Conversation with Three Japanese B2B Startup Companies: Fundraising Amid COVID-19

DNX Ventures
Jan 27, 2021 · 14 min read

Japan, along with other countries, was not immune to the great economic impact of COVID-19. How has the funding landscape for startups been during the pandemic? We heard from three B2B SaaS companies that strategically raised millions of dollars in the past 6 months: Mr. Takashi Nakagawa, CEO of KAKEHASHI Inc., Mr. Yoshiaki Hirano, Founder of XICA Co., Ltd., and Mr. Takeshi Aida, Founder of RevComm Inc.

This blog post is written based on the transcription of “B2B Summit Online #2” hosted by DNX Ventures on November 11, 2020.

Impact of COVID-19 : 3 Funding Tales

Kurabayashi, DNX(Moderator): I’d like to begin by summarizing the state of affairs surrounding the funding landscape for DNX Ventures’ Japanese portfolios amid the COVID-19 pandemic. DNX Ventures is investing in B2B startups and we didn’t see a slowdown in our investment pace even amid COVID-19. We have made additional investments in our existing portfolios, as well as new ones, RevComm, who joins us here today, is one of them.

Kurabayashi(Moderator): Of the three companies who are joining us here today: XICA has raised a series D up-round, KAKEHASHI has raised 1.8 billion yen($17 M) in a Series B extension, and RevComm has raised 1.5 billion yen($14 M) in a Series A extension. I would like to ask all of you who raised funds during the pandemic what the financing situation was like in Japan when the market was said to be cooling down.

Nakagawa, KAKEHASHI: KAKEHASHI offers SaaS for pharmacies. We have been able to grow by more than 8% on a monthly average even during the pandemic. Pharmacists are required to record conversations with patients regarding side effects and any other concerns per Japanese pharmaceutical regulations, which can take up two to three hours a day. We provide “Musubi,” a tool designed to semi-automatically draft those records. We provide services that can improve the patient experience itself and provide better guidance. In addition to the core feature of “Musubi,” we are also in the process of gradually increasing our portfolio of services with the launch of applications: one of them called “Pocket Musubi” for patient use and another called “Musubi Insight” for business use.

Kurabayashi: What has the impact of COVID-19 been like?

Nakagawa: Well, 30 to 40 percent of our customer lead used to come from things like physical exhibitions and pharmacy conferences, and all of them disappeared, so there was an impact in the marketing context initially. We were able to overcome those challenges by shifting to online webinars fairly early on. Still, there were many customers who said that it was difficult to make decisions to switch business systems during COVID and about half of the business negotiations were postponed to ensuing months. However, I’d say the situation has calmed down now, and we are getting back to business as usual.

Hirao, XICA: We at XICA offer an analysis tool called “Magellan.” We provide visibility into the impact on business results of various types of advertising, including TV commercials, and based on this, we are creating a service to derive the optimal budget allocation. We have been overwhelmingly the number one advertising analysis tool in Japan based on the number of users and the qualitative evaluation from marketers that “shows results.”

This year, we expanded our service. “Magellan” provides the Analysis part of the PDCA cycle for advertisements, but marketers have asked us to cover the Plan and Action parts as well, so we expanded our services in the Plan area with the “ADVA Planner” and “ADVA Creator.” We created a tool that specializes in TV commercials that even suggests which program slots to buy, and with Action, we started a pay-for-performance ad agency business that buys TV commercial slots based on these analyses.

COVID-19 impact was huge for us. In the early days of COVID, there was a difficult period of two to three months where no company could follow through on their marketing initiatives and they couldn’t make any deals. On the other hand, we changed our message to “We need to rethink marketing costs and ROI now, precisely because of the pandemic,” and changed our sales targets to those that were likely to place more emphasis on ROI, which led to a resurgence in business negotiations and we are now back to seeing business conversion.

Kurabayashi: Mr. Aida, how about you?

Aida, RevComm: Hi everyone, my name is Aida. I founded RevComm in 2017 after working for a trading company. We are in the business of “Voice x AI” platform and offer a B2B SaaS called “MiiTel,” which visualizes telemarketing and call center operations to increase productivity. The impact of COVID-19 has actually been positive, and feel that our product is helping people. The service that we offer is a full-cloud phone, a product that allows for remote sales and call center operators, so we’ve expanded several times over in three to four months. On the other hand, internally, we were faced with the challenge of having to keep up with customer service due to the rapid increase in customers.

Bullish Management:KAKEHASHI’s Strategic Extension Round

Kurabayashi: Three companies joining us today have roughly the same sales volume and company valuation — I think we can make a comparison between the companies that have been positively and negatively(to some extent) affected by COVID-19. I’d like to hear the kind of funding you got, what was on your mind during the funding, what difficulties you faced, and what kind of strategic approach you took. Let me start with KAKEHASHI, which I think is an interesting case study. Last year, you raised a total of $43M through a Series B extension which is a considerable amount of money. Can you tell us the details and your thoughts regarding that round?

