SaaS Annual Report 2023-2024: Key Insights and Trends

Chiamin Lai on LinkedIn: SaaS Annual Report 2023-2024

Osamu Iwasawa on LinkedIn: SaaS Annual Report 2023-2024

SaaS and a Depopulating Society

Industry Growth and Maturity

Continuous Growth:
- Despite a decline in stock prices, SaaS businesses in Japan continue to grow.
- In 2024, the top listed SaaS companies in Japan exceeded JPY 30 billion in ARR (Annual Recurring Revenue).
- Insights: The growth indicates the resilience and establishment of SaaS as a key industry in Japan.
Growth Drivers:
- Includes multi-product offerings and expanding sales to large enterprises and SMEs.
- M&A (Mergers and Acquisitions) deals reached a record 16 in 2023.
- Insights: Diversification and strategic acquisitions are essential for scaling and maintaining competitive advantage.

Emerging Trends

Vertical SaaS Solutions:
- Increase in vertical SaaS addressing social issues specific to Japan, unlike the U.S. models.
- Known as "time-machine management," focusing on sectors like construction, manufacturing, and logistics.
- Insights: Customization to meet local social needs can offer competitive advantages and innovative solutions.
Depopulation Challenges:
- Japan faces the fastest declining population.
- Labor shortages are significant in legacy industries.
- Legacy industries must choose between increasing workforce or enhancing productivity.
- Insights: SaaS can play a crucial role in improving productivity, mitigating labor shortages.

Economic and Social Context

Macroeconomic Divergence:
- Differences in macroeconomic trends between the U.S. and Japan, such as interest rate gaps and demographic shifts.
- Startups in Japan are diverging from U.S. trends, creating unique solutions.
- Insights: Understanding local context and creating tailored solutions is crucial for SaaS businesses in Japan.
Opportunities in Decline:
- Population decline seen as an opportunity for innovation.
- Potential for disruptive growth by addressing local issues through SaaS.
- Insights: Turning demographic challenges into business opportunities can lead to groundbreaking innovations.

Leadership

Osamu Iwasawa's Vision:
- Leading UB Ventures with a focus on "Creating innovation in a depopulating society."
- Background in equity research, M&A, and business development.
- Insights: Leadership with deep market understanding and experience in strategic growth is vital for navigating industry changes.

Future Outlook

SaaS as Infrastructure:
- The SaaS industry is maturing, posing the question of its role in supporting a depopulating society.
- True value of each player in the market is increasingly tested.
- Insights: As the industry matures, companies must innovate and adapt to sustain and grow amidst demographic shifts.

Extended readings:

SaaS Resilience in Japan's Depopulating Landscape - Photes.io

www.asiancenturystocks.com

Complete guide to Japan's SaaS industry - Asian Century Stocks

Osamu Iwasawa on LinkedIn: SaaS Annual Report 2023-2024

SaaS Companies in Japan: ARR Overview

Key Insights

Annual Recurring Revenue (ARR):
- ARR is a crucial metric indicating the predictable revenue stream from SaaS products, essential for assessing growth and sustainability.

Top SaaS Companies in Japan by ARR (February 2024)

Company	ARR (JPY bn)
RAKUS	32.5
Sansan	29.4
Appier Group	28.6
Cybozu	24.0
freee	23.3
Money Forward	23.2
Plus Alpha Consulting	13.1
SMS	10.6
Bengo4.com	10.0
Chatwork	10.0
PLAID	9.4
kaonavi	8.4
HENNGE	7.6
PKSHA Technology	6.0
Medley (Medical)	5.5

Strategies for Maintaining ARR Growth

1. Launching Additional High-Revenue Products

RAKUS: Rakuraku Meisai brings an ARR of JPY 7.61 bn with 92.7% year-on-year (YoY) growth.
Sansan: Bill One contributes JPY 5.94 bn ARR, marking YoY growth of 179.5%.

2. Price Increases Backed by High Retention

Chatwork: Implemented a 40-50% price increase per ID.
freee: Achieved a 10-20% unit price increase for both sole proprietors and corporations.
Smaregi: Prices per ID increased by 10-25%.

