User Local Inc (TSE: 3984), Japan’s Leading AI Chatbot & Big Data Visualization Analytics Tool SaaS Innovator – H.E.R.O. Innovators Insights from CEO Masao Ito | H.E.R.O. HeartWare | 17 December

“Software that retain their greatness over time tend to hold simplicity as a core design tenet,” commented Scott Belsky, Adobe’s Chief Product Officer and EVP for Creative Cloud, founder of Behance which was acquired in 2012 by Adobe, and author of The Messy Middle: Finding Your Way Through the Hardest and Most Crucial Part of Any Bold Venture.

When Adobe turned Photoshop and the rest of their software into a subscription service, they needed a network like Scott’s Behance, the leading online platform for the creative industry to showcase and discover the creative world. Since Adobe outlined its subscription-based software-as-a-service (SaaS) strategy in 2011 and integrated innovators like Behance into its platform, its stock jumped nearly 800% to a market value of US$112 billion.

The recurring and predictability nature of the revenue model in growing monthly paying subscribers have made a selected group of SaaS companies a bedrock of investment resilience in a volatile market environment with growing regulatory and trade-war risks rattling across industries. Logizard (TSE: 4391), Japan’s #1 logistics & warehouse management system (WMS) SaaS innovator which we highlighted in our research brief last week, was up over 15% for the week in a tough market, along with the rise in most of the 24 SaaS companies in our focused portfolio of 48 under-the-radar HERO Innovators. We are encouraged by the feedback about the quality of our research ideas and interest in H.E.R.O. by farsighted and skeptical investors, such as the super investor in Singapore who’s the former MD at one of the world’s largest sovereign wealth fund and the founder of a successful billion-dollar boutique hedge fund in Asia ex-Japan equities, and Mr. N, a savvy private investor. In particular, Mr. N shared with us his insight that a selected group of exponential innovators tends to outperform in down markets, rather than “defensive” or dividend-type companies that are increasingly disrupted or bargains that turned out to be cheap-gets-cheaper value traps: “..that was my experience with some US Hero Innovator type companies when markets were down in the past.”

Not all SaaS companies are winners and many are still loss-making and cash-burning and Scott’ Belsky’s wisdom is part of the deciphering key to distinguish between the true exponential H.E.R.O. innovators from the top-down thematic imitators in Value 3.0. Software companies can be misunderstood because investors assessing their value may be dazzled by the complex features of the software product and scoffed at software that looks “simple”. Scott’s insight is that the temptation that comes with growth to expand the offering and add novel features may backfire. Software that is “simple” is able to “engage the customers you have yet to reach” and users tend to flock to a different simple product after an existing product adds unnecessary complexity. A “simple” software brings sharper focus and also avoids the problem that there are too many moving parts to diagnose what’s working and why, especially when the company is growing and scaling up, the critical stage when valuation is most misunderstood and mispriced. Scott summed up, “Great software don’t stay simple by not evolving; they stay simple by continually by continually improving their core value while removing features and paring back aspects that aren’t central to serve the core experience”.

This week, we highlight another profitable SaaS company – User Local Inc. (“ULI”) (TSE: 3984), Japan’s leading AI chatbot and big data visualization analytics tool innovator. ULI founder Masao Ito’s philosophy on “user first principle” to develop “simple, powerful, and large-scale products” powered by its Hadoop distributed file systems engine and freemium model to convert the serious heavy-users has helped it generate high profitability with ROE of 21.7%, EBIT Margin 42.9%, and positive free cashflow (FCF) margin of 35.5%.

Our emotional labor of love over the past months in sharing openly our research ideas (to battle-test our ideas by critiques and avoid blindspots in investing) and setting up the proper regulated UCITS fund structure to protect investors’ interests has deepened our conviction for the positive change that we will make together with H.E.R.O. – and we are getting closer to giving birth in January/February 2019 to H.E.R.O., the only Asia SMID-cap tech-focused fund in the industry and guarding investors’ interests in the regulated UCITS fund structure with daily NAV & daily liquidity and no exit fees. Also, starting 2 January 2019, we will be moving from our Robinson Point office to a new location within the central financial district in a building where Microsoft is one of the anchor tenants. More details to follow on the upcoming launch of H.E.R.O. Thank you very much for your patience and support and we look forward to serve the far-sighted, open-minded and curious lifelong learners who care deeply in growing together exponentially on the H.E.R.O.’s Journey..

