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Rakus (TSE: 3923), Japan’s largest listed pure-play Software-as-a-Services (SaaS) company – H.E.R.O. Innovators Insights from CEO Takanori Nakamura

Can you name a unicorn (valuation of at least US$1 billion) who is profitable and generates positive free cashflow and has NEVER taken a single dollar of venture capital?

We know of only one such rare company globally – Ben Chestnut’s Mailchimp, which operates a SaaS (Software-as-a-Service)-cum-freemium business model in email marketing services based in Atlanta, far from Silicon Valley. What is it about the SaaS business model that makes them so resilient and exponentially scalable in growth? Importantly, are there similar emerging profitable SaaS innovators generating positive free cashflow like Mailchimp in Asia?

SaaS companies have demonstrated resilience in difficult and uncertain market and economic environment because of their (1) recurring and predictability of the revenue model in growing paying subscribers; (2) ability to plainly state the target market that is largely underpenetrated and show a pathway to address it with compelling solutions, with proof in the form of revenue growth; (3) positive cashflow to fund their own business; and (4) “land-and-expand” business model with low-priced cloud-based solution to convert users with low-touch sales force to scale up business profitably. Amidst market volatility and uncertainty, prominent listed SaaS companies breaking or staying near record-highs include Veeva, Atlassian, Tableau, The Trade Desk, Bandwidth, Alteryx, HubSpot, Zendesk, etc. They are part of a group of at least 57 SaaS companies that were listed in the recent five years which have a combined market value of US$328 billion generating US$27.7 billion in sales and trading at EV/Sales of 11.4x. Selected SaaS companies are also being eagerly snapped up recently by giants at high valuations which could raise the price for future transactions: Salesforce announced in Mar 2018 the acquisition of MuleSoft for $6.5bn at 21x revenue multiple, or 16 times its projected revenue of $411m for 2018. Adobe announced in Sep 2018 the acquisition of Marketo for $4.74bn at 14.8x revenue multiple. Microsoft announced in Jun 2018 the acquisition of GitHub for $7.5bn at 37.5x revenue multiple.

It is easy to be derisive towards the disruptive trend in SaaS companies, and we think it is more important as value investors to keep staying curious & humble, and to keep learning & adapting in an exponential world where the paradigm shift to avoid a growing “new” group of cheap-gets-cheaper “value traps” has never been more critical. We believe there is a structural break in data in the market’s multi-year appraisal (as opposed to “mean reversion” in valuation over a time period of 2-5 years) on the type of business models, the “exponential innovators”, that can survive, compete and thrive in this challenging exponential world we now live in. While tech-focused innovators with non-linear exponential growth potential are the most relevant multi-year investment trend and opportunity, it is important to have the fortitude to not chase after the popular shiny things and overpay for growth and the Rosetta stone lies in understanding and deciphering the business model dynamics of exponential innovators.  

A Mailchimp-like innovator in Asia is Rakus, which is Japan’s largest listed pure-play Software-as-a-Service cloud solution provider to SMEs with over 50,000 paying end customers using its services. Founded in 2000 by Takanori Nakamura and listed in Dec 2015, Rakus has developed multiple cloud services generating stable, recurring and increasing growth with EBIT margin of 20.2% (FY16: 19.2%), free cashflow margin of 13.7%, and ROE (= EBIT/ROE) of 36.5% (FY16: 34.9%). Amongst the 57 US-listed SaaS companies, 37 of them have positive free cashflow (FCF) and 18 have FCF margin (= FCF/Sales) above 10%, as compared to Rakus’ 13.7%. Ranked by the FCF margin are Veeva (34.9%), Atlassian (32.2%), Dropbox (25.7%), ServiceNow (21.3%), Paycom (21.3%), Blackbaud (21%), Splunk (19.7%), Appfolio (18.5%), Paylocity (17.1%), SurveyMonkey (14.7%), Cornerstone OnDemand (14.4%), Workday (13.9%), New Relic (12.4%), The Trade Desk (12%), Tableau (11.3%), Box (11.3%), Bandwidth (10.6%), DocuSign (10.4%). However, only 9 SaaS companies were able to achieve both positive accounting profit and positive free cashflow (Veeva, Paycom, The Trade Desk, Blackbaud, Alarm.com, Appfolio, Paylocity and Bandwidth) and only 3 had a higher EBIT margin than Rakus (Veeva, The Trade Desk, Paycom), making the highly profitable Rakus a rare stand out amongst its SaaS peers globally.

