Can artificial intelligence (AI) help keep baby food safe? When Kewpie (TSE: 2809), Japan’s largest mayonnaise and salad dressing company and pioneer in factory automation, asked Google how they can utilize AI to improve their existing human inspection of raw materials in baby food, especially in culling defective diced potatoes as the conveyor belt is shuttling potatoes at high speed, Google recommended BrainPad (TSE: 3655) as their development partner.
Diced potatoes used in baby food is an ingredient that comes under most scrutiny in terms of safety since quality can greatly vary across batches of production and packaging. Takeshi Ogino, deputy director of next generation technology at Kewpie, commented, “The strictest examination is made of baby food. Even though it is harmless, if mildly discolored materials are mixed, the mother will feel uneasy. We are doing visual inspection with a quarter of our factory staff. Visual inspection for 8 hours is really tough job. Of course, we tried to introduce an automatic inspection system which is not AI but defects are not recognized. There is something called a color sorting device, but it is very expensive.” BrainPad utilized Google’s open-source TensorFlow deep-learning library platform and trained the machine learning algorithms to recognize good ingredients by feeding it 18,000 photos and set it to work in looking for visual anomalies that hint at sub-par potatoes. The result was an inspection system with “near-perfect” accuracy. Kewpie currently handles more than 400 food ingredients, and wants to expand the AI system towards similar detection with eggs, grains etc. Kewpie’s Ogino said, “In the future, this inexpensive high performance AI inspection technology will be Japan’s core competence in food safety and security.”
Founded in 2004 by Takafumi Kusano and Seinosuke Sato, BrainPad Inc. is Japan’s leading Big Data analytics company with a team of more than 80 data scientists, which is the largest scale in Japan, working across its 3 businesses: Analytics & Artificial Intelligence (36.9% of sales), Solution (32.5% of sales) and Marketing Platform (30.6% of sales). As the largest domestic data scientist organization, BrainPad’s knowledge-based business model in solving high-value problems for its customers enables the generation of EBIT margin of 13.5% and positive free cashflow (FCF) margin of 16.6% with ROE (= EBIT/ Equity) of 32.4% and ROA of 21.7% and a healthy balance sheet of zero debt and net cash of 1.27bn yen (US$11.2m, or 3.8% of market cap) as at its year end June 2018 financial results. BrainPad achieved a 49% and 175% absolute increase in sales and operating profit in the recent 3 years to 4.33bn and 585m yen respectively for its latest year end June 2018 results announced on 9 Aug 2018, which helped propel a 914% increase in market value in the past three years to US$304m. Most listed Big Data companies in the world are either loss-making or/and have negative free cashflow. BrainPad is one of the few with positive free cashflow and one of the four companies with a FCF margin of above 10% – the others are Splunk (NASDAQ: SPLK) (FCF margin 19.7%), Tableau (NYSE: DATA) (11.3%), and New Relic (NYSE: NEWR) (12.4%). Noteworthy is that BrainPad has not raised any cash in new secondary shares placement since its Sep 2011 listing that raised 384m yen (US$3.4m).
Another AI application developed by BrainPad is in the detection of deterioration in the revetment concrete for rivers by image recognition. This is important because social infrastructure such as roads, bridges, sewerage systems, and revetment concrete for rivers, which were developed during the period of high economic growth in the 1960s, have seen aged deterioration, and inspection and refurbishment thereof become an urgent issue. There are as many as 35,462 rivers in Japan with concrete wall which play an important role as a disaster countermeasure such as floods. Yachiyo Engineering, one of the leading comprehensive construction consultancy companies in Japan, is engaged in investigation and examination work related to the maintenance and management of these revetment concrete and BrainPad’s AI inspection has demonstrated its accuracy and usefulness with dramatic improvements comparable to the costly manual skilled inspection.
