US inflation fears, and an economic downturn from the possible raising of interest rates. These factors have led to headwinds that have caused market corrections particularly in “growth stocks”. Despite this though, a closer look at the fundamentals of SaaS firms reveals that they have actually maintained their growth momentum over the past few years.
This phenomenon has played out in Japan too. SaaS companies often take ARR (Annual Recurring Value) as their growth metric, and when we look at the most recent filings of companies within Japan, we have 6 which have crossed an ARR of $100 million. This underlines the healthy state of SaaS firms, given that $100m was previously the magical number for companies to aspire to.
In this article, we want to look at numerical data to highlight the strengths of Japanese SaaS firms. We’ll also give hints about possible growth strategies for startups aiming to be part of this $100m ARR family too.
Rory O’Driscoll, partner at renowned American VC Scale Venture Partners, gave a presentation called “The Mendoza Line For SaaS Growth” at SaaStr in 2019.
Rory explained that US SaaS firms tended to see a gradual decline in their ARR growth as years go by, calculating that the average firm has an annual ARR growth at 82% of their previous year’s. He called this phenomenon “Growth Persistence”.
This concept illuminates the fact that no matter how big the growth potential of a SaaS product, as a company grows it should naturally get harder to find new clients.
Japanese SaaS firms also experience the same thing. However, the financial filings do illustrate a somewhat different situation in Japan.
When we look at the ARRs of the 5 Japanese SaaS companies with comparable data which have crossed $100m ARR like Sansan and freee, their year-on-year growth rate averaged 93% of their previous year’s. We can therefore conclude that they have maintained their growth momentum better than US SaaS firms.
Source: Compiled independently based on public filings of the respective firms over the last 3 years.
In fact these companies show a nearly perfectly maintained growth rate over the past 3 years - proving their strong growth momentum despite increased size.
Next, let’s look at the data to understand what exactly can explain this maintained growth. We’ll start by looking at actual filing reports to gather insights about the 3 key reasons behind this phenomenon.
The table below details the numbers of the above 5 top Japanese SaaS firms including their ARRs, ARR growth, derived user number growth and Average Revenue per User Growth (ARPU) numbers. We also list out probable factors leading to these growth metrics per company.
Table independently compiled based on public filings from each company.
Rakus is behind “Raku Raku Series” - a cloud system supporting other companies’ back office operations. They have maintained an above 30% ARR growth over their most recent 5 financial years. In fact, their most recent filing reports an ARR growth of 34.5% - one of the most notably stable growth performances within Japan.
This growth was not created through making new business lines, but by bringing each of their current businesses up to the scale where they could become independent publicly listed companies.
Their flagship product “Rakuraku Seisan” - an accounting system - reached an annual revenue of $76m while also recording 37.7% annual growth. It is what is behind Rakus’ recent rapid growth.
Source: Filing materials from Rakus, dated Mar 2022.
In addition to Rakuraku Seisan being their main growth pillar, their electronic invoicing service Rakuraku Meisai also received an external boost from recent amendments to the Japanese Electronic Books Preservation Act. This has contributed to the service enjoying a huge 92% annual growth rate.
Rakuraku Meisai has seen their ARPU stay almost unchanged, but user numbers have exploded over the past year.
Source: Cybozu December 2021 Filings and IR Materials*
Cybozu is known for their collaborative work platforms and work efficiency services. They don’t publish their concrete KPIs regarding their SaaS products which makes it hard to get into the nitty-gritty of the company. That being said, we think that their work efficiency platform named “kintone” has contributed greatly to their overall growth.
Cybozu has been pushing their flagship collaborative work software Cybozu Office since 2012 and that has been the main driver of their growth. However, in recent times they have been investing their resources into kintone in order for it to drive their revenues in cloud services.
Lately, they’ve poured $49m into advertising and marketing costs - their largest ever marketing spend through their efforts to gain wider recognition and new users through TV ads and other channels. This marketing spend is 26.5% of their revenue as of their December 2021 filings.
kintone in particular enjoyed a 27% increase in user (ie. client company) numbers in the 12 months up to December 2021, suggesting that it is the primary growth driver for Cybozu at present.
Sansan reported an overall ARR of $188m (Q3 filings, May 2022) formed from the total of its eponymous name card management service Sansan and its invoice management service Bill One. This places Sansan as the only SaaS company in Japan that is fast approaching the $200m ARR milestone.
Growth up to now has been powered by its name card management platform Sansan. However Sansan alone only reported a year-on-year subscription revenue growth of 16.8%. This indicates a gradually declining growth rate in the same way that other SaaS products tend to experience.
On the other hand, it looks like Bill One, their cloud solution for the receipt and management of invoices is becoming their next growth driver.
Despite only having 18 months since launch, it has quickly reached an ARR of $11.9m (February 2022 filings). It is also the factor which pushed Sansan’s overall ARR growth to 23%.
We at All Stars are really impressed by how the top Japanese SaaS manage to start new offshoots and grow their size to the extent where they could be independent publicly traded companies. And doing so in a timely fashion at that, just when their existing products reach maturity.
