How This Startup Makes Money from Children’s Old Notebooks – Arcterus

Links from the Founder

• Arcterus Homepage
• Everything you ever wanted to know about Clear
• Friend Go on Facebook

Transcript from Japan

 

Disrupting Japan, episode 87.

Welcome to Disrupting Japan. Straight talk from Japan’s most successful entrepreneurs. I’m Tim Romero and thanks for joining me.

You know, for a few very good reasons and many very bad reasons, education is particularly hard to disrupt. I think a big part of this is that the goal of public education is far more than imparting a set of skills onto the students. Although my libertarian friends might disagree, public schooling provides not only the hard skills that students need to function in the society, but universal education provides us with a shared experience and shared frame of reference that helps us define society. It’s something that binds us together.

Now, different countries have different approaches to creating this shared experience. In Japan, the Ministry of Education defines precisely what every child in the countries learning, in any given week. In America, there are no national requirements at all, and tremendous latitude is given to the states and to the individual school boards. One approach is not necessarily better than the other but startups that try to disrupt the way we impart skills to our children at the expense of that shared experience, are likely to fail. Or worse, succeed and do long term harm to our society.

Well today, we’re going to sit down and talk with Go Arai, CEO of Arcterus, a EdTech startup that is trying to help students learn more effectively but also contribute, just a little bit, to that shared experience.

Arcterus is a platform that allows students that share their study notebooks with other students and then profit from that sharing. We also talk about Arcterus’ recent Asian expansion. You know, we in the west often make the mistake of thinking about “Asian” culture. But there really is no such thing as Asian culture. Asian countries have an incredible diversity of cultures and Arcterus ran straight into that as they discovered that very specific cultural traits determine whether they will succeed or fail in a specific country.

But you know Go tells that story better much I can. So, let’s hear from our sponsor and then get right into the interview.

(Interview)

Tim: So we’re sitting here with Go Arai of Arcterus it’s a social learning app based on notebook sharing, but you can probably explain it much better than I can, so why don’t you tell us a bit about Arcterus and about your products?

Go: The main product that we have is called Clear. It’s a platform for the students to share their study notebooks like Youtube users can publish their notebook, others users can see it and use them as textbook to solve their study problems and if you are very popular user, you can sell your notebook in the platform. Globally, we call it “Youtube of Study Notebooks”. In Japan, we call it a “Cookpad of Study Notebooks”

Tim: Cookpad being a really popular sharing recipe site here in Japan.

Go: Yes, yes. It’s very popular in Japan.

Tim: Tell me about your customers. Who are your main users? The high school, or junior highschool, college or crams schools?

Go: The users are mainly middle school students and highschool students. We also have university students and also primary school students. They use it mainly for preparing for school exams and entrance exams. So, when they difficulties solving the mathematic problems, they look into the notebooks in Clear.

Tim: I can see why in Japan it’s easier to market a product like that because the curriculum is very standardized throughout Japan. The National Government has pretty much established the curriculum you know, every tenth grader in Japan is learning the same part in history this week as every other tenth grader?

Go: Yes, exactly. So that is something, that’s something that might be a little different from the case in the States as you say, the learning and the studying of standardized across the country and that makes it easier and more sense for the users to publish their notebook.

Tim: About how many active users do you have now?

Go: Accumulated users is almost one point five million (1.5M) users globally.

Tim: Before we dig into the company in detail and into your marketing strategies, I want to talk a bit about you.

Go: Okay, yeah.

Tim: So, you seem kind of an unlikely entrepreneur. Your background was management consulting and you worked in the management of hospitality industry for a number of years. So, why start an Ed Tech company?

Go: Yes, so right before starting out there I was CEO of turnaround business between Hoshino Resort and a private equity fund and that was about almost ten years ago. I had this business plan regarding education and I proposed this to Mr. Hoshino, to the joint venture with me and Mr. Hoshino agreed to do this business with me. But after I did this feasability study, I find that this business won’t make money. When I told that to Mr. Hoshino, he told me that, he said that the thing I am lacking here is management experience and he offered this position to manage a new business that they are studying in Hoshino Resort and that was the ski resort turn around business

Tim: You went into the path of your career strictly to learn how to manage people or learn how to manage companies?

Go: Learn how to manage company, learn how to do marketing and make money, and yeah manage the team.

Tim: It’s always interesting to when I talk to people who used to work at Oracle, Mitsubishi who are now running companies about how little they have learned applies to start-ups, but coming from a mid-sized company and one where you are expected to turn things around. Was you experience the same? Did you find that what you have learned there apply to start-ups or did you have to learn everything all over again once you started your company?