3. Expansion into Mid-sized and Enterprise Markets

Money Forward: Mid-sized companies ARR reaches JPY 6.91 bn, with a 71% YoY increase.
freee: Mid-segment ARR stands at JPY 8.82 bn, showing 47.4% YoY growth.

Additional Notes

Importance of ARR: This metric helps businesses evaluate their recurring revenue, ensuring financial health and aiding strategic decision-making.
YoY Growth: Indicates how companies are increasing their annual revenues each year, reflecting successful strategies and market expansion.

Extended readings:

ubv.vc

[PDF] Untitled - UB Ventures

SaaS Resilience in Japan's Depopulating Landscape - Photes.io

global.allstarsaas.com

How public Japan SaaS firms maintain high growth rates

Product Portfolios of Top Listed SaaS Companies in Japan

Overview

SaaS Companies and ARR

The overview focuses on the Annual Recurring Revenue (ARR) of leading SaaS companies in Japan, highlighting those with ARR exceeding JPY 10 billion. The data is compiled by UB Ventures based on SaaS KPI data from Next SaaS Media.

Key Companies and Their ARR

Company & Product	ARR (JPY bn)	Growth Percentage
Sansan	29.43	+179.5%
Cybozu	24.01	-
freee	23.25	+36.6%
Money Forward	23.15	-
infomart	13.14	+46%
フジクラ	10.62	+37.6%

Growth Drivers

Compound Strategy: This strategy involves expanding through multiple products within a specific domain. It has gained traction among Japanese SaaS startups as it allows diversification and deeper market penetration.
Key Players: Companies like Money Forward and freee have established accounting software at their core while expanding into other fields such as HR, labor, contract, and SaaS ID management.
Post-IPO Growth: Products introduced post-IPO have become significant growth drivers. Examples include RAKUS' Rakuraku Series, Cybozu’s kintone, and Plus Alpha Consulting's Talent Palette.

Insights and Trends

Organic Growth: Traditionally, startups focused on organic growth. However, there's a shift towards using mergers and acquisitions (M&A) as part of their growth strategies.
Success Metrics: The number of products generating JPY 10 billion in ARR is becoming a critical success metric for companies.

Additional Information

ARR: This is a key metric used to assess the financial health and revenue stability of SaaS companies. Understanding ARR growth can indicate the scalability and market acceptance of a company's products.
Diversification: Expanding into multiple product categories helps mitigate risk and capture a larger customer base, which is a common strategy among successful SaaS companies.

Extended readings:

ubv.vc

SaaS Annual Report 2022 – The Key to Industry Transformation

Jin Hsueh - UB Ventures reports on Japan SaaS market - LinkedIn

SaaS Resilience in Japan's Depopulating Landscape - Photes.io

SaaS Annual Report 2023-2024 Overview

Valuation Insights

Average PSR Trends

PSR Stability: The average Price to Sales Ratio (PSR) has remained between 6-8x since 2022.
- Insight: Investors may view this stability as indicating a mature market for certain SaaS companies. The consistent PSR helps in forecasting and making informed investment decisions.

Rule of 40%

Definition: The Rule of 40% refers to the combined annual recurring revenue (ARR) growth rate and profit margin exceeding 40%.
- Explanation: This rule is a benchmark for gauging the balance between growth and profitability in SaaS companies. Companies that meet this rule are often seen as healthier investments.

Valuation and Growth

High Growth is Not Enough: In 2023, companies with mere high growth but without profitability, like freee, saw a decline in valuation.
- Insight: The market is rewarding companies like RAKUS and eWeLL that balance profitability with growth, reflecting a shift in investor priorities.

Average PSR Comparison (End Feb. 2024)

Achieved Rule of 40%:
- 11 Companies: 7.1x PSR
Unachieved Rule of 40%:
- 17 Companies: 5.3x PSR
- Insight: Meeting the Rule of 40% increases a company's PSR, indicating higher investor trust and perceived value.

Historical PSR Analysis

Graph Analysis:
- Displays the PSR trends for companies like freee and RAKUS from 2021 to 2024.
- Key Observations: A spike in valuation can be associated with favorable financial performance and market conditions.