Rakus’ cloud service portfolio include:
(1) dominating as the #1 leader with 71.3% domestic market share (based on sales value) in Mail Dealer (https://www.maildealer.jp), a mail groupware for mail sharing, managing, and supporting in various names, with over 5,000 companies as customers who are in e-commerce, call centers and other B2C businesses (24.2% of sales, +15.5% yoy, revenue model is based on number of emails stored in the system + option fees).
(2) the #2 player with a 26.4% market share (based on sales value) in cloud-based expense settlement system Raku Raku Seisan (https://www.rakurakuseisan.jp) to 3,606 companies as at Sep 2018 (35.9% of sales, +67.8% yoy, revenue model is based on number of users + option fees; Mar 2016: 1,236 companies). Rakus is the #1 player based on the number of companies (2,600 in 2017), which is 2.6X more than the #1 player with 1,000 companies who has achieved a market share of 50.5% (based on sales value) by targeting large companies selling services at a higher unit price. For its fast-growth cloud-based expense settlement system Raku Raku Seisan, the target market is 100,000 companies which have 50 to 1,000 employees with 64.4% still using the traditional paper/spreadsheet system, and Rakus aim to acquire at least 20,000 customers.
(3) the #4 player in cloud-based email distribution systems (22.5% of sales, +78.8% yoy) via its Hai Hai Mail with over 6,000 customers (revenue model is based on number of registered addresses + option fees) (https://www.hai2mail.jp), Curumeru (revenue model based on number of emails distributed + option fees) (https://www.curumeru.jp), and Blaynmail (acquired in Feb 2018 and renamed blastmail) (https://blastmail.jp) with over 8,100 customers.
(4) cloud-based data processing system Hataraku DB (8.5% of sales, +29.2% yoy, revenue model is based on number of users and number of databases + option fees) (https://www.hatarakudb.jp) with over 1,000 customers.
(5) digital documentation system Raku Raku Meisai (4.4% of sales, +174.8% yoy, revenue model is based on number of documents issued + option fees) (https://www.rakurakumeisai.jp).
(6) Other cloud-based services include chatbot Chat Dealer (https://www.chatdealer.jp) launched in July 2017 to enable efficient correspondence and provide customer support by chat, and call center/CRM helpdesk Rakutel (https://www.rakutel.jp) launched in Apr 2017. Rakus also operates an IT engineer dispatch services (which accounts for 25.9% of sales and 10.9% of operating profit).

With the compellingness edge in its unique SaaS services in solving headaches for its customers to free up cost and time, Rakus achieved a 71% and 80% absolute increase in sales and operating profit in the recent 3 years to US$61.4m and US$12.4m respectively for its latest 12 months results, propelling a 279% increase in market value since its listing in Dec 2015 to US$938m. On 13 Aug 2018, Rakus announced its 1Q (Apr-Jun) results in which sales rose 40.4% yoy to nearly 2bn yen and operating profit jumped 59.1% to 463m yen, and OP margin increased from 20.6% to 23.3%. Monthly sales in July and August continued on the strong growth trend, increasing 39.3% yoy and 40% yoy respectively. Rakus is also planning the launch of a new SaaS service in its cloud portfolio: on 5 July 2018, Rakus announced the development of a new cloud service that streamlines labor management.


CEO Nakamura is clear in his mission to focus on and serve the SMEs: “There are approximately four million SMEs in Japan. But their business management resources, such as budget and personnel, are limited compared to big companies. In addition, many SMEs don’t have dedicated in-house IT system specialists. Therefore, they are behind in introducing IT and improving operational efficiency. RAKUS has contributed to SMEs’ growth by providing user-friendly cloud services which SMEs can easily adopt. We also dispatch the IT engineers we have nurtured to those SMEs which have a shortage of IT specialists and help them flourish. Our corporate mission is ‘We strengthen SMEs through IT.’ A vast majority of companies in Japan are SMEs and there are four million of them. There are only a handful of large companies such as over 5,000. SMEs employ more than half the workforce of this country. What Japan needs to keep its society safe and prosperous is stronger SMEs. In order to make the future of Japan brighter and more prosperous, we need to improve the work and the lives of people working at these companies. We believe that IT technology exists for that purpose. RAKUS provide SMEs with information technology which is usually used by large companies. We would like to contribute to the utilization of relatively inexpensive IT power Moreover, we have been improving on a daily basis the technology we offer so that SMEs can use it more easily with lower costs. The company name RAKUS comes from the word ‘easy’. This includes our wish that IT systems can be used comfortably and that people working in small and medium enterprises will enjoy work and life as well. It is a great pleasure that we can contribute to SMEs’ business growth and to the well-being of their employees.”

