The changes in SaaS and VC that have occurred during the coronavirus crisis. Forecast by Hiro Maeda, a capitalist who supports SaaS companies in Japan and overseas

A lot of people have been forced to work remotely as an infection control measure against the novel coronavirus, but some companies are doing well in this situation. Examples include companies that provide software that can be used via the cloud, such as Microsoft 365 and Slack, as well as SaaS companies such as Zoom, which has become synonymous with online meetings during the coronavirus crisis. In 2019, the domestic market for public cloud services, including SaaS, increased by 22.9% over the previous year, reaching 877.8 billion yen (*). It is said that it will exceed 1 trillion yen within the year.

* Source: Forecast of the domestic public cloud service market by IDC Japan

Using Zoom, we interviewed Mr. Hiro Maeda, managing partner of All Star SAAS Fund which specializes in investment and support for SaaS startups, and asked about the status of the SaaS business in Japan and overseas.

For this article, we requested a Zoom meeting with Mr. Maeda, and interviewed him about the changes in SaaS startups that have occurred in the “COVID period” and what managers should do for the “post-COVID period.”

INDEX

・Switching to remote work has accelerated in the “COVID period”
・The situation overseas is different, and there has been a delay of three to four weeks in India, Indonesia, and other countries.
・Forecasting the “post-COVID” world and changing the state of offices and consumption behavior
・SaaS startups and fund markets show serenity
・Assume that the same situation will continue for the next three years in order to respond to changes
・Management should emphasize communication and speed
・Key Points

Hiro Maeda
He is the managing partner of “BEENEXT,” a global fund that invests in startups based in Japan, the United States, India, and Southeast Asia. Together with Digital Garage and Kakaku.com, he co-founded Open Network Lab in 2010, which is a startup-training program aiming to expand throughout the world. He then oversaw the startup support and investment business in Japan and overseas as the head of the incubation division of BEENOS. In 2016, he was included in the venture capital category of the “30 Under 30” selected by Forbes Asia. He has invested in over 100 startups worldwide. His investment track record includes SmartHR, Kurashiru, Qiita, WHILL, Viibar, Instacart, and Slack.

Switching to remote work has accelerated in the “COVID period”

When will the coronavirus shock come to an end, and how significant will the human and economic damage be? We don’t have an answer yet. However, people’s behavior and values are already undergoing major changes. How does Mr. Maeda perceive the effects of the COVID shock?

Maeda: What has changed the most during the pandemic is people’s values, or in other words, their priorities; as the distance between people increases, what they thought was important until now has become less important.

For example, like me, some people have almost all their meetings online. I think many people have noticed that we can communicate without having to face each other physically.

Before coronavirus, I thought it was important to meet in person, so I tried to meet new people face to face as much as possible. However, when online meetings became the norm, I realized that I could convey what I wanted to say via Zoom, build relationships of trust, and build advanced collaborations. Looking around, I think many people feel this way.

Furthermore, when online meetings become the obvious choice, the mental obstacle to speaking is lowered because the need for travel is eliminated. In fact, since the pandemicstarted, my meeting time has doubled.

Mr. Maeda adds, “We are making progress in dealing with the COVID period regardless of the industry or occupation.” More restaurants are offering delivery services, and remote work is being adopted for many occupations, but are these the only changes?

Maeda: What all industries have in common is the “coronavirus” switching. To sustain their businesses, many companies are considering what to do and how to switch.

In addition to the food and beverage industry, various industries and occupations—such as human resources, legal affairs, customer support, and sales—have begun to work online. From now on, more companies will be hiring, selling, and doing other operations exclusively online, and services that can support these movements will grow.

All my fund investment targets are SaaS, and demand for SaaS, which supports online processes, has been increasing in recent months. Take SmartHR as an example, which is also an investment. We completed the online onboarding of about 200 new employees of a customer who introduced SmartHR this spring. SaaS that support customer success and sales are also growing, and I think it is a very chaotic and rapidly changing situation.

Before the COVID shock, remote work and DX were “should be” phenomena, and the degree of urgency was not high. However, it has now become an urgent and important matter. This trend will accelerate, as it is unclear when we will go back to normal.

The situation overseas is different, and there is a delay of 3 to 4 weeks in India, Indonesia, and other countries.

We have asked about the situation in Japan, but what changes are happening overseas?

Maeda: The phase of infection differs depending on the country, so we have to take that into consideration.

