These days, SaaS is arguably the trendiest startup category in Japan, with the exception of the recent emergence of AI. There are many funds that now specifically focus on B2B SaaS, and the competition is fierce for strong teams pursuing opportunities that can be convincingly explained by anyone with an MBA. SaaS is particularly appealing to Japanese because the playbooks are relatively straightforward and the important metrics widely understood. Japanese excel when the playbooks are written, like when Deming brought his principles for quality control (later named Total Quality Management), which Japan took to the next level to become a manufacturing powerhouse.
But it wasn’t always this way. In fact, I specifically remember going to a conference in 2016 and watching a panel of VCs lament that all the great opportunities seem to have been taken. Some glimmers of light that were mentioned were blockchain or livestream shopping. Not a word was mentioned about SaaS. Meanwhile, we were quietly trying to invest as much as possible in SmartHR, one of the most important Japanese SaaS companies of the decade.
While we’ve invested in a number of other SaaS companies, including Kakehashi, Kaminashi, Hacomono, PrimeNumber, Dinii, mov, and many others, the opportunities for building $1B+ outcomes are becoming increasingly scarce, and the competition for them is bidding up the prices. We’ve been fortunate to make investments in these companies at the right time to enjoy significant multiples on our investments. However, I wonder whether the next generation of SaaS opportunities will have the same success in terms of investment returns when so many are focused on finding them and the alpha is being competed away.
I believe LLMs will breathe new life into the SaaS industry, setting the stage for completely new approaches to solving the same problems. So there will certainly be opportunities. However, SaaS companies like the ones we’ve invested in will implement AI to significantly improve their product offerings. The emerging startup SaaS “winners” in many industries are likely to compound from here, making it more challenging to place early-stage bets and more appealing to place late-stage bets.
As I’ve written before (sorry, Japanese only!) potential openings for startups will be in areas where “AI native” products require a completely different business model. For example, using AI to do the work of an accountant or lawyer and charging significantly less than them, as opposed to selling software to accountants and lawyers. This is not SaaS but something different: a “full-stack” startup that does the work of the practitioner.
When it comes to subscription services, a lot of the conversation tends to skew towards B2B. But let’s not forget that there have also been large outcomes in B2C subscriptions, a la Netflix or Spotify. I believe that this new wave created by AI will provide opportunities in both B2B and B2C, so I am interested in hearing more about both. As we are still in the gestation period, it is not yet clear what the next generation of large players will look like. But it is no doubt an exciting period to be imagining, building, and investing.
Founding Partner & CEO @ Coral Capital