“’User first principle’ is more important than big data and AI. Fashionable words such as big data and AI are meaningless unless users are pleased. Technology exists for users. The real pleasure for engineers is how to change the behavior data of tens of millions of users into valuable information. From the launch of User Local to the present, we have developed and operated products that visualize the user’s behavior that is directed in interfaces that users will appreciate. At User Local, we think that intuitive design is necessary in order to utilize data. Since data is often just a number or symbol, in order to make it into valuable data, it is necessary to visualize the data. The data visualized by the analysis can be a common language of the organization which everyone can use easily and can grasp important points at a glance. Organizations often tend to decide things due to personal power relations, etc., but if there is an objective measure of ‘visualized data’, then data-driven decision making is possible. That’s why it’s important that the data analysis tools are easy to use and easy to understand by non-experts. Our users’ demands are polarized between beginners and long-term users. Those who are accustomed desire to have more features, but if you realize them obediently, it can lead to complaints from beginners that it is difficult to use. Thus, the ingenuity of our UI (user interface) in our tools is important,” commented Masao Ito, founder and CEO of User Local Inc. (“ULI”) (TSE: 3984), who also expressed a similar philosophy as Scott Belsky, Adobe’s Chief Product Officer and EVP for Creative Cloud and founder of Behance which was acquired in 2012 by Adobe.

ULI is Japan’s leading AI chatbot and big data visualization analytics tool SaaS innovator. A distinctive exponential edge of ULI’s services is its stable big data system and machine-learning engine using its knowhow of Hadoop distributed file systems (an open source software framework supporting distributed processing of large data to be processed faster and more efficiently than it would be in a more conventional supercomputer architecture) to process and scale huge traffic in providing “simple, powerful and large-scale user-friendly software products & tools” in a low-cost cloud-based SaaS revenue model to support enterprise management and marketing decisions of its clients while generating high profitability and positive free cashflow (FCF) with ROE of 21.7%, EBIT margin 42.9% and FCF margin 35.5%. ULI has two key SaaS businesses:

(1) AI chatbot which utilizes advanced natural language processing technology based on analysis of conversation data over more than 6 billion SNS and proprietary AI specialized for improving the accuracy of text analysis to realize high quality conversation, serving clients including Netflix Japan to recommend movies, Hulu Japan, Rakuten (TSE: 4755), UNIQLO (TSE: 9983), GMO Internet’s (TSE: 9449) GMO MakeShop, Askul’s (TSE: 2678) LOHACO, Domino Pizza to order pizzas in a conversational style, Kakaku’s (TSE: 2371) Tabelog, Yamato Transport/Ta-Qi-Bin (TSE: 9064), Wantedly (TSE: 3991), Amorepacific’s Etude House, ZIGExN (TSE: 3679), Daiwa Next Bank, Orix (TSE: 8591), Universal Studios Japan, Air Asia Japan, Techcrunch Japan, etc.

(2) AI big data visualization platform of web analytics tools which analyze data of 12 billion monthly PV (page view) of various sites, 26 million SNS user accounts, 1.2 corporate Facebook pages, tens of billion posts, 55 million photos, user behavior data of 2.2 million video data, and visualize them in an intuitive and easy-to-understand manner to support the accurate decision-making of its end users. ULI offers these tools to over 300,000 companies worldwide as freemium services to convert the profitable, serious and sticky heavy-users into paid users, serving over 700 paid clients such as Yahoo, Rakuten, Softbank, KDDI, Gree, Sega, Recruit Holdings (TSE: 6098), JCB, Panasonic, Shiseido, Unicharm, Kirin, Wacoal, Daiwa House, Benesse, Prime Minister office, Ministry of Internal Affairs & Communications, etc. These include (I) web marketing support tools UserInsight with UserHeat, a heat map analysis service used by over 30,000 sites to improve their UI/UX (user interface/user experience) and to improve online conversion rate by realizing real-time personalization which changes site contents for each individual visitor; (II) social media marketing analysis and management tools SocialInsight to automate exchange on SNS to realize marketing automation, serving over 800 clients e.g. gaming giant Capcom in analyzing the user reaction to assess whether the game will be a hit and improve marketing measures of game titles); and (III) media analysis tools MediaInsight utilizing AI to automatically generate article titles and attached images so that the content becomes more valuable to be read and recommended by many people.