On the competitive strengths of Rakus, CEO Nakamura commented: “The strengths of Rakus include (1) as one of the largest domestic SaaS companies, we can secure bigger internal and external funding for investment than our competitors by managing the portfolio of multiple services, (2) our main services are offered at approximately 100,000 yen of initial cost and a few tens of thousand yen of monthly subscription fees, (3) our in-house support teams provide customers with sufficient support from installation through operation of the system, (4) Rakus provides best-of-breed systems which are simple and user-friendly systems specializing in improving efficiency for a specific business operation. Other vendors may provide complicated systems with multiple operations embedded which are complex to install and operate, and are also expensive, and few users appreciate the benefit.”

When asked about his entrepreneurial journey and how he came to start Rakus, CEO Nakamura said reflectively: “After graduating in business administration from Kobe University, I joined Nippon Telegraph and Telephone Corporation (NTT West) in April 1996 and worked mainly in the sales field. I saved 20,000 yen every month as capital for the establishment of the joint-stock company Digital Networks in 1997. I studied programming on my own. With five friends, we were writing websites and writing programs at friends’ home after NTT’s normal duty on weekdays and on weekends and we devoted ourselves to development. Back then was the beginning of the internet. The Internet has not been widely used in general companies, and there was no email address. Meanwhile, in NTT, everyone has an e-mail address, and there was a training to write HTML and we were developing a free mailing list service. I left NTT in about two years to concentrate on the project. In 2000 the company name was changed to Infocast in Jan 2000. We got funding of 100 million yen from the venture capital firm JAFCO. We achieved over 400,000 users for our mailing list service. We later sold Infocast to Rakuten Corporation in Oct 2000 after Yahoo Japan started acquiring competitors one by one. I established Rakus in November 2000.”

CEO Nakamura added on the importance of looking beyond the short-term profits and at the future potential during the early days and how he had to make the difficult and unpopular decision to end a part of the business to focus on developing the cloud business: “At the beginning of the establishment, I operated an IT engineer school to train engineers. I devised teaching materials during the day and I was writing programming at night. However, because the market size is very small, the fixed cost is large as I need a classroom and some lecturers, and it is a labour-intensive business, it has been difficult to keep on it for a long time, especially if the number of students decline. So, we dropped the profits gained from the school business. Employees quite disagreed with the decision to stop the school business in 2006 which had achieved 200 million yen in sales, accounting for 40% of the total sales then. Because we had a steady profit then, we did not feel the necessity of closing. However, as an entrepreneur, we have to look not only at profits before the eyes, but more importantly look to the future potential. It seems that this point did not quite get to other employees. I stopped recruiting new students. It took about a year and a half to withdraw completely.”

“The purpose of the earlier school business was to create a useful IT engineer. Derived from that, I thought that we should focus on what to do next, using that engineer to create what is useful. We shifted the axis of our business to training and dispatching IT engineers, and we began offering our own various cloud services. One of the services we developed is a mail sharing and management system called Mail Dealer that is currently used by more than 5,000 customers. The Mail Dealer was initially in the red, but because it was profitable in the IT engineer dispatch business, I could invest for long-term growth. Our strength is to adopt a system that hires inexperienced people and develops them into engineers specialized in JAVA and dispatching them to web service providers. With this strength, we can develop new services by our abundant in-house technicians and engineers. I also learnt about the importance of advance cash flow earnings. Once a deal occurs, you can continue to trade with that customer – this will lead to stable business. The current SaaS business is consistent here,” CEO Nakamura added.

