[Podcast] Why SaaS is growing so much faster in Japan — Interview with Shinji Asada at One Capital (Part 3)

This content is provided in partnership with Tokyo-based startup podcast Disrupting Japan. Please enjoy the podcast and the full transcript of this interview on Disrupting Japan's website!

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.

To listen to this podcast, please click here.

(The third of four parts. Continuation from Part 2)

Tim: Let’s talk again about SaaS in Japan because I know that’s a subject close to your heart. So, on one hand, okay, everyone loves SaaS. Margins are great. They’re easy to measure. You can track it, you know if the startup is on target. But in the US actually SaaS that we’re seeing a lot of down rounds. We’re seeing a lot more flat rounds and extension rounds and this once extremely hot sector is, eh, kind of cooling off a bit in Japan. It still seems pretty hot. Is something unique in Japan that SaaS uniquely addresses here?

Shinji: I think it’s purely a time difference. The US SaaS market evolved a lot quicker and became a lot bigger. And then you had the zero interest rate age. So, the demand in supply of cash was very imbalanced. So even you had, I don’t know, $2-3 million of ARR some of these companies were valued at unicorn levels, but Japan is late to the game. And we have a huge market that I just explained about the 4% penetration rate of SaaS. So, there’s a lot of catching up to do. And we had covid, so there was a lot of fast forward. So, there’s a lot of revenue upside for Japan SaaS right now compared to the US market. Japan VC is probably 130th or 120th. The size, the VC market is growing. I mean, within the past seven years we 10X but we’re still around 10 billion of annual investment into startups. So, it is big, but relative to the US it’s still a small market. And I guess the numbers of unicorns, not only SaaS, but in total is about 10 to 12 companies. In the US there’s about 650. So there’s a lot of, I think, fake unicorns in the US I think it’s purely a time difference thing. When Japan becomes as big as the US market, it’s probably going to take another 5 to 10 years. Then we’ll see maybe 300 unicorns in Japan popping up. But like we’re still a small market.

Tim: So, it makes sense. So, we’re looking at earlier in the market, the valuations are lower, the penetration is much lower. So yeah, that’s a lot to love here about SaaS in Japan.

Shinji: Totally, yeah.

Tim: So, what makes a great SaaS company? What are you looking for when you’re evaluating and investing in SaaS companies here in Japan?

Shinji: I take a very simple approach. It’s the product. A lot of the VCs talk about team, the team the team the earlier stage you go into. But I think if you have such a great team, you should be able to build a great product. So, why not focus on evaluating the product and in order to be in a position to evaluate if it’s a great product or not. We try our best to use amazing SaaS products all around. We probably use over a hundred SaaS apps right now to run our firm, but we also use SaaS product that’s not even needed for a VC firm. Like market automation, DevOps, all that stuff. Even blog related SaaS products like Cumberkit. And based on that experience, we have a definition of what a great SaaS product looks like from a login to logout perspective. And I know we’re never perfect, we’re still learning on the job, but like we love to look at products, period.

Tim: That’s really interesting. Most VCs when I talk to about SaaS, they’re like, well, here are my three favorite SaaS metrics and this is what we’re looking for. But you guys really take an evaluation of the product, use it kind of very subjective, a feeling of using the product from a user’s point of view.

Shinji: Totally.

Tim: Wow. Do you have favorite metrics or do you really focus that much on the product?

Shinji: So, based on sage of the company, we have objective measurable KPIs that we look for. If you are pre-revenue, obviously you don’t have the kind of metrics retention rate is what we only focus on, right? A series A company we think should be around 1 million of a RRA middle stage company should be between three to five. A late stage should be over 10. And we focus on seed and early, meaning pre-revenue and 1 million of AR. That’s our sweet spot. We do a little bit of middle stage three to 5 million of. So, that is one metric that we look on.

Tim: That makes sense. I mean, if you’re looking at quality of the product and traction in the market, it’s hard to go wrong with that. Before you guys put out the one Capital Cloud index, are you still doing that?

Shinji: Yeah, we’ve extended that use case to a new product that we launched called the projection AI database. It’s sort of like the Bessemer Cloud Index with a lot of data. We have about a hundred companies in that database. 70 companies are US, 30 companies are from Japan that we categorize as SaaS. And we capture metrics like ARR and NRR and all that SaaS metrics of publicly listed companies.

Tim: We’ll put a link to that on the site so people can check it out because it’s really cool. What are your thoughts on generative AI right now?

Shinji: I love it. I love it. I use it every day. Generative AI needs to be integrated with all SaaS companies because SaaS is basically a system of record. It has a lot of closed data within that organization and there’s a lot of learning that should be done with that data to help the users be more productive. So, asking and telling all of my portfolio companies and that AI into their products.