With the circumspection exponential edge in illuminating data-driven decision making for its customers, ULI’s SaaS business model generates stable and recurring monthly subscription revenue, achieving a 120% and 127% absolute increase in sales and operating profit in the recent 3 years with EBIT margin of 42.9% (vs 1Q19 EBIT margin of 48.5%), positive free cashflow margin of 35.5%, and ROE (= EBIT/ Equity) of 21.7%, propelling a 123% increase in market value since its listing at IPO price of  2,940 yen on 29 March 2017 to US$214m. On 9 Nov 2018, User Local announced its 1Q results (Jul-Sep 2018) in which sales increased 17% yoy to 303m yen, operating profit rose 18.5% yoy to 147m yen, with operating margin improving from 47.9% to 48.5%. Balance sheet is healthy with zero debt and net cash of 2.261bn yen (554.5m yen raised from IPO), or 9.3% of market value.

ULI was also the developer of the backend engine of “Yahoo! Japan Access Analysis” by offering its access analysis tools to Yahoo! Japan as an OEM since Oct 2013 which ended in Oct 2017 with Yahoo Japan users migrating their data over to ULI and some converting to ULI’s paid clients in a long-term positive strategic move, and Yahoo Japan Capital is also a strategic shareholder with a 7.673% stake. Rakuten’s founder Hiroshi Mikitani has a personal stake of 2.192% in ULI. ULI also provides since May 2017 the big data real-time search engine for Mastodon (, a new decentralized/ distributed ad-free and increasingly popular alternative to Twitter developed by German coder Eugen Rochko that differentiates through its community-based, rather than top-down, moderation and service operation.

ULI is also doing R&D investments in future services that include AI text mining natural language processing engine (e.g. for Recruit Holdings’ Hot Pepper Gourmet, one of Japan’s largest comprehensive restaurant information sites); recommendations for autonomous driving and driving directions; future forecasting AI services; generating automatic portfolio according to risk tolerance to achieve individual’s desired return in the financial field; management support through automatic analysis of financial figures.

While we are intrigued by the growth of the AI chatbot market, we are skeptical given that there appears to be quite a number of chatbot companies and the quality of accurate chatbot responses varies. CEO Ito understood our skepticism and explained first on the industry dynamics, how to choose the right chatbot service and their edge: “The Japanese AI chatbot market forecast in 2018 is estimated to be 2.4 billion yen, more than doubling from 1.1 billion yen in 2017,  and is expected to reach 13.2 billion yen in 2022, according to Yano Economic Research Institute. There are five reasons for its fast growth. Reason 1: Population decline in Japan will mean it is inevitable that AI chatbot will be introduced to replace human to respond to customer inquiries, alleviate labor shortage problems and lower staff cost. Reason 2: Improvement of labor productivity is required of companies in work reform. For example, companies have decreased the number of customer inquiries by 35% in 3 months after introducing our AI chatbot services. Overtime and mistakes were reduced, and staff began to work proactively. The spread of AI such as chat bot is never a distant future story. Reason 3: In order to positively improve labor productivity, we are active in automating tasks incorporating AI. Reason 4: Major players such as LINE, Facebook, have provided chatbot development platform one after another and this is one of the major factors for the spread of AI chatbots like User Local. For example, in March 2016, Microsoft released Skype Bot Platform; April 2016, Facebook announced Messenger Platform; September 2016, LINE officially released Messaging API; October 2016, IBM announced the availability of Watson Conversation federation middleware plug-in; November 2016, Microsoft released a preview of Azure Bot Service. A chatbot ecosystem was born, which means that an environment for people to build chatbots was developed. The use of chatbots is rapidly spreading, mainly focusing on customer support and improving the efficiency of handling inquiries within the company. Reason 5: The chatbot utilization scene is not just handling customer inquiries or customer support in the information system division and helpdesk. Even within the company in corporate support departments such as general affairs, personnel affairs, HR, accounting, as well as in sales and business process manuals, inquiries are completed every day using chatbots to reduce response time and increase productivity.”