Conclusion

Profitability Focus: Profit became a significant valuation factor in 2023, emphasizing the market’s preference for SaaS companies achieving a balance between expansion and sustainable earnings.

Extended readings:

www.saas-capital.com

2024 Private SaaS Company Valuations

softwareequity.com

Understanding the Rule of 40: A Key Metric for SaaS Success

www.cobloom.com

Balancing Growth and Profit: The Rule of 40 for SaaS Companies

SaaS Annual Report 2023-2034 Overview

Key Theme: Rule of 40%

Understanding the Rule of 40%

Rule of 40% : A metric used to evaluate the performance of SaaS companies. It is the sum of a company's growth rate and profitability (operating profit margin). A combined total above 40% is considered strong.
- Insight: Investors often use this rule to balance growth and profitability, ensuring companies are not sacrificing long-term profit for immediate growth.

Current Trends in SaaS Companies

Shift in Focus: Earnings forecasts are increasingly shifting from growth to profitability.
- Insight: This shift reflects changes in investor expectations, where profitability is now a significant factor in company valuations.

Profitability Expectations

SaaS companies are now expected to commit to profitability.
Companies are emphasizing profitability in full-year forecasts or through medium-term plans for 2024 financial results.

Market Data Insights

Data Source: Compiled from SaaS KPI data and valuation data from Next SaaS Media Primary.
Forecast Basis: OP margin is based on forecasts, while ARR growth rate relies on recent results, with data as of early March 2024.

Valuation Implications

PSR (Price-to-Sales Ratio) Averages:
- Companies meeting the Rule of 40% often have a higher PSR (average 7.1x).
- Those below the 40% threshold have a lower PSR (average 5.3x).
- Insight: This suggests a correlation between meeting the rule and achieving higher valuations.

Visual Representation

A graph is used to map Japanese listed SaaS companies against the Rule of 40%, comparing OP margin (%) and ARR Growth (%).
- ARR (Annual Recurring Revenue) : A crucial metric for assessing a SaaS company’s performance, representing stable revenue that can be expected annually.

Contextual Understanding

Investor Perceptions: There is an evolution in how investors perceive company value, with a stronger emphasis on long-term profitability.
Strategic Planning: Companies might need to adjust strategic plans to align growth ambitions with profitability goals more closely.

Additional Context

The information is relevant as of the beginning of March 2024 and reflects ongoing market trends and investment strategies.

This report highlights the importance of balancing growth and profitability for SaaS companies to meet investor expectations and sustain high valuations.

Extended readings:

www.saas-capital.com

The Rule of 40 is Dead... Long Live the Rule! - SaaS Capital

softwareequity.com

Understanding the Rule of 40: A Key Metric for SaaS Success

www.cobloom.com

Balancing Growth and Profit: The Rule of 40 for SaaS Companies

SaaS IPO Market Overview 2023-2024

Key Insights

Decline in SaaS IPOs:
- In 2023, the number of SaaS IPOs was the lowest since 2018, with only two companies going public: DreamArts and Human Technologies.
- These companies were not funded by venture capitalists (VCs), indicating a challenge for startup-style SaaS firms to go public.
Market Shift:
- The industry focus is shifting from rapid growth to profitability, making companies cautious about early IPOs.
- Companies that raised funds in 2021 or earlier find it challenging to surpass valuations from previous funding rounds.
Future Outlook:
- Optimism exists for a resurgence of larger IPOs in 2024, unaffected by these market challenges.

Data Summary

IPOs of SaaS Companies (2015-2023)

Year	Number of IPOs
2015	1
2016	1
2017	4
2018	2
2019	7
2020	8
2021	4
2022	3
2023	2

Recent IPOs

DreamArts

Date: October 27, 2023
ARR at IPO: JPY 2.88 bn
Market Cap: JPY 11.1 bn
PSR (Price-to-Sales Ratio) : 2.3x
Description: Provides no-code development tools for enterprise portals.

Human Technologies

Date: December 22, 2023
ARR at IPO: JPY 4.36 bn
Market Cap: JPY 10.8 bn
PSR: 2.5x
Description: Offers the attendance management system "King of Time".

