SaaS* can be used regardless of location or device by utilizing cloud technology. Success stories have appeared on a global scale, such as “Microsoft Office 365,” “Adobe,” and “Salesforce.” The overseas SaaS market is growing by about 20% per year on average. By 2020, it is expected to grow to about 89 billion dollars (a little less than 10 trillion yen).
The SaaS market can be said to represent a big business opportunity on a global scale. Of course, Japan is no exception to this. Also, there is data suggesting that the domestic SaaS market is growing at an average annual rate of about 15%, and the venture capitalist Hiro Maeda is committed to growing the domestic SaaS market. He is one of the people to have supported domestic and foreign SaaS companies and is bringing know-how gained overseas to the Japanese SaaS business.
On this occasion, I asked Mr. Maeda about the difference between overseas and Japanese SaaS businesses, and what it will take to grow the domestic SaaS business in the future.
* SaaS (Software as a Service). Software provided in the cloud. Instead of installing software on the user’s device, the service provider runs the software, and the user accesses the service via a network
・What do globally successful companies have in common?
・The reason for not growing as a company can be due to being totally committed to diversity
・Rather than being conscious of global expansion, one should think about “industrial transformation”
・The strength of big Japanese companies leads to the success of the SaaS business
・The SaaS market in Japan is growing, with the declining birthrate as a tailwind
・The key to the SaaS business is the ability to gain people’s trust
Hiro is managing partner of the global fund “BEENEXT,” which invests in startups based in Japan, the United States, India, and Southeast Asia. In 2010, together with Digital Garage and Kakaku.com, he co-founded “Open Network Lab,” a program for developing startups with the goal of expanding them globally. After that, as General Manager of BEENOS’s Incubation Division, he oversaw the startup support and investment business in Japan and abroad. In 2016, he was selected by Forbes Asia for the “30 Under 30” in the category of venture capital. He has invested in over 100 startups worldwide. These investments include SmartHR, Kurashiru, Qiita, WHILL, Viibar, Instacart, and Slack, among others.
What do globally successful companies have in common?
Mr. Maeda is currently investing in India, Indonesia, Vietnam, the United States, and Japan. What are the difficulties facing a capitalist investing in different countries?
Maeda: There is a common language used by entrepreneurs in different countries. There is not much difference among countries regarding the things that entrepreneurs are worried about. One common problem is a ‘lack of inspiration.’ They are always thinking about how to design a business and where to monetize it. So, they have a voracious appetite for opportunities to talk with outsiders and get inspiration. I’m investing in SaaS services specifically, so there are many overseas example cases. In that respect, startup managers in all countries have felt the benefits. Another problem common to all countries is ‘loneliness.’ Entrepreneurs cannot consult employees, even if they are worried, and it is difficult for them to show their weaknesses. They are looking for a partner who they can talk to and who will sympathize with them.
— That said, laws and regulations, as well as the market environment, differ from country to country. How do you utilize service example cases from other countries?
Maeda: Of course, example cases from other countries can’t be applied as they are. However, there are many things you can learn, even if the market environment is different. I break down businesses that are successful in other countries, abstract the elements that worked well, and integrate them into our strategy.
Maeda, who has observed successful global companies, has seen what is necessary for Japanese companies to compete globally in the future.
Maeda: There are some similarities among globally successful SaaS companies. One is ‘gaining users from the bottom up.’ In other words, the service can be used easily without the need for complicated explanations, and the sales process is unnecessary. This is true for the online video conferencing tool ‘zoom,’ the task management tool ‘Trello,’ and the communication tool ‘Slack.’ They can be easily introduced by self-serve. The second point in common is ‘having one-of-a-kind value.’
This means that you cannot find a similar solution in the market they are serving. For example, now, Indian startups are proposing solutions that are not yet available in Japan, and there are signs of success in Japan. In fields that require high-level technology, such as robots and AI, there is a good chance that companies can compete globally if they have the technical capabilities. In other words, if you have ‘overwhelmingly easy-to-use service design’ or ‘overwhelmingly high-level technology,’ you will be able to compete globally. Without either of these, it will be difficult.
The reason for not growing as a company can be due to being totally committed to diversity
— The conditions for competing globally that you mentioned, “overwhelming ease of use” and “overwhelming technical ability,” are not something that can be obtained overnight. What do Japanese startups have to do to compete overseas in the future?