“In addition, chatbot has the merit that it can accumulate and aggregate knowledge over the long term without the risk that the knowledge cultivated by an experienced veteran staff over time disappears when he or she leaves the company. The introduction of a chatbot has also resulted in the reviewing of the manual and business process flow. Operating a chatbot also enables the company to quantitatively grasp and accumulate VOC (Voice of Customer) to make improvements. Furthermore, introducing a chatbot to respond immediately to the users’ questions can improve the CVR (conversion rate). On one of our EC clients who operates the websites (supplements and cosmetics for women) and (online health food), it was found that the CVR was 8.9 times the overall site average as a result of our chatbot. This is probably because questions and cases are solved on the spot by a chatbot which ultimately leads to conversions. Another example is our AI chatbot to GMO Internet’s (TSE: 9449) GMO MakeShop which is a marketing tool for EC (ecommerce) shops that can provide online shop construction and conduct customer’s automatic analysis / e-mail marketing. Our chatbot help GMO MakeShop to automatically responds to inquiries outside business hours and reduces the waiting time of the questioner. In addition, it reduces the human cost of support work and GMO MakeShop is able to devote that resource to the planning and implementation of various measures to improve the performance of their shop operators clients. A good chatbot can lead to a comfortable user experience (UX) as it becomes the first point of contact between the customer and the brand and also after purchasing the goods and services. The chatbot is the creator of marketing innovation.”

“How do you choose the right chatbot service with quality response since there are an increasing number of vendors in the market? How to respond accurately to various questions so that there is no inconsistencies in the conversation scenario with the customer in the chatbot is critical. Always ask about the chat response rate (Number of valid responses ÷ chat count) and Resolution/Unresolved ratio (How much could you solve with a chat bot?). With our support chat bot data, the average chat response rate and average resolution rate is over 95%.”

In Leap: How to Thrive in a World Where Everything Can Be Copied, IMD professor of management and innovation Howard Yu highlighted the case study of Recruit Holdings (TSE: 6098), the powerful $45-billion-market-value online recruitment giant which also spurred us to review online recruitment companies such as En-Japan and SMS Co (TSE: 2175) into our broader watchlist of 300 companies and other weaker ones such as DIP Corp (TSE: 2379) falling out of our watchlist. Hence, we were positively surprised to learn that Recruit Holdings has adopted ULI’s AI text mining natural language processing engine for its Hot Pepper Gourmet, one of Japan’s largest comprehensive restaurant information sites. As shared earlier, ULI is doing R&D in AI recommendations for autonomous driving and driving directions; future forecasting AI services; generating automatic portfolio according to risk tolerance to achieve individual’s desired return in the financial field; management support through automatic analysis of financial figures. CEO Ito commented on the development of new services to discover consumer insight using AI: “The trend of data analysis technology will change in about 5 years. The first major change was when open-source free databases such as MySQL and PostgreSQL came out. And then the hardware and software continues to evolve steadily. Nowadays, big data processing technologies such as Hadoop and in-memory technology are capable of processing data analysis at high speed, and as a result data retention cost and utilization cost have decreased. In that case, there is no need to carefully select the data to be saved in consideration of cost effectiveness, so now it is the flow to discover new insights from the raw data. In addition to visualizing data analysis, what we are working on now is the discovery of consumer insight using AI that can contribute more directly to client companies. Another is the analysis of images and videos. A huge amount of images and videos are uploaded to Instagram everyday, but we want to analyze what is shown in them and what kind of features and trends can be read from the data and understand how products are used in the daily life of people. For example, you know what brand of beer is reflected in the posted photo with your user profile and behavior so that you can understand and develop new insights. We are developing a deep learning tracking technology for that. Because cost will be higher than text analysis, I think it will take time to offer at affordable price, but I would like to proactively proceed.”

