Japan’s SmartHR raises $13.3M led by 500 Startups

SmartHR, a startup helping Japanese employers run HR and staffing smarter — because that’s of course its name — has raised a JPY 1.5 billion ($13.3 million) Series B round led by 500 Startups Japan.

The startup is perhaps comparable to the likes of Zenefits and Gusto in the U.S. — it aims to drag Japanese HR departments into today’s digital era.

“In Japan few companies think about doing their HR online, they are accustomed to doing it in spreadsheets and paperwork,” Takafumi Kurahashi, SmartHR’s COO, told TechCrunch in an interview.

SmartHR was founded in 2015 and it has 50 staff today. The service is currently targeted at new employee enrollment, which traditionally requires a hefty stack of paperwork carted back and forth between government offices. Through its service, the cumbersome process can be done digitally and that has helped it attract 10,000 customers, including unicorn e-commerce firm Mercari.

Right now, the startup doesn’t cover payroll, benefits or other areas but it plans to move into those.

The money is going to be put to work doubling SmartHR’s headcount to enable it to develop those new features and build a platform. The company hopes to become the digital system of record for Japan, which means it will open its doors to third-party services that can be hosted on its platform. One small pilot, for example, provided business card printing services to HR clients, a synergy that makes sense since the SmartHR system is used to onboard new hires.

The platform play is likely to come next year. For now, it is working on new features requested by customers. That includes allowing for multiple branches/chain stores within the system, a request particularly needed by clothing stores and other high street retailers that have high levels of employee churn.

SmartHR will also invest in marketing. To date it has promoted its services using online, but it plans to reach new customers through offline channels such as media commercials and exhibitions.

Beyond SmartHR itself, the round is notable on the funding side because it is the first time 500 Startups — a prolific investor with a portfolio of other 1,000 companies — has led a Series B round. Added to that, it did so using a special purpose vehicle (SPV) which, while fairly common in the U.S., isn’t used in Japan.

Among its benefits, an SPV allows a cleaner cap table with one single entity picking up a stake in a startup. Different investors enter the SPV to take their share of that equity.

Speaking to TechCrunch, 500 Startups Partner James Riney — who leads 500 Startups Japan — explained why he advised, and ultimately led, the SPV for this deal.

“Companies like SmartHR don’t come around very often so we wondered how we could capture the value beyond our early stage investment,” he said.

Riney said Japan’s own unique, and fairly risk-averse, funding ecosystem made an SPV the ideal solution in this case.

“There aren’t many places startups can go to [raise a large round.] You can have a ‘party round’ for $1 million here and there, but it takes a lot of time because [the founders] talk to a lot of people, spend a lot of time reporting and lose that startup speed,” he explained.

In this case, SmartHR CEO Shoji Miyata is estimated to have spent just 10 hours involved in fundraising. That’s because Riney was able to do a lot of the outreach, using other members of Miyata’s team where necessary, to secure commitments to the SPV.

COO Kurahashi also talked up the efficiency of the process.

“Fundraising is a good opportunity for a company to revisit and refine its strategy, but it is too time-consuming that it often slows down the company growth. This joint round with 500 gave us the luxury to take only the good parts of fundraising,” he added.

Riney said the SPV is “the first of its kind in Japan that we know of.” In the right circumstances, 500 Startups Japan may use the same approach again in the future, he added.

Featured Image: SmartHR

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