Nakagawa: I was very unsure of how to steer the ship in the beginning stages of the pandemic when the number of leads might be impacted, and the future situation was unpredictable. We had just closed the Series B round then, so we had more than two years of runway left in hand, but with unpredictable sales under the COVID-19 environment, we felt that management had to be a bit cautious about aggressive future investments. Nevertheless, we wanted to expand our service lineup and go on the offensive even more aggressively if we were to make an impact that will change the pharmaceutical industry as a whole and change healthcare in Japan. We wanted to invest aggressively in human resources and marketing. In order to run a strong business, we wanted to secure additional funds if possible, so we made the decision to prioritize time first and raise funds in the shortest possible time by taking the form of an extension.

Kurabayashi: I remember how back then, the management team at KAKEHASHI made decisions very quickly. In general, the theory for startups was, if you have a two-year runway, you build traction, raise valuations, and finance for those two years, but I was impressed by how, even with an uncertain future given COVID-19, you moved forward, raised additional funds, and created an environment where you could focus on business with confidence. Do you think the fact that the valuation of the first close was not bad may have been a factor that supported your decision?

Nakagawa: Yes, that’s right. In addition, I figured that, rather than having a large share of a small pie, it would be better to grow the company and have a small share with a larger impact. I didn’t think dilution was that much of a threat. Rather, we decided that raising the necessary funds to realize our mission and vision, and to expand our management options to do so would be more valuable. Also, we were incredibly lucky that COVID did not impact us as much as we expected, and our KPIs went up as we were raising funds. As a result, our investors were saying “This is one heck of a deal,” leading to enthusiastic inquiries resulting in investments from new investors as well as existing ones, and the round size more than doubled from what we had originally expected. It turned out to be very good funding round.

Existing Investors Priming New: XICA’s Up Round Under COVID-19

Kurabayashi: Exactly! Thanks to the considerable progress the company made before the second close, an offer at the same valuation made it very attractive.

Now, Mr. Hirao, you have achieved an up-round in the area of marketing and have achieved excellent financing. Can you talk about the investors whose M.O., approach, etc., changed because of COVID and those who didn’t?

Hirao: We were different from KAKEHASHI, in that we were planning to release a new service from the get-go and start the rounds from the beginning of the year. At first, we made really good progress, and we thought we would continue to go on the offensive. Then around March or April, we began to feel the full impact of COVID, with new investors getting skittish, some saying they weren’t able to make new investments as a fund, some voicing opinions about how businesses won’t be spending money on marketing as much during the pandemic, that needs for “Magellan” will disappear; risks that were unpredictable began to pop up. We sensed that it was going to take a long time for the funding round as is, so we took two measures. One was to extend the runway; to cut down on the original plan and secure the runway for an additional year and a half. Another was to pitch to existing investors before going to the new investors. We wanted to finish the round as quickly as possible. Going first to people who had seen our growth thus far and who had faith in our continued growth, quickly led to additional investments, and those 3 existing investors primed the new investors — becoming the catalyst in bringing in the new investors.

Kurabayashi: Also, in retrospect, perhaps the way we developed new investors may not have been done as well as it should. We had been approaching corporate investors since the beginning of the year, but everything at corporates halts in a situation like this.

Hirao: Yes, that was definitely the case. Each company has its own business, and in a crisis, that is more important than any investments. Existing investors like NTT Docomo Ventures and Salesforce Ventures were not veering away from investing, but new companies were focusing on reviewing their businesses and that had a higher priority than investing; it was definitely a strategic mistake on our part.

Kurabayashi: As an operating company, you could say that your approach to take a step back was the right one.

Hirao: Something good did come out of this situation, in that we learned having ongoing communication with potential investors even when we are not raising would give us a stronger position in a crisis like this, that we should reach out, communicate and build a relationship with them. You(Akira) introduced us to the professional investors, both domestic and foreign, for the next and subsequent rounds, not just during but prior to the round itself, so that they can see our progress, and get to know us better like our existing investors.

Kurabayashi: With Mr. Sugiyama coming on board as CFO, the management team at XICA is solid. I do think it’s a trade-off of how much management resources you can spare, but I think it’s best to show steady progress now that the team has more depth.

RevComm:Aiming at Becoming a 1 Trillion Yen Company

Kurabayashi: And you, Mr. Aida, you have achieved excellent financing, bringing in many business companies. Looking back on the first and second closings, what was it like?

Aida: To begin with, we think it’s better not to go the equity financing route if you don’t have to. It’s better if you can maximize your business by raising debt and then use the operating cash flow you generate to attract more debt. At the end of 2018 and the beginning of 2019, we did convertible equity financing and we had already planned on doing a slightly larger equity financing for a year following, to around February 2020. The reason for this was that with the reverse flow of US government bonds, the trade friction between Japan and China, and the lack of recovery in the Japanese economy, market participants were screaming that things might get bad around 2020. After all, the economy is determined by market participants, and I thought that a recession would come around 2020. In that light, we had to have a clean balance sheet. Since debt has a certain amount of risk naturally, we had to make sure the bottom right of our B/S was in good shape. So, at the beginning of 2019, we planned on making the bottom right of our B/S flush with convertible equity in mezzanine finance, while ensuring that no dilution would occur, so that it would lead to the first and second closings in February 2020. COVID was totally out of the blue, but the recession hit when it hit and it turned out to be OK in the end for us. Since the bottom right of our B/S was flush thanks to funding this time, the plan going forward is how to leverage the top right side — i.e., debt financing to increase our operating cash flow. This is the overall thought process.

