Japan's Leading Crowdfunding Platform Allowing Companies To Finance R&D Through Early-Adopter Revenue
Makuake (4479.JPY) is Japan's leading purchase-type crowdfunding platform. The company helps people discover, support, and buy the latest innovative products and experiences before hitting the mainstream market.
This is one of the most exciting companies we’ve found on the Japanese Mother’s Index. Makuake is the clear leader in the space yet has barely scratched the surface of its JPY 1T addressable market. The company generates 75%+ gross margins and is aggressively investing in growing its platform user-base.
Our most bullish outcome assumes 65% top-line revenue growth until 2025 with at least 15%+ EBIT margins and a share price that’s nearly 260% higher than its currently trading.
The Makuake bull thesis hinges on three key assumptions:
Makuake Helps Companies Find Innovator Customers
Makuake's Distribution Model Is Better Than The Traditional Method
Network Effects Create A Winner-Take-Most In Pre-Primary Market Distribution
Before we dive into our assumptions, let’s answer our five main questions.
How does it work?
The Makuake platform connects innovation-hungry consumers to companies designing new products and services. The process is simple. First, a company publishes a new product or service to the Makuake platform.
Next, customers (called "Project Supporters") pick which product or service they want to buy based on product-specific information. Then, Mukakue sends the money to the company after taking its 20% cut of the revenue. Once paid, the company delivers the product/service to the project supporter.
Why does it matter?
Makuake helps companies cross the chasm between test customers and the mainstream market. Traditional distribution models are slow and require companies to produce massive inventories hoping that a new product will work. This, of course, consumes loads of cash that companies could better spend on improving the product through R&D development.
The Makuake platform is the antithesis of traditional commercial distribution. It allows companies to sell new products directly to pre-primary markets before going to the mass market. This means companies can generate new revenue from testing new products, receiving feedback on those products, and acquiring new customers earlier in the product’s lifecycle.
Consumers love Makuake because it lets them "invest" in a company by buying/testing new and innovative products. These innovator customers then create the perfect launching pad for companies to leap from early market to mainstream adoption.
Is it successful?
Makuake's platform is a hit for both companies and consumers.
Total Support Purchase Value (or GMV) has increased 3.1x YoY and grown at a 237.5% 4YR CAGR since 2017. Since 2016, new project listings have grown 574%, from 231 units to 1,559. During that same time, new members (Project Supporters) have increased by a blistering 1,338% for a 267% 5YR CAGR.
What's The Size Of The Prize?
The company operates a specific niche: pre-primary products debuting in the e-commerce market from new until three months post-release.
According to Makuake, this market should grow from JPY 740B in 2020 to roughly JPY 1T by 2025.
Makuake has barely scratched the surface of how big it can grow in this market. For reference, the company generated just JPY 3.225B in revenue last year. That's less than 1/2 of the 1% market share.
What's Makuake Worth?
Makuake is growing like a weed, and estimates show no signs of stopping. For example, the company's estimating revenue growth of 74% next year and 68% in 2022. By 2025 we estimate Makuake generates JPY 38.5B in revenue with 15% EBIT margins. That would give us a valuation of ~1.78x 2025 EV/Sales and 12x 2025 EV/EBIT. The company also has a fortress balance sheet with ~JPY 8B in net cash.
Stick a 5x multiple on 2025 sales (which we believe is conservative given the company's platform model and 80%+ gross margins), and Makuake should trade at ~JPY 16,600/share. That's a nearly 200% upside from the current stock price.
Let’s dive deeper.
Makuake Helps Companies Find Innovator Customers
Innovator customers are the lifeblood of a company. If you don't have Innovators, you don't have a shot at selling into the mainstream market. The reason is simple. Innovators provide valuable initial feedback and approval on new products and features. This group will buy a new product with bugs and glitches because they love technology.
Geoffrey Moore, the author of Crossing The Chasm, coined the term "Innovator customers." He explains the importance of this customer cohort in the book, saying (emphasis mine):
“Winning [Innovators] over at the outset of a marketing campaign is key nonetheless, because their endorsement reassures the other players in the marketplace that the product does in fact work.”
You can read my book review here.
Innovators reassure the other players in the marketplace that the product does, in fact, work. Moreover, product adoption always follows the same continuum from Innovators to Early Adopters, Early Majority to Late Majority, and Laggard.
In other words, companies can't shake the fact that they need to find the Innovator customer, get the product in her hands, and receive approval as quickly as possible.
Makuake makes it easy to find Innovator customers.