Maeda: In order to achieve the two things I mentioned above, it is necessary ‘to create a good team.’ There is no option but to hire engineers and UX designers who can compete at a global level. In short, building a world-class team is the most important aspect. Capital strength is not very relevant to creating a world-class team. Just having ‘a few outstanding people’ is enough, and strategy is also important as a premise. It will be difficult to succeed globally if you make a mistake regarding which market and which problem to solve with which product. It doesn’t make sense to have a good team, if you choose a market that already has a global giant in it, like products related to business processes.
— It is sometimes said that “diversity” is necessary for innovation. So, which is better, a team of diverse people or a team that has the same values and can run toward the same goal?
Maeda: I would say ‘a team with diversity and a common mission’ is number one, but this is a luxury. Diversity is important, but teams that don’t have a common mission or criteria will face a barrier to expanding their business. This is because there will be friction in discussions if the criteria aren’t the same. For example, if you put together a person who focuses on money, a person who focuses on customer satisfaction, and a person who focuses on the vision, due to their different axes of judgment, the discussion will never end. As there is no correct answer, no matter how far along you go, the discussions will keep running in parallel. This problem happens in startups around the world.
In fact, I often integrate myself in the team to find out why the discussions are out of sync and to put together the narrative. If the judgment criteria aren’t fully set and the discussions don’t settle, there is no choice but to ask someone to leave the team, even if it is at the management level. For startups without enough resources, letting people go is a big pain, especially at the management level. However, it is also a growth pain that is necessary for a company to grow. In fact, if you look at successful companies around world, there are almost no cases where the entire management team from the time of establishment is left at the end.
Rather than being conscious of global expansion, one should think about “industrial transformation.”
— Having a team that can compete on the world stage is necessary for competing globally. Well then, what about creating a service?
Maeda: It is difficult to design a service that considers global expansion from the beginning. In any case, the startup mission should be to satisfy the customers that are in front of you. Thinking about global expansion will increase the number of items you will have to think about, which may lead to missing opportunities with customers that are in front of you and slow down development. To be honest, there is a strong element of luck in being able to expand globally, and reproducibility is not high, so it is better not to think about it too much. I think the degree of transformation that can be made in the industry is more important. For example, this is very significant in the construction industry. I wonder how big the transformation will be if SaaS for construction companies is successful. It is important to be able to aim for an exclusive position in a large industry. So, let’s think about it by industry and leave overseas for later.
— Is it common around the world to specialize in industrial transformation rather than expanding to other countries, or is this because it is Japan?
Maeda: Japan has the third most mature SaaS business in the world after the United States and Europe, and, regardless of whether you are in the United States or Europe, your business is based on your home country. India will mature in the future, but based on its own country. Japanese SaaS startups are also definitely based on the domestic market.
The strength of big Japanese companies leads to the success of the SaaS business
If you turn your eyes toward the domestic market in Japan and start a SaaS business that aims to transform an industry, “you need to be aware of major companies,” Mr. Maeda continues.
Maeda: For a SaaS business to succeed, it is necessary to find a deep-rooted problem that many people suffer with and to find a way to solve it. The more people who are worried about it, the bigger the market will be, and if it is a deep-rooted problem, people will want to solve it, even if they have to pay. This is a common viewpoint when thinking by industry, and the strength of big companies is indispensable there. If you want to transform your industry, you have to get the big companies on board. The ideal would be to have them as partners, but it is also important to have them as customers. Developing a business targeting big companies is similar to developing a business targeting small- and medium-sized companies. The ‘service is catching up’ and the ‘organization is catching up’ are both necessary for a business targeting big companies. It is not uncommon for companies to establish new units that target big companies. It is necessary to be prepared and ready.
— Establishment of new departments is a “preparation” issue. Then what does it mean to be “ready?”
Maeda: At big companies, the number of employees is incomparable. This greatly increases the scope of the impact of a single problem. SaaS business is all about brand power. ‘Trustworthy brand power’ must be fully protected. Dealing with big companies leads to great credibility, but on the other hand, a single issue can damage the brand, which is a big risk, and for that purpose, it is necessary to be ‘ready,’ which includes being ready to grow personnel numbers and the organization.
— The benefits of doing business with big companies are obvious. However, there are also disadvantages, such as the need to be very cautious, which slows down the speed of development. What is the appropriate timing for doing business with big companies?
Maeda: The optimal timing depends on the competitive environment. No matter what you think, if there is no competition, or if it can be easily replaced, there is no need to rush into targeting big companies. On the other hand, if there is competition in a market with first mover’s advantage, it is better to rush to develop relationships with big companies. Balance with the internal environment is also important, and the most important thing to avoid is a situation where ‘a major company became a customer, but the contract was later canceled due to not being satisfied.’ It is better not to move forward if you don’t have a service and organization that will satisfy customers.