BrainPad’s founder and chairman Takafumi Kusano was also sanguine in sharing how they have supported practical AI applications: “BrainPad has supported practical AI application of the process of processing aerial images taken by drones using deep learning to provide services to Sony’s Aerosense Corporation such as checking abnormalities and manage asset. For instance, in judging exactly how many cars are in the aerial photographs using machine learning, it became possible to provide automatic management of facilities and materials whether they have been stolen or lost with high accuracy and low cost.”
“BrainPad has also built an image classification system for Daito Corporation’s rental properties utilizing AI deep learning. The rental property managed by the Daito exceeds 1.3 million units and boasts the number 1 share in terms of the number of managed units in the industry. Previously, when posting images of this huge rental property on the website, the sales staff of the company visually looks at the property image and categorizes it into categories such as living room, kitchen, entrance, washroom, one by one manually. However, this registration work takes 5 to 10 minutes per property, and the total number of registrations is close to 300,000 per year, so it was a challenge to make the enormous amount of work time more efficient. In this system constructed by BrainPad, AI automatically classifies these images into 21 categories by simply putting multiple images for each property together in the system. Work time is shortened by about 70% which translates to about 3,000 hours of working time per month. The image classification model realizes a conformity rate exceeding 90% in multiple categories using a technique called CNN (Convolutional Neural Network). By accumulating correction logs for erroneous classification results, it leads to improvement of classification accuracy.”
BrainPad’s also has its proprietary natural language processing engine Mynd to analyze text based on AI and machine learning to deliver recommended personalized news and content from learning user’s actions to Apple Watch and Android Wear. Some of the internet media customers using Mynd to deliver personalized content to users include Rakuten Q&A, Golf Digest Online (TSE: 3319), Nikkei Style, Diamond Online, etc.
BrainPad Inc. is also Japan’s #1 DMP (Data Management/Digital Marketing Platform) SaaS (Software-as-a-Service) company with its proprietary Rtoaster DMP commanding a dominant domestic market share of over 56% (vs the #2 player’s 5%). Rtoaster is a private DMP recommendation engine infrastructure that combines large-scale data in user behavior site/in-app data, CRM data, offline data, external audience data, social data, content analysis data etc to execute digital marketing action and perform both pull- and push-type customer communication across multiple channels based on recommendation algorithm and machine learning which also works with marketing automation tools such as France’s Probance in which BrainPad is the exclusive partner in Japan and Adobe’s newly acquired Marketo. BrainPad’s Marketing Platform business include Rtoaster and other proprietary tools such as Japan’s largest operational-type ad optimization tool L2Mixer used to support Yahoo Japan; natural language processing engine Mynd that analyzes text based on AI and machine learning to deliver recommended personalized news from learning user’s actions to Apple Watch and Android Wear. BrainPad’s Analytics & AI business to suggest concrete action plans and measures is on a project-revenue model, although BrainPad claims many companies renew their contract every few months and support them for a long time. BrainPad’s Solution business uses mostly licensed third-party software system such as Probance, social listening platform Crimson Hexagon (BrainPad is the exclusive partner in Japan), Tableau, SAP, etc to automate CRM improvement and build a big data analysis environment. BrainPad’s overall subscription-based revenue contribution is 40%.
Parcel delivery giant Yamato Transport (Ta-Q-Bin) operates a B2B membership portal that is used by over 930,000 corporations and individual business owners in 15 different industries and service use situations. Prior to using BrainPad’s Rtoaster, Yamato Transport faced the challenge of extracting the right customer segment who have a high probability to use its paid option of 35 online business tools and services. Since utilizing Rtoaster’s big data analytics platform to make “for you” personalized recommendations, the number of customers using the paid online services jumped 6-fold as opposed to using banner ads previously. For instance, Yamato Transport has a service that collects and handles confidential documents and not only did customer usage from the expected industries ranging from hospitals, legal firms to schools increase, but they also expanded to an unanticipated new group of customers in different industries.
Japan Airlines (JAL) has used BrainPad’s Rtoaster DMP for more than 10 years to increase sales at its online travel booking site which sold 70% of its domestic tickets to over 30 million members. For instance, over 1,000 predictive recommendations are developed from the big data analytics engine to conduct successful promotions from premium economy class tickets for international flights to limited time-based products that increased sales significantly as opposed to “blind promotion using banner ads”.