Makuake's platform connects companies to millions of tech-hungry, innovator customers (or "Supporters") in the pre-primary debut market.
Here, companies can sell their new products, receive instant feedback, and generate revenue from their prototypes. Makuake then takes a 20% service fee as its revenue.
Companies love Makuake because they don't have to find Innovator customers. They’re already on the platform. Customers love it because they can "invest" in the latest products from their favorite companies while providing feedback on product specifications.
The result is a fantastic product experience for both the company and the customer, incentivizing both parties to return to the platform for their next respective sale and purchase.
More importantly, Makuake provides an experience traditional product distribution models can't replicate. Let's see why.
Traditional Distribution Models vs. Makuake Platform Model
Our bull thesis is straightforward. Makuake should be worth significantly more if its platform better connects companies to pre-primary/innovator customers than traditional distribution methods. But, first, let’s see how the two compare.
The Traditional Distribution Model
Traditional distribution models are slow-moving, friction-filled, and expensive. For example, suppose a company wants to release a new product. In that case, it must make enough to sell to its primary markets (supermarkets, electronic appliance retailers, department stores, etc.).
There are a few significant issues with this method. First, the company selling the product has no direct access to its customer. Instead, it sells the product to the primary market, re-sells it to the mass-market customer. This dramatically increases feedback loops on new product specifications.
Second, selling directly to the primary market means the company must spend more money on inventory to meet initial primary distributor demands. In other words, resellers don't want a few "test batches" of a new product. Instead, they want enough to get the wholesale discount so they can make a profit.
This introduces inventory risk because if the product doesn't sell, it means write-downs on the rest of the product.
Finally, collecting revenue from sales is slow, with low returns on invested inventory.
To review, the traditional distribution model means:
No direct access to customers
Increased spending on inventory
Longer feedback loops on product specifications
Slow sales collection
The Traditional model says, "Make more product than you probably need. Find the innovator customers yourself. Finance product improvements with your own cash, and good luck."
It's a poor value proposition.
The Makuake Model
The Makuake model simplifies everything by allowing companies to sell directly into the pre-primary market (or the 0th market) ahead of mass production. However, there are a few significant differences with Makuake's model.
First, companies can sell a pre-determined amount of a new product. If the company only wants to test 20 new units, they can. Then, of course, demand can exceed supply as supporters "oversubscribe" for a new product.
Moreover, specifying a pre-set number of units allows the company to control inventory costs and reduce the possibility of massive write-downs.
Second, Makuake dramatically tightens the customer-product feedback loop by enabling companies to sell directly to the Innovator consumer. As a result, companies receive rapid, real-time product feedback at the earliest stage in product development.
These tight feedback loops increase the odds of creating a product that sticks with the Innovator cohort, which, as we mentioned earlier, is the most critical step in any product's lifecycle.
Third, and most importantly, Makuake allows companies to generate revenue from its prototype products. In essence, Makuake helps companies finance their own product innovation.
Think of it as an insurance business. A company sells a new product to innovator customers and receives cash payments. Companies can then use these cash payments to finance any potential feedback they get from those customers.
Makuake's value proposition is far better than the traditional model. Makuake says, "You decide how many products you want to make. Don't worry about finding the innovator customers, we have millions on our platform. Oh, and you'll get paid upfront for each sale so you won't have to finance product development out of pocket."
Given a choice, you'd choose Makuake's model every time. Companies agree, which explains how Makuake's grown its Project Publishings (i.e., companies offering new products/services) by 580% since Q4 2016. Some notable companies using the platform include Canon, Sharp, Asics, and Pioneer.
Network Effects Create A Winner-Take-Most Market Dynamic
Makuake isn't a crowdfunding platform. Instead, it's an entirely new distribution channel for companies to cost-effectively test new products while generating incremental revenue. This is important because conventional crowdfunding platforms have no competitive advantage nor a shot at sustainable network effects.
The real competitive advantage isn't in what the platform offers but in its ability to aggregate customers behind a singular goal. In our case, Makuake aggregates customers that want to buy innovative products from well-established businesses.
This is what separates the company from other crowdfunding platforms. For example, Kickstarter, a popular US-based crowdfunding platform, is filled with random projects like "Help my brother pay for his broken arm." Platforms like Kickstarter serve a unique purpose, but they don't help legitimate companies find their Innovator customer cohorts.
As Japan's leading pre-primary debut market distribution platform, Makuake has the opportunity to create a near-impenetrable network effect. Here's how they do it.
