It’s not often that seed capital specialist 500 Startups takes part in a series B fundraise. For it to lead one is unheard of.
That changed today with the announcement that Tokyo-based SmartHR has raised US$13.3 million in the first-ever series B round globally to be led by the US firm.
Founded in early 2013 and originally known as Kufu, SmartHR is a cloud-based system that helps businesses to manage and streamline their HR processes. Among other things, it is able to automate employee benefit and insurance programs, which traditionally require copious amounts of paperwork and many tedious man-hours to handle. Enterprises sign up for a subscription the the service.
Companies like this just don’t come around very often.
Riney told Tech in Asia that SmartHR’s as-yet unassailed position as a provider of these services in Japan is what attracted the firm to make a rare mid-stage investment and lead its first-ever series B fundraise.
“What they’re doing is replacing paper and people, so there’s not any existing software they are replacing.” Around 7,000 companies are signed up to SmartHR, including a few companies with more than 10,000 employees, he added.
Riney continued, “So it’s not just something startups use – and traditional industries are using it, not just IT. Restaurant chains, karaoke chains – the sweet spot is companies that might have a lot of employees that come and go, a lot of people they need to onboard every year.”
Special purpose vehicle
500 Startups previously backed SmartHR’s series A fundraise in August 2016. The startup’s rapid rise since then – with an average 16 percent marginal revenue growth month-on-month – encouraged Riney and his team to think not just about investing again, but also to lead the next round.
However, since 500 Startups Japan is structured for seed investments, it wasn’t in the best position to provide the kind of capital SmartHR would need.
“Companies like this just don’t come around very often,” said Riney. “So we were trying to figure out how to participate in its series B. We’re a US$35 million fund, and if we were to invest US$10 million in [one company’s] series B, our LPs probably wouldn’t be too happy about that!”
The solution was to effectively put together a separate fund in the form of a special purpose vehicle (SPV), through which 500 Startups and partner investors could join the series B round.
“When you want to raise a larger round [in Japan], your sources of capital are pretty limited,” Riney explained. “Then, each firm will invest one or two million, so the cap table gets really crowded, and [the startup] has to communicate with a lot of investors.”
“With the SPV, we only used 10 hours of the CEO’s time. He effectively outsourced fundraising to us. So from his perspective, he’s got one line on the cap table, and he doesn’t have to work as much for the series B.”
The SPV had exclusive access to the round, so third parties had to go through 500 Startups Japan if they wanted to invest.
Riney said that to his knowledge, this was the first time such a structure had been used to make a VC investment in Japan – though the tactic is relatively common in the North American market.
Later-stage investments on the horizon
As the table below indicates, 500 Startups appears to have identified the best opportunities for investments at series B and above in Asia:
Riney thinks that the SPV tactic may be deployed again to achieve this. “The short answer is probably, yes,” he said. “It’s a big deal to set up another fund, so you really need conviction. I can’t speak for the other [500 Startups] fund managers. But we have talked about ways to participate in later stages. In Southeast Asia, they have invested in Carousell, Bukalapak, Grab – all breakout companies that, if we had this idea earlier, we could’ve set up this kind of scheme.”
Converted from Japanese yen. Rate: US$1 = JP¥110.777
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