Go: Similar I think between turnaround business and start-up business is that both are in chaotic situation of strong leadership and strong will of their management is the key. What I learn in that situation from Mr. Hoshino can be applied to a lot to what I’m doing right now. So, yeah start-up is a, I would call it a series of pivots. Every single time of pivoting, you need to lead your team members with strong will with strong will.

Tim: So was the Ed Tech start-up you had in your mind this whole time you were doing the turnaround business?

Go: The basic concept is very similar. We call it ‘adaptive learning’. A lot of people use this term for adapting the contents and the way they learn, to study. Our product is based on that concept and I always had that concept in my mind even before joining management consulting.

Tim: Okay, so what was the final trigger that made you decide to take the plunge and to start the company?

Go: There were two triggers: one is that my very good friend from business school decided to join me he had a very good experience in start-ups, he decided to join me. Another trigger is very interesting so when I was working in a ski resort, and I was skiing outside of the course with my team members, I had an incident with a tree. I bumped into a tree and I broke my three of m rib bones and two of them stick into my lung and the lungs was exploded

Tim: Wow. That’s pretty serious.

 

Go: Yeah, that was pretty serious actually. So I couldn’t move and all my team members went down to the course. I was along in a ski resort outside of the course, injured. I thought I was going to die and luckily someone in my team found out that I was lost and I came back and called the rescue team and I luckily I got rescued and sent to a hospital. During that time waiting for my team, waiting for rescue if I can live through it and get back to Tokyo, I have to restart my career as entrepreneur and education.

Tim: I can see an experience like that and being in the hospital just makes you stop and think about a lot of things in your life but what exactly about that experience made you change? What was it?

Go: When I though I was going to die, I didn’t want to die before finishing what I was going to do, what I wanted to do and what I wanted do when I started my career as a management in the turnaround business, is provide a new education service to the world.

Tim: Now, it wasn’t exactly a smooth transition either I mean you move to Tokyo by yourself and left your family behind for quite a while when you were boot strapping this up. What was their reaction to this decision?

Go: Yeah, that was tough. A tough time. My family wasn’t happy about starting my business. My father was a banker and he is very good at seeing the risk and avoiding the risks and managing the risks and  –

Tim: It’s what bankers do best.

Go: Yes. Of course, I have always respect my father but from his point of view, starting up, start up is a crazy thing.

Tim: When did he change his mind?

Go: I don’t know (laughs). After I studied, he seems supportive. He is still very supportive.

Tim: Well, that’s great. What about your wife and the rest of your family because it’s must have been hard on them because you left a very steady and promising job and to follow this dream that your dad quite correctly said was really risky?

Go: Yes, their reaction is a typical reaction for Japanese family. What would happen if the company fails, how much the income will be and what would you do if it doesn’t go well. I didn’t have an answer to them at that time. I just thought I have to prove myself to my family that won’t be too happy with the path I was going to take.

Tim: How long did it take for your family to realize that this was a good path and to come on board or maybe they are still not sure?

Go: The funny thing is that maybe not funny, I thought that it did take about two years for my family to be comfortable but maybe they are still not comfortable.

Tim: Well, I can understand that.

Go: They all see those startup failures.

Tim: Yeah, well I mean the odds are against you. S

Go: So, I am still trying to answer your question about when it is difficult. There are many times that we had some key members of the team left the company or we had to change the product. Actually, Clear is the fifth product since we started the company.

Tim: Okay, what was the first one that you were well known for?

Go: The first one was the primitive service of the standard we are still doing. Assessment service of the kit about how they started, the way they think.

Tim: That was the Kais product.

Go: Yes, that was cut part of the Kais. It was only the assessment service that we were trying to sell to the parents through internet and it didn’t go well at all. So we decided to sell that product to Jyukus tech schools and that is going good. The service is recurring, revenue service. That was the second service and we had others several services that we started and we had to abandon.

Tim: When you pivoted from these products were there, did people leave the company? Were there splits within the company?

Go: Yes, yes. Sometimes they, when we change the focus even if they don’t leave the company, people are disappointed so the team needs to be motivated again.

Tim: Do you think Japanese companies have more difficulty pivoting than say, US companies do? Do you find people get attached to a particular product or a particular way of doing things and don’t want to let go?

Go: Generally speaking, Japanese people may have strong attachment to what they are currently doing but that means they have an attachment to the other team members so that is a good sign.

Tim: Getting back to the company, your advertising talks a lot about optimizing the learning environment to fit student’s specific learning styles. How does that work in practice? How do you match up students with the right notebooks for them?