The more customers Makuake has on its platform, the more attractive it becomes for companies to sell innovative products. In turn, more products make the platform more attractive for tech-hungry, innovator customers. The result is a self-reinforcing advantage that only improves as the company grows its marketplace.
We see this in Makuake's financials and KPIs (Key Performance Indicators). For example, Total Support Purchase Value (think GMV) has 10x'd from JPY 500m in 2017 to JPY 5.25B by 2020. Over the last year, the platform's doubled new project postings, increased members by 89%, and increased payments processed by 211%.
Makuake's Growth Levers
There are a few ways Makuake can grow over the next five years. First, like all two-sided marketplaces, it can increase project publishers (companies) and project supporters (customers).
Second, Makuake can increase the frequency of repeat listings from companies. Between 2019-2020, 30% of project owners used Makuake a second time. Talk about some low-hanging fruit that requires zero customer acquisition cost.
Such low repeat frequency from project owners make us wonder if the companies aren’t seeing value in Makuake’s services after the first use. However, total open projects continues to climb.
This compares to a 70% repeat purchase rate for Makuake's project supporters.
Third, the company can expand into international markets. Makuake's value proposition is unique not only in Japan but globally. Anecdotally I know I'd love something like this in the US.
Finally, Makuake can offer other value-added services like its Makuake Incubation Studio and Makuake Shop. Both services help companies plan, develop, and market new products.
Why The Opportunity Exists
There are four main reasons why this opportunity exists
Overly focused on Operating Profits
The stock trades on the Japanese Mother’s Index
It’s a small-cap stock
Questions on the company’s ability to scale
Let’s break each reason down.
Investors Overly Focused on Operating Profits
Investors should focus on revenue/gross profit growth over the next five years as the company heavily invests in SG&A to grow its brand awareness. The company outlined its strategy for growth on slide 43 of its investor presentation (emphasis mine):
"We will limit growth in operating income to slight increases, bolstering promotion as an investment in future growth and expanding our platform base."
In other words, Makuake's trading short-term operating profits for long-term platform expansion. We love this type of long-term thinking from management.
The company's also said that they won't pay a dividend so long as they can invest into growing its marketplace platform—music to a long-term investor's ears.
The Stock Trades On The Japanese Mother's Index
The only people fishing in the Japanese Mother's Market are short-term local Japanese traders. There aren't large US institutions allocating capital here, and many people haven't even heard of most companies.
It’s A Small-Cap Stock
Makuake is a ~$500M market cap company. Such a small market cap makes it un-investable for most large institutions. But, of course, that’s assuming they find the name in the first place!
Questions On Scaling The Business
The company's platform does more than algorithmically connect willing buyers and project publishers. There's significant human curation and creativity involved, which means higher labor costs.
There's a strong argument that Makuake's business isn't as scalable as other crowdfunding platforms. That said, it'll be interesting to see how much Makuake automates as it grows its publishers and customers.
Thinking About Valuation
Though the leader in its category, Makuake has only tapped 0.4% of its current addressable market. By 2025, that addressable market will reach JPY 1T. The company's expected to grow revenue by 74% in 2021 and 68% in 2022.
Given its marketplace network effects, the company should continue to grow at high incremental rates over the next five years. As a result, we estimate that by 2025 the company will generate JPY 38B in revenue with at least 15% EBIT margins. That's an implied 64% 5YR revenue CAGR and a ~1.8x EV/2025E Sales.
Public market investors love two-sided marketplace businesses and usually place high multiples on such companies (think Uber, eBay during its heyday, HeadHunter, etc.).
If we assume a modest 5x multiple on our 2025 estimated revenue, we get ~JPY 190B in enterprise value. Add back the company's ~JPY 8B in net cash, and you get close to JPY 200B in shareholder value or ~JPY 16,600/share. That's a nearly 260% upside from the current stock price.
The company currently looks expensive at 14x current sales. We're hoping investors continue to focus on short-term metrics like operating income and operating margins, which will look worse over the next few quarters.
If we're lucky, these traders will sell down the stock, allowing us to buy shares closer to 1x our estimate of 2025 sales or a JPY 38B EV.
Makuake is one of the most exciting businesses I've found in the Japanese market. The company's pre-primary market distribution model is vastly better than its traditional competitor. Businesses are selling more products on the platform to an exponentially-growing project supporter market. Over time, the platform's network effects will create one of the largest customer acquisition channels for any business developing new products.
Management has a clear mission to connect the world through the creation of new things. If they keep doing that, an investment in Makuake will pay handsome rewards.