Similarly, Hakuba Valley, Japan’s largest snow resort, has introduced BrainPad’s Rtoaster to enhance personalized communication to customers and succeeded in significantly increasing the number of visitors to its ski resorts. Customers who have purchased a train ticket from Kyushu Railway’s website arriving at a specific station by receive personalized e-gift that can be redeemed at the retail stores near the station.
Financial institutions such as Mizuho Securities also engaged BrainPad to utilize machine learning and predictive analysis system to analyze the data of 1.68m customers such as their transaction trades, transaction styles to predict their interests and recommended products and trades in line with the customers’ life stage and asset status.
German giant Bosch Security and BrainPad collaborated to launch a CRM hospitality support system solution utilizing the images of Bosch’s security camera for mall operators and retail store owners to grasp information beyond in-store POS data and membership information and integrate them with the big data analysis of customer information captured such as stores stopped by, products purchased, visit frequency, etc to deliver more effective concrete marketing measures.
Besides the cases highlighted above, BrainPad has delivered data analytics solution in direct relationship for over 800 customers across industries that include IT (Yahoo Japan, Trend Micro, Bosch Security, Sega, Hakuhodo); Transport (Japan Airlines, Yamato Transport, Kyushu Railway), F&B (Kewpie, Lion Co, Kikkoman, Coca-Cola Japan), Retail (Takashimaya, Lawson), Finance (Mitsui Sumitomo Trust & Banking, SMNC Nikko Securities, Daiwa Securities), HR (Persol, Technopro, MS-Japan), Property (Daito Trust, Misawa Home, Nomura Urbannet), etc.
Chairman Kusano shared that BrainPad’s mission is powered by the fact that they are a Big Data company that is able to combine data analytical skills and software engineering capabilities to transform data into value by delivering unique solutions for their clients: “The mission ‘To create a sustainable future through the promotion of data utilization’ is the reason for the existence of our company since our founding 14 years ago in 2004. However, there was not even the word ‘big data’ during our founding period and this mission was hard to convey to people outside the company. BrainPad has since grown into a leading company in data analysis with the understanding and support of client companies and partner companies. Our company is a rare Big Data Company in the world that combines analytical skills and software engineering capabilities to transform data to value and to deliver our unique solutions by combining these two powers to support business creation and management improvement. We command the No. 1 market share in DMP (data management platform) centering on our internally-developed Rtoaster, a digital marketing service that supports corporate marketing activities through the provision of advanced and practical marketing solutions. We believe that we will undertake a number of changes with companies that are actively working on utilizing data and that we want to make more use of BrainPad’s power throughout Japan.”
On BrainPad’s 3 businesses in Analytics, Solutions and Marketing Platform, Chairman Kusano commented: “We have three businesses in Analytics, Solutions and SaaS Marketing Platform. We listen to the customer’s issues and problems, consult, build the system and do it all the way to the actual operation. The Analytics business provides professional services such as analyzing data, consulting related to data analysis. This is mainly for marketing purposes, analyzing data that solves the problem by taking customer’s data and taking action. The Solution business integrates marketing automation and CRM to build the environment related to analysis and inputting analysis results. For the Marketing Platform business, we made the recommendation engine Rtoaster by ourselves in 2006 to provide the service in the SaaS revenue model called private DMP (data management platform) which is the foundation of unified management and analysis of various data of the company and external data. As we have incorporated customers’ requests more and more into the function of Rtoaster, we have a reputation for the achievement of interconnectivity, stability and the richness of functions. Thus, software engineers incorporate the logic generated and implemented by the data scientist as a system into our own developed product, and connecting it with the backbone system, the solution will be implemented in the business of the client company.”
Chairman Kusano shared that BrainPad continuously developed new innovative proprietary analytical software tools and products, such as the recent matching engine Conomi in July 2018: “In July 2018, we launched our new proprietary matching engine Conomi that converts ‘sleeping data’ in companies into value. Conomi utilizes the collected and accumulated data and uses a unique algorithm to match humans and objects and generate unique recommendations based on the customer preferences to improve customer experiences. Conomi can also be used for offline customer service such as display suggested products to the terminal used at the store or printing recommended products on the receipt.” BrainPad also collaborates with external partners and some of the recent ones include:
- On 19 Sep 2018, BrainPad announced a collaboration with Salesforce.com to combine Rtoaster and Salesforce’s Marketing Cloud into a solution to as a data linkage package by Accenture Interactive;
- On 13 Sep 2018, BrainPad announced a collaboration with RPA Holdings (TSE: 6572), which specializes in RPA (robotic processing automation) outsourcing work, to jointly develop a service to support the automation of operations occurring in ecommerce management, including automation of sales forecast / price optimization model, automation of content check processing of PDF catalog contents, data aggregation necessary for measuring the effect of Web advertisement and customer acquisition, sale of products and follow-up after delivery, automating inventory tasks, etc.
- In Jan 2018, BrainPad was selected and certified as a partner company of “NVIDIA Inception program“ to provide AI services.
Another earlier collaboration in Sep 2015 was on building a connected smart car platform utilizing the NCXX in-vehicle telematics device provided by Japan’s Next Communication and with automobile electronics specialist Techtom Corporation. BrainPad will help establish a data analysis system that comprehensively supports vehicle travel data collection to service development to business operators engaged in service development using telematics devices such as insurance operators, vehicle diagnosis and maintenance, traffic management, etc.
While we are impressed by the various real-world practical cases highlighted that demonstrate BrainPad’s deep capabilities and know-how in big data analytics and AI, we are still somewhat skeptical as we are aware of the HR-related challenges in implementing AI and big data, such as the interpretation of the results and organizational resistance to using the results, etc. On how BrainPad overcomes such resistance to keep winning new clients, Chairman Kusano explained: “If you are simply asking for accuracy, if it is a statistical method, in reality you just need to squat into a few dozen variables, whereas machine learning has to do with hundreds and thousands of variables. For instance, in the retail industry, the idea of automatic ordering has been around since a long time ago. Whether or not to accept automatic orders depends on the company’s policy. A simple system is to look at past trends in sales and inventory to predict the number of orders required. In the case of Tokyu Hands, that is a problem. For instance, selling three pieces per month in a long tail product can be tricky to incorporate into an algorithm. Supposing that there are three pieces in the stock, if the store happens to sell two pieces, and the machine orders about four pieces because ‘This sells!’, but after that, the store cannot sell anything. So the machine is not usable. Also, no matter how much you analyze using data, if it ends with ‘I do not understand’, it will be meaningless unless you link to action based on the results. When we made an automatic order by machine learning, people in the store said ‘it is not my responsibility’. Even if you do have missing items, it will not be my responsibility to overstock inventory. That’s why we focus on algorithms that humans can understand even when ordering automatically.”
Chairman Kusano added on the benefits of integrating disparate sources of data for the client companies to form new insights with richness, “For example, if it is POS data, the store sees that 10 bottles of shampoo A and shampoo B are sold. However, this is not accurate when analyzing the customer’s behavior in front of the shelf. Out of 12 people who took shampoo A in their hands, 10 people bought it and 2 people returned it to the shelf. Shampoo B had 30 people taking it with 10 people buying it and 20 putting it back to the shelves. What if you can see such data? Brand A is probably ‘pre-sold’ outside the shop in which the customer already decided to purchase it. However, only 12 people are reached for Brand A. On the other hand, brand B has touched 30 people, and it may possibly sell more by changing the campaign or packaging etc.”
Chairman Kusano elaborated that BrainPad focuses on big data analysis in the field of marketing where the results and benefits to the clients are measurable and easy to evaluate to recognize and prove the value of their work so as to win more repeat customers: “We have consistently continued to grow by responding to the challenges of client companies. As the digitization of the business progresses due to the spread of the Internet, utilizing data such as Amazon’s product recommendation resulted in the cycle of profitability, resulting in more data gathering and utilization. Big data enables true marketing. I thought that the marketing domain is not using data well compared to the manufacturing industry where there is a base to utilize data to a certain extent, such as making production plan based on data. Also, in the marketing area, it was easy to attach the black and white of results, so it was easy to evaluate. In areas where it is easy to link marketing measures, we thought that we could quantitatively recognize the value of our work, it would be easier to receive fee and win more repeat customers.”
Chairman Kusano commented how he believed that the awareness of big data analysis has reached a tipping point and they are receiving more inquiries from companies on how they can implement big data analysis and AI: “A favorable case of tipping point became available, and gradually the client’s consciousness and interest changed regarding the application of big data to business and there are many reactions such as ‘I want to do it, how can I do it?’ The awareness of data analysis in the world has changed since about 2010 when the word big data was born. Until a while ago, data was central to transaction history data or user action history. Now the contents of the data are much more diverse and the amount of data is getting larger. Furthermore, circumstances are beginning to catch up with the involvement of humans, such as having to process such complicated and massive data for value creation in real time. Deep learning has developed as one of the techniques for processing such data. As we make use of IoT, it becomes possible to convert arbitrary events in the world into data using various devices. By analyzing these data in the computer, it is possible to create new value added such as customer experience and improvement and to feed back to the real world. And I think that this approach can be applied to almost all industries. Considering this unprecedented potential, we think that our company size of about 200 employees is still quite small. I believe that now that we are able to challenge new things while nurturing human resources, we have entered the stage where we can fully work towards achieving our mission.”
We felt some of BrainPad’s technological gaps in AI relate to facial recognition, a field occupied by unlisted private Chinese AI companies SenseTime 商汤科技 and Megvii 旷视科技, both of whom are the most valuable AI unicorns in the world with applications in surveillance and photo-taking/image processing in AI smartphones (eg OPPO, VIVO etc). Outside of China in our broader watchlist, Dr. Masaki Hiraga’s Morpho (TSE: 3653) is the only pure-play AI facial recognition, video/image processing and motion detection company whose AI software products from PhotoSolid for smartphone camera anti-shake correction technology, MovieSolid for motion pictures to high dynamic range correction technology Morpho HDR are licensed and installed in over 2.5 billion smartphones cumulatively. However, while Morpho’s AI technology is excellent, its financial performance has been affected by deceleration and slowdown in the Chinese and Korean smartphone market. In contrast, BrainPad is not exposed to the smartphone market and has a more diversified customer and revenue base.
While BrainPad is profitable and positive free cashflow generative now, Chairman Kusano shared that the entrepreneurial journey to start BrainPad in 2004 has been full of struggles. Chairman Kusano shared reflectively the inspiring story: “I was born in 1972 in Tokyo. I grew up in the family where my father is an ordinary office worker. A certain conversation with my father when I was in elementary school has influenced the thought of entrepreneurship. My father was a trading man in the stainless steel field. When I asked ‘Why did you choose stainless steel as your work?’ My father replied, ‘I was assigned to this work at the trading company I joined after graduation.’ Although I was young, because of that conversation, I began to think that I do not want to be a salaried worker who cannot choose one’s favorite work. I think that the desire to choose my own work led to the way of entrepreneurship eventually. I felt something strange about my criteria for evaluating myself. When I was in school, I do not like studying because of the comparison in grades. My conclusion was that when we began measuring ourselves in comparison with others based on criteria such as grades or money, we could not be happy. So I think I bumped into the question ‘in what way do I want to live’ when I was in middle school and high school, a question without an answer. When I was in college, I went on a trip to India with my friends. The development was very shocking. There are many people who are said to be poor and there are various risks such as hygiene. At that time, I felt I am fortunate to be born in Japan. I thought I must make an effort to fulfill my responsibility when I was born with this advantage. Compared with the safety of life, status and business failure were trivial to some extent. So I stopped making excuses such as ‘it’s risky’ or ‘something is not right in Japan.’”
“After graduating from university in 1995, I did not get a job and I went to graduate school of media and governance at Keio University. what I wanted to do still was not clearly defined at that time. When I was in graduate school, I was still blind and I was not sure what would be appreciated, so I worked diligently to do the amount of work. In 1997, after I completed my masters course, I joined Sun Microsystems, which was later acquired by Oracle in Jan 2010, and stayed for two years and three months. At that time, after issuing Java, because the Internet was popular, Sun’s servers were selling like flying out the door, and I learn the dynamism of a successful Silicon Valley venture. As a branch of an overseas company, I thought ‘Even if I work for a long time, I cannot learn about what I really want to study.’ I thought a business venture is one that causes a change to occur when someone does their best. In May 2000, I helped established FreeBit (TSE: 3943), an internet service provider, with the concept ‘to spread the Internet to more people.’ In 2001, Masayoshi Son started to sell cheap broadband and won overwhelmingly in terms of spreading the internet. I felt a crisis of the meaning of existence as a venture in which the relationship between the initial vision and the business model has collapsed.”
“When I first met with my co-founder Mr. Seinosuke Sato around 2003, I was working at FreeBit. It was just when the Internet was transitioning from narrowband to broadband and the volume of data also increased greatly. Because of my experience in Sun, I knew Japanese companies could not make use of data well as they use IT investment for defensive cost reduction and work efficiency improvement but not as a differentiating offensive factor to expand new business opportunities and innovate services. If it remains as it is, Japanese companies will lose their global competitiveness and productivity will fall. I thought that this is both a big crisis and opportunity. If you cannot analyze the data, you will not know the customer. On the contrary, it will become easier to understand various things more than before. I felt it was an era when data analytical power becomes a company’s competitive edge. Other members of FreeBit do not agree on the data analysis business and eventually I decided to resign from FreeBit. When I decided to quit FreeBit, I thought about ‘What is necessary for this country from now on?’ I thought that the problem for this country is where we use data to increase productivity. From that time I thought that the big theme of Japan’s declining population was ‘improving productivity.’ In Japan, I am aware of the problem that managers’ interest in IT is low. It can be understood from the fact that even in 2017, 44% of companies in Japan do not have CIO (Chief information Officer). On the other hand, 95% of companies have CIOs in the US in 2013. America has more than three times more software engineers than Japan. Looking at the distribution of IT technicians and engineers, about 70% belongs to user companies in the United States, but 75% in Japan belongs to IT service companies. In Japan, the proportion of job seekers who registered as data scientist is about 0.6%, which is rare. That is why data utilization and analysis are meaningful projects and I thought that life is of value to pursue this. In order to improve this country, I felt that someone had to do the job of data analysis and I felt this was a very big business opportunity. At the same time, I wanted to do work in building something that is not in the world. I wanted to engage in such work in creating new value and encouraging change to the world. We establish BrainPad in 2004. At that time, there are not other companies doing similar work.”
“BrainPad began in the room of a certified public accountant office of my acquaintance that I borrowed. There was no window in the room. It was about half a year there. At the time of entrepreneurship, considering the amount of money that must be pooled for living expenses, there was not much money available for capital. Eventually, I decided to borrow from our co-founder Sato. At that time, he had a car. We decided to sell the car and use it as funds, but when I actually went to sell, it was only a small amount of money that was cheaper than expected and I was shocked. After that, I borrowed money and invested at the same ratio from the amount raised from selling Sato’s car. I was worried about money. Even as soon as I was able to get the job to pay out everyone’s salary quickly, I was not able to get a job that was quite stable. Even if we work hard for several months, the money we earn also decreases quickly if there is no order for a month. I borrowed working capital from the bank.”
“But even if we receive a lot of work, there are not enough members in the team to analyze. When I take too much work, the data analysis team will puncture, but at that time, I could not outsource because there were no companies that had similar services in the world. Eventually, I installed a contribution from JAFCO which was Japan’s largest venture capital in Dec 2005 and we stabilize a little. I felt the need to have a large venture capital investment in order for people to trust the company because it is a business that society is not familiar with, but yet it keeps important data of customer companies and analyzes it. I wanted to build a software system to analyze data but I hit a wall in developing my own service. In the beginning, there was no software development engineer in the company, so I tried to make a product in revenue sharing with a company with development resources. However, I did not progress. After considering various things, I came to the conclusion that it is necessary to have a software development engineer inside the company, and decided to build a software engineering team in parallel when securing analytical talent with the fund from JAFCO.”
“I am grateful that my entrepreneurship turned out to be good. When we were listed, an employee said at the celebration, ‘It was Mr. Kusano, thanks to BrainPad, I was able to work in the job of data analysis.’ When I heard this message, tears appeared unexpectedly. I was able to make new work and create new value in the world. I was able to contribute to someone’s life with that. Of course I was pleased that it was listed, but I am happy that this contribution to someone’s life and creation of new value is more memorable.”
Chairman Kusano summed up by emphasizing the importance of having a sense of purpose and mission to persevere through difficulties and to guide them to navigate the future to create new value: “Whenever I encounter difficulties, I will return to the mission. Our mission is ‘to create a sustainable future through the promotion of data utilization’. So I think ‘Is this a work that leads to the mission?’ BrainPad is a company that started with the desire to ‘make Japan progress’, so if you return to the mission, you will be motivated and it will be the criteria for judging ‘Should I or can I do this job?’ I am thinking that choosing to be an ‘entrepreneur’ and choosing a profession is not the same. If you think of starting an business because you came up with an efficient business idea, you will not be able to step beyond your strength when you encounter difficulties. I think the sense of purpose is important for entrepreneurship. There is a purpose that I want to do from the bottom of my heart and I work because of that and I think that I can work hard even when it is difficult. In the case of BrainPad, the purpose and mission is to analyze data in this country. If there is such a purpose and it will come true as a means of entrepreneurship, you should take on the challenge. I think that the way will surely open up if you think out and tackle the purpose.”
Intrigued and want to read more? Download this week’s H.E.R.O. HeartWare: Weekly Asia Tech News with brief highlights of the inspiring entrepreneurial stories of tech leaders in Asia whom we have been monitoring over the past decade in our broader watchlist of over 200 listed Asian tech companies and our focused portfolio of 40 HERO Innovators who reveal their problems and successes behind building the company. Inspired by Brandon Stanton’s photo-journalistic project Humans of New York which collects and highlights the street portraits and moving stories of people on the streets around us who were doing things that changed lives and made a difference in the city but often went unnoticed, we have curated a collection of Hear the Heart of the H.E.R.O. stories on our website which we aim to update with refreshing and uplifting new stories weekly. Please check them out and give us your valuable feedback so that we can improve to make them better for you.
It started with rethinking a few questions. Question No. 1: Can the megacap tech elephants still dance? Or is this the better question: Is there an alternative and better way to capture long-term investment returns created by disruptive forces and innovation without chasing the highly popular megacap tech stocks, or falling for the “Next-Big-Thing” trap in overpaying for “growth”, or investing in the fads, me-too imitators, or even in seemingly cutting-edge technologies without the ability to monetize and generate recurring revenue with a sustainable and scalable business model? How can we distinguish between the true innovators and the swarming imitators?
Question No. 2: What if the “non-disruptive” group of reasonably decent quality companies with seemingly “cheap” valuations, a fertile hunting ground of value investors, all need to have their longer-term profitability and balance sheet asset value to be “reset” by deducting a substantial amount of deferred innovation-related expenses and investments every year, given that they are persistently behind the innovation cycle against the disruptors, just to stay “relevant” to survive and compete? Let’s say this invisible expense and deferred liability in the balance sheet that need to be charged amount to 20 to 30% of the revenue (or likely more), its inexactitude is hidden; its wildness lurks and lies in wait. Would you still think that they are still “cheap” in valuation?
Consider the déjà vu case of Kmart vs Walmart in 2000s and now Walmart vs Amazon. It is easy to forget that Kmart spent US$2 billion in 2000/01 in IT and uses the same supplier as Walmart – IBM. The tangible assets and investments are there in the balance sheet and valuations are “cheap”. Yet Kmart failed to replicate to compound value the way it did for Walmart. Now Walmart is investing billions to “catch up” and stay relevant. Key word is “relevancy” to garner valuation.
We now live in an exponential world, and as the Baupost chief and super value investor Seth Klarman warns, disruption is accelerating “exponentially” and value investing has evolved. The paradigm shift to avoid the cheap-gets-cheaper “value traps”, to keep staying curious & humble, and to keep learning & adapting, has never been more critical for value investors. We believe there is a structural break in data in the market’s multi-year appraisal (as opposed to “mean reversion” in valuation over a time period of 2-5 years) on the type of business models, the “exponential innovators”, that can survive, compete and thrive in this challenging exponential world we now live in. Tech-focused innovators with non-linear exponential growth potential are the most relevant multi-year investment trend and opportunity.
During our value investing journey in the Asian capital jungles over the decade plus, we have observed that many entrepreneurs were successful at the beginning in growing their companies to a certain size, then growth seems to suddenly stall or even reverse, and they become misguided or even corrupted along the way in what they want out of their business and life, which led to a deteriorating tailspin, defeating the buy-and-hold strategy and giving currency to the practice of trading-in-and-out of stocks. On the other hand, there exists an exclusive, under-the-radar, group of innovators who are exceptional market leaders in their respective fields with unique scalable business models run by high-integrity, honorable and far-sighted entrepreneurs with a higher purpose in solving high-value problems for their customers and society whom we call H.E.R.O. – “Honorable. Exponential. Resilient. Organization.”, the inspiration behind the H.E.R.O Innovators Fund, (surprisingly) the only Asian SMID-cap tech-focused fund in the industry.
The H.E.R.O. are governed by a greater purpose in their pursuit to contribute to the welfare of people and guided by an inner compass in choosing and focusing on what they are willing to struggle for and what pains they are willing to endure, in continuing to do their quiet inner innovation work, persevering day in and day out. There’s a tendency for us to think that to be a disruptive innovator or to do anything grand, you have to have a special gift, be someone called for. We think ultimately what really matters is the resolve — to want to do it, bring the future forward by throwing yourself into it, to give your life to that which you consider important. We aim to penetrate into the deeper order that whispers beneath the surface of tech innovations and to stand on the firmer ground of experience hard won through hearing and distilling the essence of the stories of our H.E.R.O. in overcoming their struggles and in understanding the origin of their quiet life of purpose, who opened their hearts to us that resilience and innovation is an art that can be learned, which can embolden all of us with more emotional courage and wisdom to go about our own value investing journey and daily life.
As the only Asian SMID-cap tech-focused listed equities fund in the industry, we believe we are uniquely positioned as a distinctive and alternative investment strategy for both institutional and individual investors who seek to capture long-term investment returns created by disruptive forces and innovation without herding or crowding to invest in the highly popular megacap tech stocks, and also provide capital allocation benefit to investors in building optionality in their overall investment portfolio.
The H.E.R.O. HeartWare Weekly highlights interesting tech news and listed Asian emerging tech innovators with unique and scalable wide-moat business models to keep yourself well-informed about disruptive forces and innovation, new technologies and new business models coming up, and the companies that ride on and benefit from them in some of the most promising areas of the economy in Asia as part of our thought leadership for our ARCHEA Asia HERO Innovators Fund to add value to our clients and the community. Hope you find the weekly report to be useful and insightful. Please give us your candid feedback and harshest criticisms so that we can improve further to serve you better. Besides the BATTSS (Baidu, Alibaba, Tencent, TSMC, Softbank, Samsung), do also tell us which Asian tech entrepreneurs & CEOs whom you admire and respect and why – we will endeavor to do up profiles of them for sharing with the community. Thank you very much and have a beautiful week ahead.
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