CEO Nakamura also demonstrates humility in admitting to the role of luck in his success in starting and building Rakus: “Interestingly, I think that there was a tendency that many entrepreneur-oriented talented people were adopted more often at the time I joined NTT West. That’s why there are so many people in sync, and if you noticed, there were five people synchronizing together to make a company. No doubt I had a lot of luck to have joined NTT West by the dawn of the Internet. I think 80% of the reason that have reached where we are today is due to that.”

CEO Nakamura shared an intimate turning point in his personal life on why he wanted to start Rakus: “The turning point of my life was when I was 27 years old. I felt keenly to protect my health and not continue with unreasonable way of work. The consciousness has changed to working more efficiently, and it also serves as the basis for service development and our current working way. We were focusing on SMEs as our customers for the cloud-based services for two key reasons. One thing is that a major IT company is reluctant to sell to SMEs, which is troublesome due to support for the amount of dollar sales achieved. Another is a sense of mission that we can help improve the quality of life of people working in SMEs who are lagging behind in IT if they introduce the cloud services. The company name RAKUS was named from the desire of ‘making it easier for customers’ to improve the efficiency of corporate operations. I would like to offer open technology and cloud services as used in large enterprises at low cost to SMEs, so that companies will grow by improving work efficiency and contribute to the further development of Japanese society. We cherish how we can efficiently produce time. For that reason, I think that I can work out with my friends who can devise and devote more effort with ‘easy’ as a keyword in my own way of working as well as thinking to offer a better service to the customer.”

When asked about the failures that he had experienced during the entrepreneurial journey, CEO Nakamura was also candid in his sharing: “Not all the services that we have provided so far have been successful. There were some cases that failed. Our initial groupware was a failure. We also transferred the marketing service business using SNS that we tried to deploy in the US without profit at all.”

Given the overwhelming dominance of Rakus in its two flagship solution Mail Dealer and Raku Raku Seisan, we were intrigued to understand what makes them so compelling to the users. CEO Nakamura was forthcoming in his sharing on Rakus cloud-based solutions:

Mail Dealer (24.2% of sales, +15.5% yoy)
“Mail Dealer is a mail groupware that can perform mail sharing, management and correspondence efficiently with multiple names. Since we can check the correspondence situation and history of inquiries from customers at a glance, we can prevent leaks and delays in correspondence beforehand. The trigger to develop Mail Dealer comes from our own experience. When I was supporting the management of e-mail at the company I first worked for, I thought that it will be impossible to immediately handle e-mails that are of enormous amounts every day when managed by the conventional mailer. So when we provided customers with structured management procedures, new requests have been raised one after another, so by choosing and solving them, we steadily increase the number of functions and products that fit customers’ needs.”

CEO Nakamura shared the client case example of ABC-MART (TSE: 2670), which has a network of 900 shoe specialty stores nationwide and has been strengthening the omni-channel strategy with online sales growing 30%. According to ABC-Mart’s sales team leader Mr. Yonemura, they received about 150 inquiries every day on questions about products and returns. The most important emphasis of ABC-Mart is promptness when dealing with customers, as well as replies that are easy to understand and replies according to age and gender. Prior to introducing Mail Dealer, ABC-Mart used Microsoft Outlook to deal with email inquiries with a team of 10 staff using the mailing list to share inquiries and reply contents. When all of the staff are also sharing and replying to the mailing list, the number of mails on the mailing list becomes enormous, and we abandoned it due to confusion and there were lost correspondence and double correspondence risk. There is also a limit to the speed of correspondence, and when a person in charge is absent, it took time to search and hand over the correspondence history. Also, on Saturdays and Sundays, the mail-order department staff also goes to the physical store, so during that time we were unable to respond to e-mails, and we kept customers with inquiries waiting. On Monday at the beginning of the week, the problem of having to spend the day alone with mail correspondence was also a problem. Mr. Yonemura commented: “When I saw the demonstration and talked to the staff, it got me really excited and I heard an inner voice saying ‘I want you to introduce it as soon as possible’. It used to take a whole day to correspond to e-mails, but it came to be completed in half a day after introducing Mail Dealer. Usability was the best decisive factor. Especially the ease of setting up and using templates, the ability to specify print items, the status of the correspondence situation of mail (new arrival, reply processing, correspondence completion) is clear and easy to understand. Ease of use of functions that are used frequently in mail correspondence work was also highly evaluated within the company. The cost side was also reasonable despite its fulfilling functions. The user interface and arrangement of functions were intuitively controllable, and we were able to put it on operation immediately after installation. I did not have to take time for lectures and it was a great help for all of the staff to use.”