Significant Series C or Later Fundraising in 2023

Company	Funding Round	Valuation	Release Date
KAKEHASHI	Series C	JPY 42.3 bn	2023/03/29
CADDi	Series C	JPY 66.0 bn	2023/07/05

Analysis

Investment Climate: The environment is challenging for newcomers aiming to achieve IPOs without prior VC support, highlighting the importance of profitability and sustainable growth.
Strategic Consideration: Companies are increasingly focusing on enhancing corporate value through strategic fundraisers instead of rushing into IPOs under unfavorable conditions.

Extended readings:

www.iconiqcapital.com

Decoding the SaaS IPO Landscape: The Metrics that Matter and the ...

www.forbes.com

The Great SaaS Slowdown: Navigating The New Liquidity Landscape

sapphireventures.com

The State of the SaaS Capital Markets: A Look Back at 2023 and ...

2023 SaaS M&A Overview

High-profile M&A Deals in 2023

Key M&A Transactions by Japanese SaaS Companies

Release Date	Buyer	Target	Target Business	Feature
2023.12.11	ITANDI	Housmart	System for realtors	Integration of vertical SaaS and startup
2023.10.4	EQT	HRBrain	Talent management system	PE investment in later-stage startup
2023.10.4	Kaminashi	StatHack	Image recognition AI model	Acquisition of startup for AI technology
2023.10.2	SmartHR	Metaps Cloud (business transfer)	SaaS centralized management	M&A as expansion strategy by later-stage startup
2023.7.21	Bengo4.com	Lisse	AI contract review	Multi-product expansion in legal tech
2023.1.20	freee	sweeep	Invoice management	Expanding functional coverage in ERP domain

Insights

Integration of Vertical SaaS: ITANDI's acquisition of Housmart exemplifies the integration strategies for vertical SaaS platforms, focusing on niche markets such as real estate systems.
PE Investments in Later-stage Startups: EQT's investment in HRBrain reflects the growing trend of private equity funds targeting later-stage startups for substantial returns without pursuing IPOs.
AI Technology Acquisitions: With the increasing relevance of AI, companies like Kaminashi are acquiring startups like StatHack to leverage AI in their offerings.

M&A Trends in 2023

Key Trends

PE Investments in Later-stage Startups:
- PE funds, such as EQT, are acquiring significant stakes in established startups, focusing on enlarging market cap without IPOs.
- Insight: This reflects a strategic focus on long-term growth and market positioning rather than short-term exit strategies.
Multi-product Expansion:
- Acquisitions, like freee acquiring sweeep, aim for synergies and cross-selling opportunities, enhancing SaaS companies' value propositions.
- Insight: Vertical SaaS companies are diversifying product lines to become category leaders.
AI Technology Acquisition:
- The demand for AI-driven solutions is driving companies to invest in AI technologies, highlighted by Bengo4.com's acquisition of Lisse.
- Insight: Legal tech and other sectors are actively seeking AI integrations to enhance service offerings.

M&A Activity (2016-2023)

The graph indicates a significant increase in M&A activity, peaking in 2023, highlighting the dynamic growth and interest in SaaS companies.

Conclusion

Record High M&As: 2023 observed approximately 20 M&A deals involving SaaS companies, showcasing increasing interest and strategic alignments in technological advancements and market expansions within the SaaS sector.

Extended readings:

news.crunchbase.com

Startup M&A Trends Higher As PE Leads, But Remains Sluggish ...

aventis-advisors.com

SaaS M&A Transactions: Insights & Trends in 2024 | Aventis Advisors

news.crunchbase.com

Rough Ride: M&A Dropped 31% For VC-Backed Startups In 2023

Japanese SaaS Startup Fundraising Overview 2023

Key Highlights

Decrease in Investment:
- Total investment in Japanese SaaS startups decreased by 41% from 2022.
- The number of funded companies dropped by 37%.
Insight: This indicates a challenging funding environment, likely due to economic uncertainties or stricter investment criteria.
Share of Total Investment:
- SaaS accounted for 18% of Japan's startup investments in 2023.
- Total startup investment was JPY 753.6 billion.
Insight: Despite the drop, SaaS maintained a significant share, showing its importance in the startup ecosystem.

