low hanging fruit within the local domestic market. For instance, I was an early investor in Freee, which is cloud accounting, and same as you have with any country, the accounting laws, the tax laws in Japan, is Japan specific. That is a big market in Japan. So, a company like Freee should stay in Japan and replace on-prem or packaged software. Tim: But what are you most excited about? What do you see the most potential in now? Is it the Japan market specific startups, or do you see Japan startups being able to play add some unique value at the global market? Shinji: I see the Japan market as a very low hanging fruit because those SMB SaaS companies are competing with spreadsheets or on-prem software that is so hard to use and you have to physically go to the office and use it. But with a modern SaaS offering, it's accessible through your mobile. So, the Japan market is super, super appealing. I'll just give you a big number here. The annual IT spend from ranging from SMBs enterprise of it is about 200 billion every single year. $200 billion. And SaaS accounts for roughly about 10 billion, which is about 3-4%. Tim: How does that compare to more developed SaaS markets like the US? Shinji: The US penetration rate within enterprise it is about 18%. Europe is about 12%, so Japan's like 4%. So, we need to still catch up to the rest of the world. Tim: But that is a lot of opportunity then. From the enterprise side, Japanese enterprise has totally embraced the concept of SaaS at least. Shinji: Yeah. Yeah. Once you experience how easy and modern and how productive using these SaaS tools are through products like Zoom or even Google meeting, then you start asking why aren't the other software that we're using modern yet? Tim: Yeah. Yeah. The difference is really painful when you jump from modern tools to the old IT. Shinji: Exactly. Exactly. Tim: In Fund one, you are providing digital transformation advisory to your LPs. You are helping them with their own internal tools. Is that something you're still doing going forward with Fund two? Shinji: Yes. When I started Fund one, there is the typical route of going to an LP and talk about potential IRR or cash on cash and soliciting your Fund as a financial product. I thought that was purely boring. Why isn't VC innovating from an LP standpoint? So, we brainstormed, why don't we create a hybrid model from LPs. One is the pure LP, which is looking at IRRs and returns. The other strategic LP base should be about solving their own internal strategic problems around digital transformation.