Raku Raku Seisan (35.9% of sales, +67.8% yoy)
“The time and cost spent on sales-related travel expense reimbursement adjustment is surprisingly large. Raku Raku Seisan can help achieve a 75% reduction in time and cost required for expense settlements. It was really troublesome work on expenses adjustment, and there was a time when I did not do it myself. So I thought it would be nice to have a system that would settle the expense settlement. For instance, one of our customers is a medium-sized OA (office automation) trading company in Tokyo. Most of the company’s employees are sales staff who go out to engage in marketing activities to customers. In the evening, after coming back to the office, they will prepare reports, including their reimbursement payment for transportation expenses. They check the fare for transportation used and post it to spreadsheet software one by one. They print it out, have their boss press the approval seal, and submit it to the accounting staff. While looking at this form, the accounting staff check whether there are errors in the content including consistency and appropriateness with internal rules, and then manually enter it into accounting software. If there is an error in the contents, you have to contact the applicant and return it, and the work will increase further. Of course it is an indispensable task in SMEs, but it is a wasteful task that the sales department does not contribute to core operation which is sales activities. As a result of working overtime for transportation expenses adjustment work, it will become a loss of opportunity due to obstacles faced by the operations of the sales department, but it can also increase personnel costs.”

“By making IT do simple tasks that human beings do not have to do, it is possible to reduce personnel expenses, which is a big cost. Payment of expenses such as transportation expenses is one of the most costly items. Raku Raku Seisan is the expense adjustment system that leads to solving these problems, greatly reducing work and eliminating mistakes. Since the ‘transfer guidance system’ is built in, the amount is automatically inputted by merely inputting a route. Charges can be chosen for tickets and routes with different rates for transportation IC cards such as Suica® and PASMO®. At this time, you can read the usage history of transportation IC card and apply as it is. The periodic section is automatically deducted, so there is no need for confirmation. Since it also supports smartphones and tablet terminals, applicants and approvers such as bosses can also apply and approve at any time on the go. Furthermore, it is surprising to say that it will automatically perform journalizing and transfer data matching accounting software. Obviously, each flow can check progress at a glance, so it is possible to prevent omission of approval. Payment work is also easy because bank transfer data can be created automatically. Because of the low cost from 30,000 yen per month with an initial cost of 100,000 yen, the introduction is easy and popular.”

“Our customers are mainly SMEs with 30 to 300 employees in size, but some companies with more than 1,000 employees also use Raku Raku Seisan. We have heard many cases from our customers that they have helped do a great deal of work in the accounting department. In fact, our company has already utilized Raku Raku Seisan. When the number of employees was 100 people, the annual cost reduction of about 4 million yen was achieved. When we have about 300 employees, the reduction effect was about 11 million yen per year. Raku Raku Seisan was originally developed to solve our own expenses settlement issues, and we are confident that we have a fulfilling functionality and ease of use for the users. We can create an environment where all employees can concentrate on our core business. For example, sales staff can concentrate on sales activities by shortening the time of application work, and managers can concentrate on strategy planning by reducing the burden of approval work. Even in the accounting department, there are merits such as being able to suppress the occurrence of human errors and concentrating on planning financial strategy. Thus, the expense reimbursement system will increase the time to carry out core work. The target market is 100,000 companies which have 50 to 1,000 employees with 64.4% still using the traditional paper/spreadsheet system. We aim for 100 subscribers a month at an early date, and based on that we anticipate 5,000 companies in about two years from the current 2,600. Rakus aim to acquire at least 20,000 customers in the mid- to long-term.”

CEO Nakamura also shared how they listened to the voice of the customer in continuously developing and incorporating new functions to add value to their users: “In Sep 2018, we started offering credit card cooperation service which can automatically capture usage statement of corporate card and Mastercard into Raku Raku Seisan at the request of many of our users. After using the card, after 2 business days in the shortest, the usage statement will be captured on the Raku Raku Seisan, so the applicant or employee with the card uses the data of the usage details as it is without paying the expenses adjustment.”