Funding Trends

Median Funding Increase:
- Median funding per startup rose by 34% year-over-year.
- Notably increased primarily in Series A and early-stage investments.
Insight: Indicates a focus on larger, more substantial investments for potential high-growth startups, often led by experienced entrepreneurs.

Large-scale Fundraising by Serial Entrepreneurs

Date	Company	Founder	Round/ Aggregate Funds (JPY)
Sep. 2023	-	Yasukane Matsumoto	Series B / 18.1 bn
Sep. 2023	-	Masayuki Makino	Pre-Series A / 3.3 bn
Nov. 2023	-	Yoshinori Fukushima	Series A / 13.3 bn
Nov. 2023	-	Koji Asano	Series B / 6.1 bn

Insight: Serial entrepreneurs are key players, often securing significant funding rounds, highlighting investor confidence in their experience and vision.

Funding and Investment Trends (2016-2023)

No. of Startups Funded:
- Peaked at 402 in 2021 and dropped to 247 in 2023.
Total Funds Raised:
- Peaked at JPY 225,061 million in 2022, declining to JPY 134,799 million in 2023.
Median Funding Per Startup:
- Increased from JPY 27,159 million in 2016 to JPY 71,921 million in 2023.

Insight: While the number of startups and total funds have declined recently, individual funding levels are rising, indicating selective and focused investment strategies.

Conclusion

The landscape for SaaS startups in Japan is marked by reduced overall investment, but increased funding per company. This trend reflects a preference for targeted, impactful investments, especially favoring experienced entrepreneurial leadership.

Extended readings:

"Japan SaaS Insights 2023" Released - One Capital, Inc

Japan SaaS Market Q4 Overview - One Capital, Inc

assets.ctfassets.net

[PDF] Japan Startup Ecosystem Report 2023

ARR Acquisition Efficiency Notes

Overview

This section of the SaaS Annual Report 2023-2024 focuses on the efficiency of acquiring Annual Recurring Revenue (ARR) by analyzing costs and growth rates.

Key Concepts

Gross Burn: Calculated as the cost of sales plus SG&A (Selling, General, and Administrative expenses) divided by new ARR. It reflects the expenditure incurred to acquire new revenue.

Gross Burn / New ARR

Top Performers:
- RAKUS: 3.2
- Plus Alpha Consulting: 3.3
- Smaregi: 3.3
Moderate Performers:
- Chatwork: 3.4
- Cyber Security Cloud: 3.8
- kaonavi and rakumo: 4.1
Lower Performers (with Net Loss) :
- SpiderPlus: 5.2
- Infomart: 5.3
- freee and Money Forward: 6.0
- CS-C (Significant Loss) : 40.7

Cost Breakdown of Growth Efficiency

The cost is divided into:

Total Cost of Sales
Advertising Expenses
Total Personnel Expenses

Examples:

RAKUS: 31% cost of sales, 23% advertising, 17% personnel
Sansan: 14% cost of sales, 13% advertising, 34% personnel

Insights

Profitable Companies: Demonstrate the ability to balance growth and profits with efficient cost structures. Top companies maintain positive operating profits and high growth rates.
Investment & Growth Discipline: Companies like RAKUS show disciplined investment strategies leading to strong top-line growth.
Market Trends: SaaS valuations are increasingly linked to profits, with a renewed focus on growth in the U.S. in 2024.

Conclusion

Efficient ARR acquisition is crucial for profitability and growth, with the top companies in this analysis showing a strategic balance of investment and expense management to maintain strong performance.

Top Vertical SaaS Startups in Japan by Valuation

Overview

This report provides an analysis of the top 20 vertical SaaS startups in Japan, ranked by valuation. Vertical SaaS refers to software solutions tailored for specific industries, supporting niche markets with specialized functionalities.

Key Highlights

Limited Large-Scale Financing:
- While large-scale fundraising is limited in Japan, several startups are steadily gaining financial support and increasing their market presence.
- Notable fundraising in 2023 includes CADDi and KAKEHASHI, securing significant investments.