Tim: Wow. Right. Let’s step back a bit and talk about Japan in general. So, since you’ve started your career in investment since way back at Itochu, how have you seen Japanese founders change in that time? What’s been the biggest change you’ve seen in Japanese founders over that time?

Shinji: When I entered it back in 2000, that’s way, way, way long ago, I still had the privilege of meeting founders. And not to sound too critical or negative, some of these entrepreneurs were people that weren’t able to land a job at a big company or even a mid-size company. They had to choose to only become an entrepreneur because they weren’t able to be hired. Fast forward a decade, you have amazing founders from amazing companies. It was the recruits, it was the Mitsubishi Corporation, Itochu Corporation, like these large companies had entrepreneurs like pouring out. I think today you have the Googles, the Facebooks, the Salesforce Japan members spinning off and starting companies. And also you have amazing Japan tech startups going public and the early members, not the founders, but the early members gaining experience and gaining confidence, cashing out their stock options and starting their own companies. So, at One Capital, we really focus on these two groups, the ex-US tech companies that enter Japan and the Googles of the world starting companies, and really members of these tech companies that went public. So, those are the two entrepreneur base that I’m actually scouting right now.

Tim: Yeah, I think you’re right. The quality of entrepreneur, both in terms of the, what can we put it, social status of the entrepreneur because back in the dotcom era, a lot of founders started companies because they didn’t really have a better choice. There was not a whole lot of other options. And I guess to some extent I’m in that category and now, yeah, some of the graduates of the top universities, senior level people at major corporations are quitting to start companies. And that’s amazing. But also the quality of education, the logistics and how to build a company is much better understood now than I think it’s ever been before in Japan. So yeah, I agree. We’ve seen a tremendous increase of quality among founders. What about the change in VCs you’ve seen over that time?

Shinji: I think VC is lagging compared to how the startups and the founders have evolved and become high quality. That’s why at One Capital we took a very unique approach in raising capital, using that consulting as a service concept, but applying that model to a typical LP role. I think there should be more innovation in Japan or VC in general. And especially for like the investing area we shipped three products with within the SaaS realm. One is that the database that I just mentioned. The second one is we have a financial model builder that through three clicks, then you can create a very robust financial model. VCs should also be able to build the product and understand how to scale products. Of course, scaling the product isn’t our main mission. So, we’ve kept that to a decent level.

Tim: That’s a very interesting point. Yeah, you’re right. A lot of Japanese investors think about investment far too narrowly that they tend to be very smart finance people. And they don’t think about products, whether that product is something you’re offering your portfolio company or an actual information product like the cloud index and yeah.

Shinji: And through developing and shipping those products, I’ve learned a ton about SaaS. Not just from the textbook but…

Tim: I bet. Yeah.

Shinji: Real world of shipping a version and then having to debug issues and getting yelled at by customers. And I actually do inside sales sometimes with these products. And some of the founders that want to use this product are like, hey Shinji, why are you on this call? I’m like, I’m the inside sales guy. But at the same time, that’s also deal sourcing for me because I’m targeting the early, early seed stage companies to use my products.

Tim: And I think that gives you a real credibility with founders. Even if you haven’t really started a real startup yourself going through those experiences for real. When you don’t have to and you’re not going to get a billion dollar exit. Yeah, I can see that buying you a lot of credibility and goodwill.

Shinji: And that’s what I think lacked within myself during my prior investment roles. Because you were the person that was choosing the companies. But at the same time, it’s actually the opposite. The amazing founders have to choose the VC and those are the companies that you should be investing in. So I was like, what are the ingredients of being chosen by these amazing founders? And my short answer was to speak the same language. And my questions when I do diligence is not about what’s your attend, what’s your voter market strategy? These companies typically reach 1 million, as I said. So my question as a product founder myself, I’m like, how did you get to 1 million? I am still at like 100k, I’m suffocating. I’ve done this marketing, I’ve done this, sales motion. What have you done to achieve 1 million? Teach me. And that is a very different way of asking the same question from like a typical VC saying, how’d you make it? Why aren’t you at 3 million of ARR? Why isn’t it that easy? Like that VC’s never even done it. I’ve never done it. So, you get a lot more modest and a lot more respectful for the founder. And that’s what I really gained through that experience of building a product and shipping it and having a hard time.

Tim: Well that’s awesome. I think you’re right. There are a lot of particularly successful old school venture capitalists in Japan who haven’t really accepted the idea that the founders are choosing who their investors are. It’s a hard thing to really get your mind around the first time.

Shinji: Totally. Totally.

(To be continued in Part 4)

In Part 4, we will ask Mr. Asada about the changes he has experienced over the past year and his outlook on Japanese startups over the next decade.

[ This content is provided in partnership with Tokyo-based startup podcast Disrupting Japan. Please enjoy the podcast and the full transcript of this interview on Disrupting Japan's website! ]

Click here for the Japanese version of the article