With the increasing glaring problems in data privacy breaches and misgovernance in content moderation experienced by SNS companies such as Facebook and Twitter that could become the plateau in limiting further growth and even result in a precipitous decline, calls for alternative decentralized/distributed ad-free SNS platforms with community-based, rather than top-down, moderation and service operation are growing louder. One of the important ones to emerge in recent years is Mastodon (, dubbed the Twitter-killer developed by German coder Eugen Rochko and ULI has provided since May 2017 the real-time big data search engine for Mastodon. CEO Ito explained: “There are several reasons for providing the real-time big data search engine for Mastodon. One is the intellectual curiosity of this new type social networking service. I want to understand the service from early. I want to accumulate data. I do not know yet about the future, but I want to learn to know. Another reason is my mindset to support new innovative services young people create. Actually innovative and popular social media services are often made by young people around their mid 20’s. That is true with Facebook and mixi, and so was Yahoo! Eugen Rochko, the developer of Mastodon, is in his mid 20’s. I was about 22 years old when I made ‘Everyone’s Job Hunting Diary’. So, I am paying attention to the new innovative services that the young people make and I have a desire to support them personally.”

We were initially skeptical of ULI’s “simple” visualization data analytics software UserInsight, SocialInsight and MediaInsight given that there are already Google Analytics. CEO Ito explained why they are different and why an increasingly number of paid clients have found them compelling to subscribe to their offerings: “With the explosive growth of digital data, it is becoming increasingly important for site creators and marketers to select information. User Local enables our clients to achieve marketing success and UI/UX (user interface/ user experience) improvement by data-driven decisions by developing products that can intuitively solve solutions so that it is not time consuming to analyze data and make changes such as critical designs and catch phrases. You can easily improve the user interface of the Web site with the heat map function that you can see at a glance where the user who visited the Web page is clicking and where the content was seen often. Knowing the website visitors deeply is essential to the operation of the site. By analyzing the attributes and organization of Web site visitors, User Insight will be able to understand a realistic user beyond mere numerical data. Although there are many people who have difficulty in website improvement and access analysis, User Insight supports the improvement of the website by holding a study meeting based on an easy-to-understand management screen for everyone and a wealth of website improvement cases. WEB data analysis which usually requires experience and know-how, even beginners can intuitively discover WEB issues. Sony Interactive Entertainment Japan achieved a 300% increase in visitor number and improvement of retention rate at the same time as a result of effective use of User Local’s UserInsight Heat Map analysis in the site renewal of the official PlayStation website. Persol Holdings (TSE: 2181) achieved a 500% increase in CVR of inquiries and 180% increase in seminar applications using User Local’s Heat Map analysis and EFO function in a competitive online job change information market. Another example is Sapporo Beer who used SocialInsight to find out their loyal fans ratio, which is the engagement rate (the fans who gave ‘likes’ or comment actively or spend more time reading the post) divided by the number of inflows to its site. It is a big meaning in terms of how many more core fans there are, not just fans, and how to expand and nurture such layers.”

“The mechanism of the heat map in WEB analysis tracks the movement of the mouse and creates a heat map from the mouse’s log. It has been demonstrated that there is a correlation of more than 80% between the human eye and the mouse movement, and by expressing the movement of the mouse with a heat map, the user’s thoughts can be visualized to grasp the user’s psychology. For example, even content with a large number of PVs (page views) is not necessarily an excellent content as long as attention is gathered only on a part of the page. With UserInsight, it is possible for anyone to easily find problems that can not be found with numeric data of ordinary web analysis tools. Unlike Google Analytics and other access analysis tools, what is different is that we mainly focus on knowing deeply the visitor to get user insight, something which other tools do not understand as these usual tools mainly analyze how the site is accessed and how it moves on the user’s site. But UserInsight provides more information to understand users. You can analyze user attributes based on age composition, male-female ratio, access frequency, Internet usage rate, presence of conversion, etc., not only for the entire site but also for individual pages, leading to improvement of the site and which content is appealing to which audience. In addition, UserInsight is superior in that you can check the following information with a heat map unlike all other tools, including ‘How far the user has read on the page’ and ‘Which areas on the page you were reading often’.”

“Even if you are only looking at figures with a sophisticated analytical tool, I think it is hard to tell where the problem is. Instead of blindly analyzing a large amount of data, we first bird’s-eye the entire site, then narrow down the problem in a visualized state with a heat map to start improvement. I think that visualization of data in a form that everyone can understand using UserInsight has led to more reliable and highly effective improvement. For some of our SaaS (software-as-a-service) clients, the repeat frequency of their customers is an important point of business success and they can grasp how much each customer is logged in and which functions are used. A study meeting at the beginner’s level, intermediate level and proficiency level is held at least once a month. It covers a wide range of contents from how to use the tool to tips on utilization. We support not only the ease of use of the tool but also the achievement of the site’s marketing success.”