So why did we divide the financing into two rounds? We basically wanted business companies who would bring synergies to come onboard. However, as we aimed to create a 1 trillion yen company, VCs with deep pockets and VCs who can follow on according to the individual company’s thoughts and KPIs without considering the macroeconomic situation — their stance will be important. Therefore, we asked VCs to invest in the first close and then enter the second close under the same conditions. I think Mr. Nakagawa used the same scheme, but the important thing here was to basically not change the conditions, and by not changing the valuation, the stock made for a really good bargain. There was no point in focusing on valuations here. Instead, we focused on synergies and getting investors who would really support us wholeheartedly. We raised funds by using Preferred Stock, which is favorable to the issuer: SHA (Shareholder Agreement) and SPA (Stock Purchase Agreement).

Kurabayashi: The business progressed substantially between the first and second closings, so we, as investors in the second closing, were on the edge of our seats until the very end, wondering if the price would change significantly (laughs). Just one question: while you had quite a few investors from business companies participate, was there anyone who was hesitant about investing?

Aida: No, they basically did not change. We had been working from the beginning to have companies with solid synergies to participate, so it wasn’t like “Hey, let’s synergize with this financing,” but there was already a premise of “We already have a business collaboration, so let’s finance,” and that I feel was a big factor for those companies who invested.

Kurabayashi: I see so you are saying that as long as there was a solid synergy and the company was a good one, they committed as planned. Any questions anyone?

Precisely Because of Tough Times; “Bullish” Equity Stories

Aida: Question for Mr. Hirao. I think that with COVID, advertising costs were the easiest to cut and marketing costs were also the easiest to cut. I’m wondering how you spun the equity story and communicated with investors under such circumstances.

Hirao: We managed to show it with business results. There were about 3 months when we didn’t have any new customer leads; when none of our customers were clicking on our ads and to be honest, we were at a loss for an explanation. Although we had data to logically explain how the advertising costs actually came back quickly during past recessions, in the end, the fact that the business leads came back was the clincher.

Aida: How did you explain the use of cash to the investors? While VCs invest to grow business, raising funds to extend a runway is a defensive stance, correct?

Hirao: We kept it bullish. We expected clients to come back during the fiscal year and told investors that we wanted to continue in the same way as in the regular term. In addition, there was still a lot of room for growth in CS and product development, so we wanted to grow the company by hiring; we just kept on talking about how we were proactively moving forward.

Nakagawa: KAKEHASHI also mainly talked about being bullish. In terms of the runway, it was difficult to talk about extending the runway because we had a certain amount of money left in the bank. Rather, we explained about evolving by hiring good people, building a good team, and investing to increase market share while other companies were unable to make any bullish moves in this environment.

Aida: Mr. Kurabayashi, even for startups whose runway is in trouble due to the recession, is it easier to invest in equity stories that are not about securing a runway but about going on the offensive?

Kurabayashi: Great question! What both of you had in common was that you had plenty of cash. On the other hand, there were companies with a six-month runway who obviously could not be bullish, and they had to be really clear about extending their runways. We were fortunate that many of our portfolio companies were able to raise aggressive financing because they were cash-rich, but for companies that were not, they took the approach of extending or bridging and postponed the funding until next year. I think a major factor here was whether or not the existing VCs and CVCs could do extensions. As for Lessons Learned, it’s better to have a lot of cash, as obvious as that may be.

Hirao: How about you, Aida san?

Aida: Things were up and up for us, and so the only way to go was to be bullish.

We didn’t have to secure any runway or anything. Rather, we had enough operating cash flow to be able to do debt financing. But in terms of increasing the number of our supporters, we communicated that we wanted to put in equity this time and that we wanted people who shared our values to invest.

In the End, What Matters is How You Grow Your Business

Kurabayashi: In closing, if you have a message for entrepreneurs who will be financing.

Nakagawa: I think that equity stories and fundraising are just one of the means. In the end, what is important is how to grow the business itself. As long as the business is growing, we can create as many options as we want. The external environment such as COVID may fluctuate, but SaaS is relatively stable, and I think you can build a solid business. You need a good team and good numbers. Put it another way, I feel that the most important thing is to build the business properly and not to run away from building the business by focusing too much on financing.

Hirao: I feel the same way as Mr. Nakagawa. I realized that the most important thing is to grow the business. One thing I am glad about COVID is that we have entered an era where customers are looking at our services carefully and thinking about what they should pay for. For us, this is the time to shine. If we can become the service of choice precisely because we are in such an era, we will be able to concentrate on polishing our services more than ever before. COVID is giving us a chance to strengthen our services in a disruptive way. We will do our best, and I hope everyone will do their best as well.

Kurabayashi:Thank you so much for the wonderful messages!

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