“In Nov 2017, we expanded the API linkage to Raku Raku Seisan which can now capture data from many systems such as personnel systems and attendance systems etc. Convenience is greatly improved, making further work efficiency more feasible. Moreover, as it became possible to collaborate with a wide range of systems, the possibilities have expanded towards increasing the number of alliances. For instance, on 15 Jun 2018, we announced a collaboration with TKC Corp (TSE: 9746) to integrate our cloud-based travel expense settlement system Raku Raku Seisan with TKC’s FX4 Cloud, a cloud-type ERP and integrated accounting information system for medium-sized enterprises equipped with financial accounting function for daily bookkeeping and management accounting function for performance management. TKC claims its FX4 is used by 11,200 companies and has achieved the #1 market share for three consecutive years.”

CEO Nakamura shared two client cases: Oisix Corporation (TSE: 3182) which is engaged in the ecommerce sales of foods and ingredients and Trenders Co (TSE: 6069) which is in the marketing PR and media business. After the implementation of Raku Raku Seisan, Oisix is able to achieve shorter settlement work from 4 days to 1 day. According to Oisix finance team leader, “Accounting personnel visually checked the application form for all employees made by Excel, and were preparing journal entries and transfer data. However, in that case, the burden on the person in charge is also large, it is difficult to quickly grasp the expenses and make use of it in management judgment. Therefore, considering systematization, we chose Raku Raku Seisan by considering the cost of installation and operation and convenience of use from multiple choices. The checkout work that took 4 days each month could be shortened to 1 day, and mistakes were drastically reduced.” Trenders is able to accelerate settlement by quick expenses adjustment: “With the introduction of Raku Raku Seisan, the amount of work for each employee when applying for expenses has been overwhelmingly reduced. Because human error at the time of application hardly occurs, the time required for confirmation and correction by accounting personnel also decreases. In addition to abundant functions including cooperation with accounting software in enabling efficiency of work on the accounting side, it is possible to check where the work is stopped even if the application is stalled so that it is possible to complete the expense adjustment. We can realized the early settlement of accounts on the first two business days of the month.”

Raku Raku Meisai (4.4% of sales, +174.8% yoy)
“Raku Raku Meisai  is a cloud-based document issuing system that makes it easy to issue invoices and payment details. It is easy to publish by WEB mail, realizing efficiency of work. When issuing a bill, simply by fetching billing data into the system, you can easily issue an electronic invoice and the business partner will be able to download it on a dedicated page on the web. Companies that print, enclose, or mail a large number of bills and payment statements every month do not need inefficient tasks in the time and labor required in processing. Costs such as personnel expenses, printing expenses, postage expenses, can be greatly reduced.”

CEO Nakamura highlighted the client case of Hello Medica, a publisher of academic books, specialty magazines, creation of digital contents. Hello Medica’s senior director Ms. Junko Sato shared her thoughts on Raku Raku Meisai: “Our company’s publications are primarily requesting doctors and nurses to write, and we send about 800 payment details per month to their authors. Writers such as physicians and nurses have many changes in their place of work, and a certain number has been returned every month for reasons such as address change. Prior to the introduction, it took a considerable amount of time to track and reissue the payment details. From the viewpoint of protection of personal information, the confirmation of the address is a high hurdle, and sometimes it took about a month to pursue. After introducing Raku Raku Meisai, what used to take about 7 days to date for a series of payment tasks such as totaling the amount and number of items, printing the specifications, enclosing and shipping, we came to finish the task within one day. We believe that there is a possibility that it can be expanded to invoicing subscribers in the future as well.”

When asked about the acquisition of Blastmail in Feb 2018 and the M&A strategy of Rakus, CEO Nakamura commented: “We acquired 100% of Blastmail for 1.5 billion yen in Feb 2018. Blastmail provides a cloud-based mail distribution service to more than 8,100 paying subscribers. Our own distribution mail service has a complementary relationship with Blastmail in terms of function and price, and by expanding our know-how and resources, we expect to expand sales of Blastmail, improve profit margin and to improve market share in the cloud-type mail delivery system market. In Oct 2016, we had also acquired 14.5% of Victory-ONE for 40 million yen. It is a cloud-based payment/ collection specialized solution system covering from deposit clearance to loan balance management, and develops and provides a system that contributes to the efficiency improvement of accounting personnel. By combining Victory-ONE with Hataraku DB, Raku Raku Seisan and Raku Raku Meisai, it is possible to greatly improve operational efficiency as a FinTech service that handles from billing, administration, payment clearance and expense adjustment all at once, through sales management. We expect to have a high synergy with the cloud services offered by the company. In the immediate future, unlisted companies have very high valuations, so it is quite difficult to buy them, so I am thinking I will look at it firmly without being impatient.”