In the case of the United States, the peak of infection was around April 20, and it was in a chaotic state, and there was a lockdown. In this situation, medical care and survival were prioritized rather than the economy. Currently [as of April 27], it has calmed down to some extent, so we are in the switching phase of “How do we reactivate the economy from now?”

On the other hand, for India and Indonesia, this situation is yet to come. Looking at the number of infected people, the peak will come three to four weeks after the United States. They are now in the phase of preparing, because there may be confusion in the future.

Japan is unique, and so are its infection control measures. The policy is to settle things down while keeping the economy moving as much as possible. Speaking only of the SaaS industry, which is my investment target, there are cases where the number of negotiations and orders has decreased less than expected.

In Japan, the number of infected people has not increased explosively at the level of Western countries, nor has it decreased, so I think the government is in the process of figuring out how hard the coronavirus will hit.

In the midst of this disaster, life and the economy are in a trade-off relationship. The first wave of the pandemic is slowing, but it is possible that a second or third outbreak will occur. It is difficult to answer whether the decision of the Japanese government was good or bad.

Forecasting the “post-COVID” world, and changing the state of offices and consumption behavior

In the previous section, we asked about the change in the COVID period. Now, let’s ask about the changes after going back to normal. What will be different in the post-COVID world?

Maeda: The kind of habits that will become established between the COVID and post-COVID periods is an interesting topic of discussion.

I think DX will accelerate, using this situation as an opportunity. The companies that have on-premise environments will introduce the cloud, work efficiency will be improved, and work styles will change further.

When things go back to normal, some companies will continue with the remote system. My investment targets are also considering that it may be okay to continue with remote work. Of course, there are some relationships of trust that can be built only face to face, so I think offices will not disappear, but the concept may change.

The concept of the office will change from the conventional “place where work is done” to the “promotion of collaboration,” “cultivating the unity of members,” and “promoting information sharing.” Since the design of offices changes depending on the purpose, the space design should also change.

Mr. Maeda says online consumption will also become established.

Maeda: China is a couple of months ahead in terms of the impact of and response to the coronavirus crisis, and the demand for live streaming and online shopping is increasing. Online consumption is convenient and safe, so it should be used worldwide after going back to normal.

In this case, there is no choice but to stop making the excuse of “I can’t” and just develop the capability of doing it. In that sense, I think that society will take a turn toward a more modern direction.

SaaS startups and fund markets show serenity

Now, I would like to ask about changes in funds and SaaS startups, areas that operate more at the micro level—in other words, the specialty of Mr. Maeda. How will fund money move in the future, as the world economy is expected to cool down?

Maeda: I think the movement of funds will change significantly depending on when a company was established. Funds that target companies established less than two years ago have some remaining power, and new investments are necessary.

On the other hand, I don’t think that funds need to invest too quickly in the case of companies established more than two years ago. Also, as portfolios have been solidified to some extent, if funds are confident about their investment targets, these can be left as they are.

A lot of new funds were formed in Japan last year, and I think those funds have no choice but to take action. We were established in just June last year, so we are looking for new investment possibilities.

The startup ecosystem has been growing in recent years, and many VCs and CVCs have made new entries. Mr. Maeda has a “two years since establishment” threshold, so it looks like there won’t be a significant cooldown in funding. So how will valuations and the market environment change?

Maeda: As far as I can see, there is no big change, but I think that the impact will be great if the COVID crisis persists for a long time. I think year-end valuations will change significantly and may get lower than usual.

At the very least, I think there will be many flat rounds [where the company valuation is the same as in the most recent round]. Down rounds [where company valuation goes down from the last round] could also occur; however, the motivation of managers and employees may go down and morale may also decrease, so I think many VCs will try to avoid down rounds.

The startup market in Japan has been strong for the past few years, but with the coronavirus shock, it will be evaluated as calm.

Startups in recent years have been in a bubble state; it has been easy to raise funds, and large IPOs have been occurring one after another. The momentum is likely to slow down due now. Funds and start-ups need to show more steady behavior.

Assume that the same situation will continue for the next three years in order to respond to changes

Since the coronavirus shock, many people have been struggling to identify and respond to the situation. The question here is how to respond to the changes. What type of action is required of us in the midst of the coronavirus shock?

Maeda: I tell the companies I’ve invested in that “I want you to assume the worst.” Don’t be optimistic because there is no prospect of going back to normal, and you should assume that the same situation will continue for the next three years in the worst case.

In order to succeed in business amid the COVID situation, a wide range of support is required for all functions within a company, such as product design, organizational operations, recruitment, management, and sales. The reason is that if the situation continues for a long time, it will be irrelevant what you think about what type of needs will increase and how work will operate in each industry.