“SocialInsight includes not only analytical tools such as ‘social media listening’ and ‘fan analysis’ but also CRM-like elements of social media called ‘communication management’. Social media listening analyzes how the set keywords are being talked on social media. For example, clients who have set up product name and brand name can analyze how they are being mentioned, and how much they are mentioned from analyzing tens of billions of data from multiple sources such as Facebook, Google, YouTube, Instagram, Twitter, Wikipedia, mixi, etc. and analyze them by our own text processing engine at super high speed and are automatically notified by alert functions when the key words are buzzed to detect the flames and avoid harmful rumors, particularly useful in reputation management and risk prevention. Changes in our own accounts, fans of competitors, transition graphs, influencer surveys, post analysis, and fan attribute analysis are quickly displayed. As our clients such as Rakuten comment, ‘If you just want to see the situation of your company, you can watch Twitter figures every day, download Facebook insights, etc. But SocialInsight can objectively see the situation of the competing sites of other companies.’“

ULI’s “simple” big data visualization tools are not only delivered via the SaaS recurring-revenue model, but also via the difficult but highly rewarding freemium model, like Mailchimp, which seeks to convert free users who are serious and sticky heavy-users into highly-profitable paid users and fans. On its freemium model and its low advertising expenses, CEO Ito said, “We have not devoted to advertising publicity activities so far, but have focused on sales activities based on the functional advantage of the provided services. As a result, we believe that we are now able to introduce our products to a wide range of industries and companies, and to establish a solid customer base through continuous transactions. Our company is small, so now it is often advertisement to give out free service than to spend advertising expenses.”

Curious by the origin and meaning of ULI’s company, we asked CEO Ito who went on to elaborate at length his philosophy and conviction on “user first” and making big data analysis user-friendly: “The origin of the company’s name comes from the name of the disk space “/usr/local/” in the hard disk. It is a folder name like Windows ‘Program Files’. Since the other meaning of local is ‘nearby’, we also have the feeling of being a company with a user-oriented service close to the user.”

“As communication using the Internet becomes active, the importance of data utilization is increasing in enterprise marketing. The biggest feature of the Internet is that there is interaction and user behavior is accurately recorded. It has overwhelming superiority when compared with traditional media. However, in order to utilize its superiority in business, special skills for analyzing data are required, but effective utilization in general corporations has not progressed. In such circumstances, we have developed a business specialized in the field of data analysis since even before the word ‘big data’ exists. The important thing is to provide general users with the data in a user-friendly form that can lead to improvements in organizations and services. Our company not only collects and processes a huge amount of data but also focuses on the research of the visualization technology, and our research results are creating uniqueness of the service.”

“’User first principle’ is more important than big data and AI. Fashionable words such as big data and AI are meaningless unless users are pleased. Technology exists for users. The real pleasure for engineers is how to change the behavior data of tens of millions of users into valuable information. From Rakuten where I tried collecting data, I came into the phase of how to make full use of it. From the launch of User Local to the present, we have developed and operated products that visualize the user’s behavior that is directed in interfaces that users will appreciate. At User Local, we think that intuitive design is necessary in order to utilize data. Since data is often just a number or symbol, in order to make it into valuable data, it is necessary to visualize the data. The data visualized by the analysis can be a common language of the organization which everyone can use easily and can grasp important points at a glance. Organizations often tend to decide things due to personal power relations, etc., but if there is an objective measure of ‘visualized data’, then data-driven decision making is possible. In addition to direct web managers, people in various positions, such as content producers, system departments, and sales representatives, are involved in the operation of the website. As such, visualized data can be a common language for people in different positions. That’s why it’s important that the data analysis tools are easy to use and easy to understand by non-experts. For instance, our UserInsight is a tool mostly for B2C internet and media operators to visualize how the content is viewed by users with a heat map. You can visually grasp the frequency, movements and responses of the user and you can make improvement to the contents production and service design. Our users’ demands are polarized between beginners and long-term users. Those who are accustomed desire to have more features, but if you realize them obediently, it can lead to complaints from beginners that it is difficult to use. Thus, the ingenuity of our UI (user interface) in our tools is important.”