CEO Nakamura added on the importance of continuous innovation and development to expand their solution lineup by focusing and listening to the voice of the customers according to the purpose: “We will not settle on current mainstream services, and we will continue to expand our solution lineup. Many companies are trying to broaden the scope of services, but we are aware of deeply exploring the development that is focused and narrowed down according to the purpose. It is because it will result in strength as a result of providing superior service relative to the amount of resources that we have than other companies. We narrow down the function while we listen to the customer’s opinion.” Always looking ahead, CEO Nakamura added: “Before existing businesses become useless or less relevant when the flow of the world is so fast, we need to sow the next seed, to make investments and foster the next generation of business. If you do it, as soon as you notice that there are cliffs, you can stop and change direction. When I am profitable I will sow the next new seed.”

We are also impressed that CEO Nakamura seem to display the rare quality in accepting his own fallibility: “I always try to consciously say ‘I am wrong’. When you become an entrepreneur, people around you usually do not point out your faults and problems to you. That’s why I think it’s dangerous if you do not rule out yourself as wrong’.”

Above all, CEO Nakamura displayed the exceptional quality of PQ (Purpose Quotient) of our H.E.R.O. Innovators, emphasizing that Rakus is offering a system to increase not only efficiency but “mind-richness”: “Overtime characterized Japan. Although the Abe administration is discussing issues from various perspectives, including raising workers’ ways of reform as the biggest challenge, the question is how can each company overcome long-standing labor practices? So what I am hoping for now is to make smart operations like using cloud services. What we really are offering is not a system to increase efficiency but ‘mind-richness’. When people can spare time, the heart will be enriched. You can also be kind to people if you are rich in heart. Reducing wasted time will increase the time to think about the future. It is our mission to create such a society that takes care of how efficiently we can create time with ‘easy’ as a keyword in our way of working as well as thinking to offer a better service to the customer.”


Intrigued and want to read more? Download this week’s H.E.R.O. HeartWare: Weekly Asia Tech News with brief highlights of the inspiring entrepreneurial stories of tech leaders in Asia whom we have been monitoring over the past decade in our broader watchlist of over 200 listed Asian tech companies and our focused portfolio of 40 HERO Innovators who reveal their problems and successes behind building the company. Inspired by Brandon Stanton’s photo-journalistic project Humans of New York which collects and highlights the street portraits and moving stories of people on the streets around us who were doing things that changed lives and made a difference in the city but often went unnoticed, we have curated a collection of Hear the Heart of the H.E.R.O. stories on our website which we aim to update with refreshing and uplifting new stories weekly. Please check them out and give us your valuable feedback so that we can improve to make them better for you.


It started with rethinking a few questions. Question No. 1: Can the megacap tech elephants still dance? Or is this the better question: Is there an alternative and better way to capture long-term investment returns created by disruptive forces and innovation without chasing the highly popular megacap tech stocks, or falling for the “Next-Big-Thing” trap in overpaying for “growth”, or investing in the fads, me-too imitators, or even in seemingly cutting-edge technologies without the ability to monetize and generate recurring revenue with a sustainable and scalable business model? How can we distinguish between the true innovators and the swarming imitators?

Question No. 2: What if the “non-disruptive” group of reasonably decent quality companies with seemingly “cheap” valuations, a fertile hunting ground of value investors, all need to have their longer-term profitability and balance sheet asset value to be “reset” by deducting a substantial amount of deferred innovation-related expenses and investments every year, given that they are persistently behind the innovation cycle against the disruptors, just to stay “relevant” to survive and compete? Let’s say this invisible expense and deferred liability in the balance sheet that need to be charged amount to 20 to 30% of the revenue (or likely more), its inexactitude is hidden; its wildness lurks and lies in wait. Would you still think that they are still “cheap” in valuation?