In terms of organizational operations, fully remote companies should expect the situation to continue for some time. Currently, various companies are trying to carry out management, recruitment, employee education, and other activities completely online. The same is happening with sales. It has become difficult to do face-to-face sales; online support is required right from the initial proposal to the negotiations and closing.

However, customers have the same sense of crisis and are supportive, so positive results are beginning to appear.

In addition, Mr. Maeda says, “Empathy is required for future business.”

Maeda: The characteristic of the COVID crisis is that the impact on the economy is not equal. If you have no empathy for the struggles of different industries, you will not be able to properly design and sell products.

For example, the restaurant and hotel industries have been hit hard, but this situation has been a tailwind for food manufacturing, logistics, e-commerce, and the pharmaceutical industry. The food manufacturing and logistics industries include types of work that cannot be done unless people meet each other. Internally, employee safety will be a top priority. Businesses in the coronavirus period require empathy given the different struggles and needs of each industry and occupation. Services that can meet these needs will continue to grow.

It is possible to create subdivisions within the same industry. For example, call center customers can be divided into securities, e-commerce, human resources, and more, so different types of support are necessary. Even in the manufacturing industry, the support content differs depending on whether we are talking of food manufacturing or automobile manufacturing. I think that more detailed attention is required, such as in the design and support for introduction hurdles.

If you lack empathy, you will not be able to grasp customer needs, and the product will not stick. The recession caused by the coronavirus shock will change customers’ cost awareness toward being more cautious. Whether or not people consider buying a product depends on empathy.

In order to improve our empathy, let’s try to imagine the jobs in different industries and occupations in as much detail as possible. If you put yourself in the position of the customer and think “What kind of issues could occur if I were the person in charge?” you should be able to determine the needs.

After the COVID shock, the economy may cool down, and companies may tighten their purse strings more firmly. SaaS companies that can help increase operational efficiency will be sought after even in a recession, but there may be a divide between companies that can and cannot follow this trend.

Management should emphasize communication and speed

Mr. Maeda also mentioned management. In particular, companies that have a fully remote system are required to improve the frequency of communication.

Maeda: In management, please pay attention to doubling the amount of communication. Let’s try to have meetings twice a month instead of one monthly meeting, or having weekly one-on-one meetings instead of once every two weeks.

This is because the frequency of conversations decreases steeply in remote work. Interaction and information exchange facilitate teamwork. If attention isn’t paid to them, it will be difficult to maintain teams, so we have to increase the frequency of interactions.

It will also become difficult to ask for advice, so please create an environment where members and managers can easily consult with each other.

Mr. Maeda also emphasizes the speed of response. Business requires a sense of speed in normal times, but more speed is necessary during such crises.

Maeda: On April 28, SmartHR released a TV commercial titled “The Procedure for Joining the Company Done through Teleworking” and has also developed advertising posters to display in trains. What I want to emphasize is the sense of speed. The TV commercial was released 20 days after conceiving the idea, and the poster advertisement was released in 10 days.

Now, there are a lot of people who have to go to work but don’t really want to. This advertisement resonates with such people and has a strong message. In the future, more people will suggest to their bosses, “Let’s introduce SmartHR.”

I would like many companies to imitate this sense of speed. Growing companies are quick to respond to changes. Because you can make quick decisions, you can take a leading position and gain a market advantage.

Other than SmartHR, KARAKURI, which uses AI chatbots to improve the efficiency of call center operations, and Holmes, which provides legal support for companies, are compatible with remote work and help make quick decisions, so I think they will grow in the future.

Darwin, who advocated the theory of evolution, said, “It is not the strongest that survives, but the one more responsive to change.” In the coronavirus crisis, which is a kind of event that has rarely been seen, not only responsiveness but also speed may be important.

Finally, we asked Mr. Maeda to offer a message to our readers.

Maeda: We will certainly overcome the coronavirus crisis at some point. We can see a light ahead, so the question is how ready you are for the post-COVID period. The business ideas that can be applied only during the coronavirus period are weak, and companies can’t grow unless they can predict what the world and economy will be like in the post-COVID era.

It has been necessary to deal with chaos during the last one to two months. I think the first wave of the coronavirus crisis will settle down sometime from summer to autumn. We need to prepare now for further growth.

It’s a situation that many people didn’t expect, and I think many people are in trouble, but let’s deal with this disaster with hope.