— Winning a big company as a customer is a phase-changing event for startups. Well then, how about dealing with major companies as partners rather than customers? Tell us why open innovation doesn’t work.
Maeda: The primary reason why open innovation fails is that the motivation between startups and big companies is not consistent. If the aim of open innovation and the definition of success aren’t shared, it is not possible to succeed. It is also important to be equally committed to each other. If either one is only halfway committed, open innovation won’t succeed. In fact, when I talk to startups and conduct hearings, there are actually many cases where things aren’t being taken seriously. You won’t succeed if the motivation is just to have a track record of working with open innovation or to collaborate with a big company.
The SaaS market in Japan is growing, with the declining birthrate as a tailwind
— In the Japanese SaaS market, startups involved with big companies are expected to flourish. However, the population of Japan will decrease in future due to the declining birthrate. Is there a future in the Japanese market?
Maeda: The Japanese SaaS market will continue to grow, because the declining birthrate and aging population will raise the bar for hiring people. In order to keep sales, even with a small number of people, there is no other option but to improve business efficiency, and SaaS is indispensable for that. Conversely, in countries such as Vietnam, where the working population is increasing, the SaaS business may be at a disadvantage. SaaS will not spread easily unless it is in an environment where ‘considering personnel expenses, it would be overwhelmingly cheaper to use SaaS.’ This is a big bottleneck when Japanese SaaS companies expand overseas.
— The conditions are favorable for SaaS startups in the Japanese market. How would this be reflected when expanding the perspective to the startup ecosystem?
Maeda: Japan’s startup ecosystem is very blessed. There are cases where funding supply is low or the amount of funding raised is low, but even in such situations, they are fortunate compared to startups overseas. In the United States, the fund-raising hurdles for SaaS companies are increasing year-on-year. Since SaaS is mainly B2B, it is relatively easy to analyze and set KPIs, and all the fast-growing top-tier KPIs are available. Even KPIs of startups in their seed stage get compared to those of top tiers, so they can’t get an investment if there is no sign of becoming a top-tier startup. In other words, money is concentrated on top-tier companies, and in contrast, other companies can’t collect money.
— The situation, which can be said to have the characteristics of equity finance, has already begun overseas. Won’t Japan be affected by that?
Maeda: Japan has a different market to the United States, so competition is not visible at the moment. Even if it is judged by looking at the growth curve, it is not compared to detailed KPIs. In the first place, there are still not many SaaS companies in Japan. Therefore, there is no definition of top tier, and if there is a certain social need, it is possible to raise funds. In the United States, there are three or more companies providing SaaS for one issue, and the competition is fierce. In contrast, in Japan, even if there is competition, it is from one company. So, the fund-raising hurdles are low.
There seems to be no doubt that Japan offers a good environment for doing SaaS business.
The key to the SaaS business is the ability to gain people’s trust
Future startups will have to deal with partners in completely different environments, such as overseas and big companies. Mr. Maeda talks about what is necessary when crossing boundaries.
Maeda: The important thing is ‘to gain people’s trust.’ Specifically, you must act with your partner in mind. It is difficult to earn trust by persisting with solely your own way. SaaS business is the world of data, but at the end of the day, the circumstances among people will speak for themselves. This also reflects the reason for my existence. If it were possible to invest only using data, then a VC would be unnecessary. As the data world is important, a soft side is also required.
— As it is a digital world, analog humanity is necessary. No matter how much technology has evolved and the business model has changed, it seems that the skills needed by managers have not changed.
Maeda: Looking at successful startup managers, they are always gentle and humble. That’s why they are interested in the other party and notice the details. Such people grow faster. No matter how successful they are, they understand that they ‘are not perfect human beings,’ so you can see that they grow every time you meet them. Strategies are important, but I want to see more managers who value gentleness and humility.
— SaaS business will become a majorbusiness trend in Japan. As it is a business that uses cutting-edge technology, it is interesting to go back to the most important points in business, such as human empathy and trust. The more a business evolves and the more technology it develops, the more likely it is that the human aspect to handling it will be highlighted.
・Innovation can happen when the team has diversity and a common mission.
・The amount of change that can be made to an industry to achieve growth with SaaS services should be considered.
・Open innovation requires the sharing of the definition of success, along with equal commitment levels, in order to be successful.
・In order to keep sales, even with a small number of people, there is no choice but to improve the efficiency of the business, and SaaS, which is indispensable for that, will be advantageous.
・In order to cross the “boundaries” between startups and big companies, it is important to gain people’s trust.