[Podcast] Why SaaS is growing so much faster in Japan — Interview with Shinji Asada at One Capital (Part 2)

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.

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. And it’s simple offense and defense. And what do I mean by defense? We would search and understand what your internal systems are. And usually these enterprise companies that came in as digital transformation LPs, they have about 200 internal systems and 99.9% were on-prem. So, we would offer an alternative, a modern SaaS product. Not everything can be switched overnight, there are some mission critical things that should be on-prem. We would work on a project like that and seriously modernize the internal it.

Tim: I think your CVC roots are really showing in that approach, right? The delivering strategic value back to the LPs. So, do those conversations kind of inform the types of startups you go out and find?

Shinji: No, that is totally separate. Our investment mandate is 80% SaaS, enterprise software. Well focus 20% on subscription based businesses that are in healthcare and finance. But the majority of the investments are going to be enterprise software. So, there is no influence around that. It’s just that we help these companies, the huge digital transformation objective.

Tim: And so some of the startups she’ll introduce will be portfolio companies, some will be pipeline companies, it’ll just be whatever it might be useful to them.

Shinji: Yes, exactly. So, we are definitely not a corporate VC of that LP.

Tim: Let’s talk a little bit about traditional VC and CVC in Japan, because you’ve got a long career in CVC in Japan. I think the first time we met was back when you were at Itochu. I think I was trying to get you to invest in one of my startups as a matter of fact.

Shinji: Maybe that was the case. Yeah. Itochu is actually independent VC and also a corporate VC. Itochu is not the a hundred percent LP. Itochu is the 20% LP and the 80% come from financial institutions looking for IRR. When we invest in a company, we will help them penetrate the Itochu Group Company as a potential customer and also a distributor.

Tim: So ,what made you decide to move on from Itochu?

Shinji: When I was an investor at the Itochu, it was a rotational position. So, the maximum duration that I was able to stay there was three years. I was there at around two and a half years. I loved the job. So, I had the chance to meet the Salesforce ventures team in the US and I went to the pure corporate VC role at Salesforce. And it was a great organization, a great strategy, and I learned a ton. There were some challenges. Any position you have highs and lows, right? The lows was that since it was a strategic investment program, when you had an amazing portfolio company that you invested in the early stage, there were some challenges doing follow on investments. Because the whole notion of the partnership program was if you strike a deal, then you have a partnership. Salesforce becomes your partner in the sense that they attach your product into the Salesforce ecosystem. Once you have that in place, it’s not really necessary to do a follow on because it’s not going to shunt in the partnership. So, my goal was to invest in new companies all the time.

Tim: Right. But all the return comes from the follow on.

Shinji: Exactly. All the returns. And also there’s a lot of trust that’s built when you do a follow on with the entrepreneur. If you pass on it, even justifiable reasons, there is a market signaling risk for the founder. So, I am in the business of serving the founders as a VAC so I decided to move on and start my own independent VC.

Tim: Awesome. So, you’ve worked quite a bit both in San Francisco and in the Japan ecosystem. Do you think CVCs play a different role in Japan than they do in the US?

Shinji: Totally. And I think there should be an adjustment within the corporate VC in Japan. You have to be very strategic as a corporate VC because you’re essentially utilizing the balance sheet of the parent. That investment should be used in a very strategic way that adds value to that corporate. There are a lot of corporate VCs in Japan that are like an independent VC looking for an investment upside. Leave that to us. A corporate VC has an amazing brand, an amazing reach. Utilize that asset and maximize your shareholder value. And let me give you an example. I think there’s probably several models of doing corporate VC. One, when you invest in a company that product or service should serve that company’s customers. So, in the case of Salesforce, Salesforce had this marketplace called the app exchange. An obvious example is a company called Sansan, which is business card management. Everybody has a business card in Japan. So, the challenge of Salesforce without Sansan is that when you exchange a business card, you got to read that the business card data and type that data into Salesforce. That’s pretty painful. That was one of the reasons Salesforce Japan’s users were churning from Salesforce because it was such a nightmare entering data. When Salesforce and Sansan partnered from a product level, all you needed to do was exchange a business card, scan it through Sansan, import that into Salesforce, and that really solved the churn issue of Salesforce. That’s why Salesforce ventures invested in Sansan. That’s how you should strike this model.

Tim: I agree. And Sansan’s a great example of a company that for Salesforce was both strategic and provided some great financial return as well. But from a lot of the conversations I have, I think a lot of CVCs in Japan actually globally, but especially in Japan, I think a lot of CVCs start out with the idea like, okay, we’re going to provide strategic value. And then either because of problems getting that internal collaboration or because returns aren’t as high, they end up getting kind of spun out or pushed out and say, okay, we’re just going to focus on financial returns. But I agree totally a CVC’s reason for existence is to drive value back to the parent.

Shinji: Yeah. And I think Salesforce does an excellent job of doing that. I was hired as an investor. Some of the interview questions were around, do you think you can do hot deals? That’s what a top VC firm would ask. But you need that kind of people because if you invest in a very, very low probability startup and you put it in the ecosystem and you introduce that product to a customer, and let’s say they like it and they start using it, but that company fails to raise money and goes out of business, what’s going to happen to that data? That is a huge repetition problem. So, you need an investor guy that has the hat on to actually evaluate the company if it’s going to be really, really successful or not. Then you need the business development guy that understands the nascency of the stage of the product. But you need an organization structured to really help the startups.

Tim: Do you think Japanese VCs are more strategically focused than US CVCs?

Shinji: Many of the Japan CVCs, they say that they are strategic, but I think they’re more financially return driven, which I don’t think is sustainable at all. Because let’s say you have a huge company like Toyota doing a non-strategic CVC role, their net profit is huge. Even if you gain 10 million of capital gains, which is a pretty big deal for me, that doesn’t mean anything for Toyota, right?

Tim: Yeah. And the market would discount it anyway because it’s not coming from their core business.

Shinji: Exactly, it is a car automobile sales, right?

Tim:It’s like even if they win, nobody counts it.

Shinji: Exactly. Exactly.

(To be continued in Part 3.)

In the third part, we will discuss the trends in Japan's SaaS market and the changes among entrepreneurs and VCs in Japan.

Click here for the Japanese version of the article