Beyond Short-Term Revenue: How SaaS Drives Lifetime Value and Transformation in Large Enterprises | Hiro Maeda, ALL STAR SAAS FUND

In this series, we discuss what is necessary for major companies to transform, including digital transformation (DX), from a venture capital (VC) partner’s perspective. In this third installment, we feature an interview with Hiro Maeda, Managing Partner of ALL STAR SAAS FUND. Maeda, who runs a venture capital firm specializing in SaaS, says, "SaaS provides an opportunity for change. What role does SaaS play in the transformation of major companies, and what should we be aware of when collaborating with startups? We will now take a closer look at Maeda's theory on the transformation of major companies.

The Role of SaaS in Advancing DX at Major Corporations

--How do you view the current state of DX at major Japanese companies?

First of all, I believe that there are three major phases of DX.

Phase 1 involves making products and services available for purchase online. Phase 2 focuses on eliminating paper from internal workflows and digitizing as many company operations as possible.

With the Corona Disaster as a catalyst, most companies have been able to put Phase 1 products and services online, and I believe that the use of this technology has spread rapidly over the past few years. It is now possible to purchase many products and services online or make reservations.

I believe that many companies that are developing their business based on the Internet are in Phase 2. However, companies that operate in the "real world," such as in the medical and manufacturing industries, are still primarily paper-based, and I believe that they are in the process of gradually shifting their workflow to digital.

As for Phase 3, I believe that companies that have started up as digital-first, cloud-native companies have already achieved this, but I feel that most companies that are developing their business from a real place are just beginning to think about moving toward Phase 3.

--So you are saying that digitalization has only just begun. In light of that, do you think there are still many issues to be addressed?

There are numerous challenges. Service vendors and SaaS startups supporting DX for major companies need to provide appropriate support, ensure customer success, and design services that accurately address the needs of large companies. This area still has significant room for growth.

Currently, most SaaS is for small and medium-sized companies, and even if it is for enterprises, it is a situation where only a limited portion of a huge amount of work is being SaaS-ized. In other words, it is safe to say that there is not yet a service vendor or SaaS startup that fully meets the entire workflow digitization needs of large companies.

In the future, as major companies move forward with DX, it will become more important to have an entity that can meet the digital needs of large companies in a broader scope.

--Over the past few years, a number of SaaS startups have sprung up; what do you see as the role and potential of SaaS startups in the DX of large companies?

SaaS startups are prompting companies to rethink their current business practices and identify areas for future improvement. In addition, SaaS startups design and develop their products while talking with many customers, so they are accumulating more and more best practices. For example, if we provide a product that specializes in the construction industry, we know what workflows are unique to that industry, where many companies have issues, and how to solve them.

Such know-how is accumulated and reflected in the products, so customers can learn about cutting-edge best practices and imitate the best parts. In that sense, I think SaaS startups provide an opportunity for evolution.

If the services are successfully implemented, they can improve the efficiency of business operations. For example, we have actually seen companies that we have supported reduce their man-hours by 10% or increase their profit margins by 2-3% by adopting their services. I believe that SaaS startups can be like partners in creating better services.

Difference between Japan and the U.S. IT people are the ones who should go to non-IT areas.

--The ALL STAR SAAS FUND was launched in June 2019. I don't think there was a SaaS-specific fund at that time. What did you see the potential in SaaS, Mr. Maeda?

The main reason we launched a SaaS-specific fund was because we felt the inevitability of SaaS becoming more popular. Currently, the SaaS penetration rate is said to be around 10-20%, but based on the momentum and market needs over the past few years, I believe that this number could go up to 50-70%.

And a big part of that is that I strongly believe that SaaS is the ideal model for B2B software purchases. There are various ways to purchase B2B software, such as on-premise or packaged software, but a subscription or pay-as-you-go based fee structure, as represented by SaaS, is the most consistent. For both the service vendor and the customer, the SaaS model is the most beautiful. I believe that this model will continue to exist for the next 100 or 200 years. That is why I launched the fund, thinking, "I am willing to spend 100 years in this area.

--What do you think is necessary to increase the SaaS penetration rate?

The SaaS companies that provide services must evolve to meet the needs of their customers, and the customers must become more proficient in using SaaS. I think that the SaaS penetration rate will come close to 100% when both sides work together to solve problems, rather than when it is an issue for one side or the other.

The impact of SaaS on a company's profits is huge. We have seen cases in the past where simply introducing a service can increase operating profit margins by several percent. If you introduce services that lead to increased business efficiency and sales, you will be able to increase your profit margin even more. This would also create opportunities to create new business.

--Are there any differences when compared to other countries?

There are differences from country to country. Focusing on the U.S., one difference between the U.S. and Japan is the "job market for IT personnel. In the U.S., many IT professionals are employed in non-IT areas such as food and beverage, manufacturing, and medical care, etc. In Japan, most IT professionals work within IT companies, leading to a lack of IT literacy and skills in non-IT sectors. This gap likely impacts SaaS and software penetration rates. In that sense, it is important for Japan to have more IT personnel enter the non-IT domain.

Unlearning is necessary for the transformation of major companies

--Major companies can not only introduce SaaS, but can also find ways to create their own SaaS-like businesses. If so, what should they consider?

The most important point about SaaS is that the product or service itself evolves along with the customer, rather than being created once and then left behind. SaaS must be designed based on the basic premise that it will continue to evolve and be refined.

Another thing is to think from the perspective of "how much lifetime value can we provide to our customers" rather than "how much sales can we generate in a short period of time. Can we provide greater value over 10 or 20 years or have a greater impact on society than 10 million yen in sales in one year? I think we should design our services and fee structure based on this kind of thinking.

I think that we should consider these points comprehensively and then decide whether to introduce SaaS or create it ourselves. Companies with long histories and successful track records may struggle to innovate. In these cases, creating a new SaaS business in-house requires 'unlearning'—letting go of past successes and embracing new approaches.

--What are the key points to be aware of when major companies and startups collaborate?

From my perspective, understanding each other's mission is crucial.

Startups have a mission to strengthen their own foundation in addition to expanding their business and making a positive impact on the world. They do not want to deviate from the strategies they have established based on these missions as much as possible. That is why it is important for us to have strong relationships and cooperative systems with major companies that are our customers.

In order to achieve good cooperation, mutual consistency is more important than anything else. I think it is very important that the direction that the startup and the major company are heading in is consistent and that a win-win relationship is created. If one of them is lacking, it will basically not work. I believe that collaboration will proceed more smoothly if both parties have an understanding of what each other is aiming for and the prerequisites, such as flexibility and commitment.