In addition, while not reflected fully in their filings, Sansan has also started moves to bring Unipos into their group of companies through business tie-ups and investing in the latter. Unipos has recorded a preliminary ARR of $5.8m (+40% vs previous year). Sansan is therefore striving to challenge the next benchmark (of ARR $200m) while working on growing services even outside of their own lineup.
Both freee and Money Forward provide solutions in accounting, enterprise resource planning and back-office operations. Aside from growing their own products, both have strived to increase user count and per-user revenue through actively conducting M&As.
freee’s most recent filings (Q3, June 2022) states that they’ve recorded a 36.6% increase in paying customer count. These numbers are a direct result of them expanding their user counts through the M&As of Taxnote, a bookkeeping service aimed at small businesses, as well as NINJA SIGN (now rebranded as freee sign), an online contract signing service.
Independently compiled based on the financial filings of each company.
On Money Forward’s side, they have been expanding their service lineup through M&As of the companies behind V-ONE Cloud, a payments tracking service, as well as HiTTO, an internal chat tool for companies.
Money Forward’s public materials state that their previous additions to their group have both contributed to growth both through independent revenue growth as well as synergy with other business branches. We see that their journey to establish Product Market Fit across their whole company is going smoothly.
Source: Money Forward Financial Results for the Full Year ended November 31, 2021*
For both freee and Money Forward, their growth numbers have been underlined by both enjoying more than 30% growth in user numbers, especially among SMEs and sole proprietors.
We are watching how both companies continue to increase their ARPUs, leveraging on opportunities to cross-sell both their in-house developed services and those of their acquired companies. We’re also looking forward to seeing them adding new functions such as payments and financing to their existing products.
As we can see, the Japanese SaaS firms raised have not just relied on the steady strong growth of their flagship products but have “growth hacked” through expanding their product lineup.
Through analyzing this dataset of the top Japanese SaaS firms with more than $100m ARR, we draw 3 lessons about growth strategies for SaaS firms.
This is not a topic we have gone into so far, but a common point across all the top Japanese SaaS firms is an extremely low churn rate, which in turn props up their strong growth rates.
We see this from how freee’s gross monthly churn rate is 1.3%, Rakus’ Rakuraku Seisan’s monthly customer churn rate is only 0.41% etc. Even though both are SaaS services mainly aimed at SMEs, the SaaS firms examined have managed to keep their churn rates extremely low. This in turn accords them a strong basis to grow from.
This churn rate is even comparable to that of American SaaS services aimed towards enterprise-scale clients. Usually, foreign SaaS firms serving SMEs have to face many of their clients closing or being M&A-ed etc. and therefore have to contend with a 3-7% monthly customer churn rate.
This low churn rate can therefore be said to be partially due to a quirk in how SMEs in Japan operate. Given that bankruptcies or M&As among SMEs are uncommon in Japan, once a company adopts a SaaS product it tends to be used for a long time.
Getting past $100m ARR and maintaining an annual growth rate above 30% is not easy if a company tries to approach this only with a single product. This is where a multi-product strategy becomes important.
However, neither Rome nor this can be built in a day. In fact, Sansan started building up Bill One 2-3 years ago, just when their main Sansan service started showing signs of slowing growth.
Therefore if a company wants to continue having strong growth numbers even past ARR $100m, it is key that they start thinking about and validating their second and third products just about when their flagship SaaS services start on their growth trajectories.
In addition, the development of these second or third products needs to be done referencing the overall corporate vision and the comparative advantages from a company’s flagship product. In Sansan’s case, all their products reflect both Sansan’s philosophy and strengths in bringing crucial business information still trapped on paper into the digital age and subsequently. using this digitalization to impact clients’ operations.
As mentioned above, both freee and Money Forward have used M&As to become multi-product companies in order to avoid facing a stagnant growth curve. The other commonality between them is that both companies used favorable market conditions in 2021 to conduct large scale fundraising.
freee raised up to $424m whereas Money Forward raised $307m in these rounds. Given the currently difficult market conditions, both companies’ calls to raise funds when they did were definitely astute business decisions. With the current situation where cash is tight and company multiples are going down, both companies are now in a more advantageous position to conduct M&As.
We also want to draw attention to both companies’ strengths in developing organizational cultures and their corporate vision. No matter how awash in cash a company may be, without a strong vision and culture, it will find it hard to acquire other companies - not to mention post-acquisition problems that will surface in Post Merger Integration.
Therefore, SaaS companies’ efforts to develop their mid-to-long term corporate visions and company culture are a key factor in raising their success rates in leveraging the power of M&As to power their growth.
ALL STAR SaaS Fund will continue to analyze and report what’s noteworthy about Japanese SaaS firms. We hope that the information here can help SaaS startups in pursuit of reaching the magical ARR number of $100m ARR!
※2021 numbers taken from Sansan and freee’s FY2021 Q3 numbers due to differences in companies’ Financial Years. Money Forward’s numbers are from their annual numbers reported in Nov 2021.