“Of course it is important to generate sales and profit in doing business. But in order to have someone think that it is worth paying money, you have to pursue what is more valuable than money. I think that is ‘user’, essentially how to create a good service that the user is looking for. One way is approaching the ideal of ‘this service should be like this’ in terms of vision, technology, UX (user experience). The second way is approaching from ‘how do users use services?’ to improve according to the actual situation. Of course, we need to have the ability to analyze ‘what is required of this service’ while looking at the data, such as growth in the number of users and average number of times and length of time each person is using the services. The ability to develop business strategies by putting them in numbers becomes a big weapon for developing a good service. It is important to focus on the voice of the users. For example, even if we are doing ‘to fix this here because the customer feedback came’, the whole does not quite improve. In many cases, the part that you need to focus on to increase the number of users and sales is different from the part where each user’s opinions and requests gather. It is necessary but not enough for the user to give feedback, but it is required to capture requests and actions as a whole. This is a very difficult task. Studying user data and viewpoints to make an appropriate KPI (key performance indicator) logic tree to achieve the KGI (key goal achievement index).”

“I learned the importance of reading power and practice when I worked at Rakuten. At the beginning of the Rakuten marketplace, since there was no revenue source other than the initial listing fee of 50,000 yen a month, we initially focused on increasing the number of store openings as a goal. Rakuten began to receive advertisement publication fees and sales commissions later on. I was learning a lot of things about the progress of KPI towards the KGI at that time from the morning meeting which was held every week. While it is commonplace now to make business judgment and decisions by looking at ‘average economy per user’ and ‘unit time economy’, such as LTV (life time value) per user etc., Rakuten’s founder Mr. Hiroshi Mikitani was already doing it before 2000, formulate the use of the unit economics knowledge that can be used in daily work as the ability to develop a business strategy.”

When asked about how he came about to start ULI, the challenges he faced and overcame and the breakthroughs during his early entrepreneurial period, CEO Ito shared reflectively his inspiring story: “I was born in the Chiba prefecture in 1973 and I was crazy about computers since I was in the elementary school. When I was in the fifth grade of elementary school, I got my personal computer for the first time and since I do not have the money to buy a game, I made a game by entering the source code on the PC magazine with BASIC, a programming language for beginners. At that time, I also played the game I made with one of my friends in a class and a PC group. While I was tinkering with variables little by little, I became able to understand that ‘programs are made like this’ and started to make original games. In high school, I entered into the radio department and obtained a license as an amateur radio specialist. It was around this time that even high school classes began to deal with PCs, but I was already familiar with it and was making my own game during class.”

“In 1996, when I was in the 4th grade at the School of Political Science and Economics at Waseda University, I set up the online job placement site ‘Everyone’s Job Hunting Diary’. There were only a few companies in the country during that time that are engaged in recruitment activities using the Internet, and there were no place for students to exchange information on the Internet. It is a service that started from the fact that I felt the endless possibilities of the Internet as an information infrastructure. The simple thing that made the site interesting was the creation of a bulletin board system where information can be exchanged in the course of finding employment. This BBS function, which is now commonplace, was epochal at that time. The number of users to the site has increased rapidly in about four years from its start-up and it has grown into a service that can be used by many job hunting students. As the number of users increased, the knowledge of the system and the programming skills also increased as we looked for ways to reduce the load on the server as much as possible.”

“As the users’ voice of requests for improvement increase, I repeated trial and error to get users to be more pleased. E-mails from students expressing gratitude also go up to hundreds annually and I was glad to see it. The experience during this time when listening to the voice of each user and efforts are undertaken with incentives other than money will have a big influence on my belief later to incorporate these elements in building User Local. At that time, I operated the site while working as a reporter at the business magazine publishing company of Nikkei BP after joining them as a new graduate, writing articles to cover corporate IT measures and publishing them in the magazines. If you ever publish on the paper media, the content will not get better from there on, but in the case of publishing on the net, comments are added to the content and further improvement is possible, an experience that I reconfirmed with this fact once again. A business travel in 1999 to Okinawa led me back to the world of the Internet. An elderly master of a small liquor shop which I visited shared with me that he sells his Awamori liquor products recently using the Rakuten marketplace.”