Consider the déjà vu case of Kmart vs Walmart in 2000s and now Walmart vs Amazon. It is easy to forget that Kmart spent US$2 billion in 2000/01 in IT and uses the same supplier as Walmart – IBM. The tangible assets and investments are there in the balance sheet and valuations are “cheap”. Yet Kmart failed to replicate to compound value the way it did for Walmart. Now Walmart is investing billions to “catch up” and stay relevant. Key word is “relevancy” to garner valuation.

We now live in an exponential world, and as the Baupost chief and super value investor Seth Klarman warns, disruption is accelerating “exponentially” and value investing has evolved. The paradigm shift to avoid the cheap-gets-cheaper “value traps”, to keep staying curious & humble, and to keep learning & adapting, has never been more critical for value investors. We believe there is a structural break in data in the market’s multi-year appraisal (as opposed to “mean reversion” in valuation over a time period of 2-5 years) on the type of business models, the “exponential innovators”, that can survive, compete and thrive in this challenging exponential world we now live in. Tech-focused innovators with non-linear exponential growth potential are the most relevant multi-year investment trend and opportunity.  

During our value investing journey in the Asian capital jungles over the decade plus, we have observed that many entrepreneurs were successful at the beginning in growing their companies to a certain size, then growth seems to suddenly stall or even reverse, and they become misguided or even corrupted along the way in what they want out of their business and life, which led to a deteriorating tailspin, defeating the buy-and-hold strategy and giving currency to the practice of trading-in-and-out of stocks. On the other hand, there exists an exclusive, under-the-radar, group of innovators who are exceptional market leaders in their respective fields with unique scalable business models run by high-integrity, honorable and far-sighted entrepreneurs with a higher purpose in solving high-value problems for their customers and society whom we call H.E.R.O. – “Honorable. Exponential. Resilient. Organization.”, the inspiration behind the H.E.R.O Innovators Fund, (surprisingly) the only Asian SMID-cap tech-focused fund in the industry.

The H.E.R.O. are governed by a greater purpose in their pursuit to contribute to the welfare of people and guided by an inner compass in choosing and focusing on what they are willing to struggle for and what pains they are willing to endure, in continuing to do their quiet inner innovation work, persevering day in and day out. There’s a tendency for us to think that to be a disruptive innovator or to do anything grand, you have to have a special gift, be someone called for. We think ultimately what really matters is the resolve — to want to do it, bring the future forward by throwing yourself into it, to give your life to that which you consider important. We aim to penetrate into the deeper order that whispers beneath the surface of tech innovations and to stand on the firmer ground of experience hard won through hearing and distilling the essence of the stories of our H.E.R.O. in overcoming their struggles and in understanding the origin of their quiet life of purpose, who opened their hearts to us that resilience and innovation is an art that can be learned, which can embolden all of us with more emotional courage and wisdom to go about our own value investing journey and daily life.

As the only Asian SMID-cap tech-focused listed equities fund in the industry, we believe we are uniquely positioned as a distinctive and alternative investment strategy for both institutional and individual investors who seek to capture long-term investment returns created by disruptive forces and innovation without herding or crowding to invest in the highly popular megacap tech stocks, and also provide capital allocation benefit to investors in building optionality in their overall investment portfolio.

The H.E.R.O. HeartWare Weekly highlights interesting tech news and listed Asian emerging tech innovators with unique and scalable wide-moat business models to keep yourself well-informed about disruptive forces and innovation, new technologies and new business models coming up, and the companies that ride on and benefit from them in some of the most promising areas of the economy in Asia as part of our thought leadership for our ARCHEA Asia HERO Innovators Fund to add value to our clients and the community. Hope you find the weekly report to be useful and insightful. Please give us your candid feedback and harshest criticisms so that we can improve further to serve you better. Besides the BATTSS (Baidu, Alibaba, Tencent, TSMC, Softbank, Samsung), do also tell us which Asian tech entrepreneurs & CEOs whom you admire and respect and why – we will endeavor to do up profiles of them for sharing with the community. Thank you very much and have a beautiful week ahead.

Warm regards,
KB | kb@heroinnovator.com | WhatsApp +65 9695 1860
www.heroinnovator.com

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About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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