Top 20 Vertical SaaS Startups by Valuation

Company	Industry	Valuation (JPY mn)	Funding Year
ANDPAD	Construction	85,380	Funded before 2023
CADDi	Manufacturing	66,016	Funded before 2023
atama plus	Education/study support	52,198	Funded before 2023
KAKEHASHI	Wholesale/retail	42,309	Funded in 2023
Linc well	Healthcare/welfare	32,058	Funded before 2023
NUR*VE	Real estate/goods rental	31,693	Funded before 2023
CBcloud	Transportation/postal service	31,248	Funded before 2023
Ubie	Healthcare/welfare	31,181	Funded before 2023
iYell	Real estate/goods rental	22,163	Funded before 2023
FairyDevices	Information/communication	21,101	Funded before 2023
Unifa	Healthcare/welfare	17,428	Funded before 2023
WealthPark	Real estate/goods rental	14,864	Funded before 2023
Frontier Field	Healthcare/welfare	12,472	Funded before 2023
Toreta	Accommodation/restaurant	12,158	Funded before 2023
hacomono	Lifestyle services/entertainment	11,999	Funded before 2023
Nealle	Real estate/goods rental	11,770	Funded before 2023
Hacobu	Transportation/postal service	10,619	Funded before 2023
Monoxer	Education/study support	10,101	Funded before 2023
DennoKotsu	Transportation/postal service	8,942	Funded before 2023
Mnes	Healthcare/welfare	8,593	Funded before 2023

Insights

Dominant Industries:
- Startups in healthcare, real estate, and transportation are prominently represented in this list.
- These industries address key societal needs and leverage technology for enhanced service delivery.
Emerging Fields:
- Companies like FairyDevices and Nealle are emerging in critical sectors such as manufacturing and mobility, reflecting the evolving industrial landscape in Japan.
Funding Challenges:
- Despite challenging funding environments, startups like OPENLOGI continue to attract investment. This indicates ongoing interest and potential for growth within these verticals.

Conclusion

Japanese vertical SaaS startups are gaining traction in diverse industries, with some achieving high valuations. While large-scale financing rounds are limited, strategic investments continue to support growth and innovation in this sector.

Extended readings:

"Japan SaaS Insights 2023" Released - One Capital, Inc

Japan SaaS Market 23.Q2 - One Capital, Inc

nihonium.io

The State of SaaS in Japan 2023-2024

Vertical SaaS Investment Insights

Overview

Labor Shortage as an Opportunity

2024 Problem: Japan is facing a severe labor shortage due to the Workplace Reform Act, which enforces overtime restrictions.
Investment Surge: This labor issue is creating opportunities for SaaS solutions to fill the gaps.

Notable Companies and Investments

X Mile: A SaaS provider for non-desk workers expanded to 10,000 locations, securing JPY 1.8 billion in Series B.
Ascend: Focused on logistics, expanded its cloud-based business system, Logix, and completed Series A financing.

CADDi's Lead

Major Investment: CADDi procured JPY 11.8 billion in Series C to expand its data management SaaS in Japan and the U.S.

Fundraising Data

Industry	Number of Rounds	Total Funds Raised (JPY mn)
Healthcare / welfare	29	87,450
Manufacturing	19	34,385
Wholesale / retail	14	29,645
Accommodation/restaurant services	23	29,348
Construction	12	28,356
Real estate / goods rental	18	27,605
Transportation / postal service	15	23,643
Education / study support	7	15,830
Lifestyle services / entertainment	5	8,926
Information / communication	1	4,555
Academic research, professional services	2	3,257
Finance / insurance	2	1,925
Services	1	811
Public services	1	160
Agriculture / forestry	1	79
Others	1	78

Insights

Healthcare and Welfare: Attracts the highest investment, reflecting the demand for digital health solutions amid aging populations and healthcare reforms.
Manufacturing: Significant investments highlight the push for automation and smart factory solutions.
Diverse Categories: Funding spread across traditional and emerging industries shows SaaS’s broad applicability in addressing specific challenges.

Conclusion

Startups targeting specific industrial challenges with vertical SaaS solutions are seeing increased investments.
Addressing labor shortages and regulatory changes presents a lucrative opportunity for technology providers.

Extended readings:

SaaS Resilience in Japan's Depopulating Landscape - Photes.io

MARKET / TREND Japan SaaS Insights 2024 - One Capital, Inc