“During that time, the mainstream view was that EC (ecommerce) will not spread in the world and Japan. As I get to touch the frontline of IT as a reporter, I realized that there is a gap between reality and what I think as common sense. I visited Rakuten and I was moved by the words of Rakuten’s founder Mr. Hiroshi Mikitani that ‘everything will be able to be sold on the net’. After a few more months, I changed job to join Rakuten in 2000. At that time, there were only about 50 employees at Rakuten, out of whom were only about 10 engineers. I also decided to commercialize in full scale and founded ‘Everyone’s Employment Corporation’, now renamed Rakuten Shinken when it became a subsidiary of the Rakuten Group in 2004 and it has over 550,000 registered users and over 29,000 enterprises posting jobs on the site. At Rakuten, I worked as an engineer and was in charge of development and design of the mobile version of the Rakuten marketplace site. At that time, the internet for mobile phones including DoCoMo’s i-mode was gradually become popular. I worked from morning till evening with a small project team of about three people and we changed the site to suit each mobile carrier.”

“While working at Rakuten, I eventually began to feel strongly about wanting to learn the technologies of the Internet and computer at university like Rakuten’s founding members. What I wanted to learn specifically was the analysis of user behavior. I felt strongly that analyzing user behavior to grasp needs and improve service to become more user-friendly is true for any internet services company in order to survive the increasingly intense competition. There are no companies who will say ‘attracting customers is always going well’. Every company wants more attention from more people and I want to deepen the communication more. An era will come when it is important to focus on the user rather than just making the internet services, such as EC or CGM. I thought that I would like to take a profession involving data analysis, analyzing data and finding value. I would like to dare to do something that everyone thinks is useless. In 2005 at the age of 32, I entered into the graduate school of international information and telecommunication studies at Waseda University and studied user behavior analysis on the web, analysis of large-scale data, research on recommendation engines, etc. We commercialized these research results within the industry-academia incubation center in Waseda University. We establish User Local Inc in 2007 using the research results there.”

“I did not consider the listing at all since I started the company since we have a surplus all the time. We wanted to make a system that can invest in the future in order to provide good service for a long time. In discussing with various people, we change our mind as it may be better to build a foundation for doing business as a social institution while receiving moderate pressure from the market. Listing is the first step. User Local does not adopt advanced financial engineering strategy like many other tech companies and we do not need to explain at the results announcement meetings and AGM regarding the acquisition of some company and amortization of goodwill.”

CEO Ito also shared his thoughts on how to remain a valuable engineer in this fast-changing world: “In order to remain a valuable engineer, we must acquire competitive expertise. I believe that our engineers will be able to expand their expertise in three areas. The first is database technology to handle big data. The second is visualization technology to make it easier for users, marketers and publishers to utilize data such as the heat map analysis of our UserInsight. The third is statistical analysis skill such as AI text data mining that deepens the factors of the words occurring on social media. Even though we can learn a lot of technology, it is quite difficult to get motivated. Without motivation, technology will not be established. Ultimately, I think that the most important thing to gain skills is motivation.”

CEO Ito summed up: “I have long thought that we would like to develop a service that enriches the lives of many people and makes the world more interesting through the Internet. User Local is the company started to realize that feeling. Today, the Internet is the information infrastructure present in not only personal computers and smart phones, but is also penetrating every corner of society, linking the world together. Furthermore, due to the evolution of cloud technology and the improvement of machine-learning performance, the processing speed of data has dramatically improved. For the first time, the era of big data utilization has come, which is to process a large amount of data at high speed to derive useful knowledge. The possibilities that we can fully demonstrate our technologies and know-how data analysis, data visualization, natural language processing, distributed processing, and artificial intelligence are expanding. We are a company with strength in R&D who gathers staff and engineers who believe in the possibility of the Internet. We are sharing the consciousness to solve the problem of ‘what is good for customers’ and ‘what the world needs’, and we are improving the environment where we can concentrate on development, voluntarily conduct research and repeatedly conduct experiments, and enhancing services while listening to the direct voice of individual users as well as companies, without being bound by meetings and specifications.”

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 300 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 | | WhatsApp +65 9695 1860


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 (, 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.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: