What I learned in 5 years as CEO of a public company

I am currently building my latest startup, Josys - a SaaS and device management platform, from scratch. My current management style and approach to company building at Josys is informed by my experiences leading Raksul as a public company for five years. Let me share with you some of what I learned during that time.

The need for 30% growth YoY

While working as a CEO of a public company, there is one thing that has changed drastically from the time when the company was private. That is the relationship with shareholders. After the company went public, the expectations of shareholders became higher. The most challenging and rewarding aspect of this was the expectation that the company would continue to grow at a high level as a high growth company. Specifically, the company was expected to continuously increase its sales by 30% or more every year over the previous year. The year we went public, our sales were 11 billion yen (about US$100M), and the following year they were 17.1 billion yen (about US$155M), which means we have grown by about 55%. To be honest, this part was not that difficult. The challenge comes from looking into the year ahead and seeing that we would have to increase sales by another 30%. And then continue to do so for two, three, four years and so on. If you want to grow by another 30% from US$400M in sales you would need to increase sales by US$120M.?

Raksul’s key business is an online platform for printing fulfillment. Let’s say the online printing market in Japan grew by US$100M in a year. If our sales were US$30M we only needed to capture 10% of the market growth to say our revenue increased by 30%. However, when sales reach US$400M, even if we took all the market growth, we could not achieve 30% growth. With this in mind, we decided to expand our business domain. So we acquired a cardboard company, a T-shirt customizing company, and other new businesses in various areas. We also expanded into other businesses such as Novasell (commercial advertisements) and Hacobell (delivery). In other words, we took two approaches: sinking deeper and deeper into adjacent business areas while also expanding into completely different arenas. You can read more about that journey of business development and M&A here.

In order to maintain growth at 30%, the company needed to move forward, looking three years into the future. This is because growth in a given year is the result of what was done the year before or the year before that. To do this, we needed to think backcast from three years out, building teams and identifying business issues. The results will be seen in three years; M&A will lead to immediate sales, but if you try to create a business from zero, it will take about three years to reach US$20-30M in sales. For Japan, if a startup achieves annual sales of about US$30 million it can probably go public. It was a big challenge to think of developing five or six such new businesses every year.

Facing the stock price during the pandemic

The "Covid Stock Bubble" was a very valuable experience for me as a manager. The company's market capitalization was 40 billion yen (about US$360M) when it went public, but by November 2019, it had grown 6x to about US$2.1B. However, we also saw it later fall down to roughly US$540M. Currently, it is hovering around 90 billion yen - facing the volatility of the stock price is a major challenge.

What is the problem with high stock price volatility? We have introduced a Restricted Stock Unit (RSU), a system in which employees are compensated in the form of stock. This is common in the U.S., but not yet popular among Japanese companies. When the share ratio of compensation is large, income for employees can increase by 20% or 30% in a couple of months when the stock price is rising. In such a case, it is good. However, when the value of the stock drops all at once, a reverse impact.

The reason we introduced this system was to ensure that management, employees, and shareholders all work from the same perspective. When employees are paid in stock, they are motivated to raise the stock price and to think about corporate value. Thinking about corporate value is different from just increasing sales. It means that they will be able to think about balancing profit and growth with high quality growth over the long term. In this respect, I believe that stock-based compensation is a very good system. However, when the stock price fluctuates wildly, everyone becomes very conscious of changes to what they take home. When the stock price falls, it also leads to turnover. Therefore, we decided to better balance the compensation system by lowering the stock compensation from about 40% for directors at one time to about 20%.

Control what you can with stock price volatility

The key to managing your stock price is to control your company’s performance. In the short term it may be difficult, but stock prices are always based on a company's fundamentals, its intrinsic value. For instance, even if a bubble occurs once in a while and the stock price becomes very high, it will soon go down if it is not accompanied by substance. If a management team wants to impact their stock price in the long term, they must commit to controlling business performance.

Even in the short-term perspective, it is possible to reduce volatility. The key is communication with investors. If the stock price falls, we can find investors who recognize the value of the company and ask them to invest in the company. To this end, we need to meet with many investors, show them IR materials, and explain the story of our growth potential. We talk a lot with investors who have the appropriate price discovery skills. In other words, we talk a lot with investors who can understand if a company is worth hundreds of millions or billions of dollars.?

Often, when a company becomes overpriced, it is shorted, but this is not a bad thing. By getting to the right price, it can be seen as reducing the volatility of the price.?

Whether it is from a short-term or long-term perspective, we need to let investors know our story not only in Japan but also in the U.S., U.K., Singapore, Hong Kong, and other countries around the world. By doing so, we can help reduce volatility. The idea is not to just "raise the share price," but to "bring the share price closer to its fair value.”

Dialogue with Legendary Investors

Investor relations is also important in this sense. We do not just ask anyone to buy our stocks, but we ask investors who know the value of our stocks to buy them. Investors who can make an appropriate judgment of how much Raksul is worth, and investors who can sell or buy based on their judgment of how much this business is worth through constant monitoring of financial results in IR. A good investor is an investor who is always looking at financial results through IR. This is why I travel around the world to meet with various investors. Both Yo Nagami and myself, the current CEO and former CFO of Raksul, place great importance on communication with investors.

I think the biggest benefit of going public is that we were able to talk to a wide variety of investors. I believe that investors are very smart people. They may not be able to understand the details of a business, but they have a tremendous ability to see the big picture. By talking to investors from all over the world, I have been able to get all kinds of feedback on the management of the company. This was a very big thing.

For example, Raksul has a shareholder called Baille Gifford, which has been a shareholder in the company since it went public. The company is located in Edinburgh, Scotland. They have been shareholders for more than five years and in that time have both bought and sold shares. They have always seen the value of the company and have been a discussion partner with which we could have nice conversations about how to manage the company.

I have also had conversations with investors who have been watching Amazon and Alibaba since they went public, or who were on the board of Tencent. When we were still private, I did not have the opportunity to meet these investors, especially in Japan. Due to the IPO, I could now meet and have discussions with people who are like legends who have been watching the technology industry globally for 20 or 30 years. They would give me advice about what we should do given the stage of the company. Of course, they might not have always been 100% correct. However, they have seen many cases and histories, so they are very helpful. This was a great lesson for me as a CEO of a listed company.

The "skeleton" of a unicorn is determined early on

I was the CEO of a listed company for 5 years, and then I started a new company from scratch. When I started over I realized that the growth of a company after it goes public is to some extent determined in its early years. The skeleton of a company, whether it becomes a unicorn or larger, is determined in the early stages. The skeleton is, qualitatively speaking, what kind of culture the company will have. Specifically, whether the company is disciplined or not, whether it can maintain a bird’s eye view or not, whether it is challenging or conservative, and so on. These are things that are not easily changed once the company is grown up.?

In addition to culture, other factors include what business model to choose and what percentage of gross margin to charge. Will the business be conducted only in Japan, or will it be developed country by country, or will it be global from the start? Will the leadership be local or global? Will it be a business with 130% NRR (Net Revenue Recurrence) or 100% NRR (Net Revenue Recurrence)? It is very difficult to change these things after the fact. In the case of Raksul, the skeleton of the company was set at the initial stage. In retrospect, I realize that this was an important decision. On the other hand, it is quite difficult to change Raksul into a completely global company now. This is because it is a company in the Japanese market with Japanese members. If we wanted to go global, we had to go global from day one.

To create a profitable business, you must create a profitable business from the start. It is not enough to say, "Let's continue to run the business and eventually make it more profitable. You cannot enter a growing market without first challenging a growing market. Is the business model to be produced in-house or outsourced? If you start with in-house production, it will be very difficult to change the business model. What I have learned from managing a publicly listed company is that what is being created now will be the foundation for the next 10 years. The culture, business model, and team structure set up in the early stages of the company's development will continue to be used over the next five to ten years. After going public, investors' evaluation will be determined by these figures. Therefore, it is necessary to work backward from that point and create it now by backcasting.

Therefore, Josys, which is currently taking on this challenge, is trying to create the "ideal" company first, rather than gradually creating it. The first thing we discuss at the Board of Directors is what the metrics will look like in three years, and then we decide what kind of technology, architecture, business model, and team we will need to create in order to achieve those metrics. Backcasting is the first step in the process. That is what is important.