Go: The basic approach is that the background of the students and what kind of notebooks they have, what kind textbook they use at school. Each notebooks has the name of the textbook.

 

Tim: This again it really makes sense in Japan because there are relatively few textbooks for any given subjects.

Go: Yes, yes. Especially textbook for high school and middle school and primary school students. That’s why we adapt the notebooks to the users. Another way is, a very similar way is Amazon recommends the products. Someone who bought the product also brought this product.

Tim: Oh I see. So, you’ve one student found another student’s textbook particularly helpful in history, they may also help find that same students that same student notebooks to be useful in mathematics and maybe the next years history course?

Go: Yes..

Tim: Okay, that makes sense. Actually, I heard one time you actually started your own cram school, your own Jyuku. Was that one of those earlier pivots or was that really just to focus and understand the new needs of the students?

Go: We are still running cram school. The reason we started and running this cram school is to actually understand the needs and the problems of the students have and also, we can test our products easily so we can show our product to them and get feedbacks right away.

Tim: Do you run it as a profit center or strictly as a laboratory? Is it making money for you?

Go: The purpose is to run a laboratory but it does make money for us. Yes, it’s a good thing.

Tim: Yes, that’s the best kind of laboratory I suppose. But for such a small company and such a young company, does that get a bit of a distraction having this cram school side business?

Go: No, no we have a very good principal in cram school and he runs the cram school very well so it doesn’t distract for example myself or our engineers. Rather, our engineers can have a very good experience learning about this.

Tim: Excellent. Okay, let’s talk about your sales and marketing strategy. How are you appealing to users. So, in general are you targeting the students, the parents, the cram school operators themselves? What are you doing?

Go: So, for Clear, it’s a B to Z service. So we directly communicate to our users. For example, in Japan, the only way we communicate to our users is only through Twitter.

Tim: Only through Twitter?

Go: Through Twitter and maybe App Store and Google Play. So we don’t do any paid marketings.

Tim: So no paid marketing, no Facebook.

Go: No Facebook in Japan. We do Facebook in Thailand but the reason that we don’t do Facebook in Japan is that the middle school and high school students in Japan they don’t do Facebook and heavily on Twitter.

Tim: Okay. So you’re marketing directly to the students there?

Go: Yes, and also another important channel is words of mouth. Existing users recommend Clear to their friends.

Tim: So I take it high school students are the biggest block of your user based? Like what percentage of high school students?

Go: Eighty to eighty five percent are the middle and high school users.

Tim: Okay. Saas businesses are wonderful things, economically. Just the business models are great. But a business like this must have a lot of churn by definition, your customers are going to graduate and they’re going to stop using the product. How do you combat that I mean it seems that you have to get like almost a hundred percent of replacement every couple of years?

Go: So that’s another thing we are going to challenge for them. The number of users goes down when they are getting to universities. Ideally, the longest term that the users will use is six years. From seventh grade to twelve. So, what we’re going to do is we provide the subjects for university students to share with. Not something very much focused to schools but other certificate like CPAs, certificate for lawyers that are very standardized throughout the country.

Tim: It seems like that in terms of the strategy prevent churn, you got to four year gap in there because after they graduate in high school and before they start getting professional certifications they’ve got four years of university.

Go: Yes. Some people start to take like those kind of exams third year, fourth year but some people take it earlier and what is more there they will start most of the people start studying when they get to the university.

Tim: Really so budding accountants are studying for their CPA exam from year one. Why don’t you apply the system to more general university classes it’s just that the number of textbooks becomes too many?

Go: Yes, yes the contents varies widely from courses to courses. If the courses is different, if the professor is different, the content is different. The notebooks won’t be so much so useful for the students in another university.

Tim: In high school, you’ve got the whole country learning from two or three textbooks the same week everyone learning the same thing?

 

Go: Very standardized.

Tim: But in the university you pretty much have to get the same professor teaching the same class, the same university?

Go: Yes, exactly so the content is very much fragmented throughout the country. So public we share the content long so rational for university students.

Tim: That makes a lot of sense. When you originally launched Clear back in twenty thirteen right? It’s been a free ad sponsored programs since it’s launch. You’ve recently switched to a more premium model? Tell me more about that, how did it go?

Go: Yes. Of course the users can still it free but they are very, very popular users in Clear and we had some surveys if those popular users premium notebooks that they have to pay, the significant percentage of the users reacted positively.

Tim: So, it’s a revenue sharing.

Go: Revenue sharing notebooks.

Tim: The authors of the notebooks get some of the money, you keep some of the money?

Go: Yes. For EdTech Trends I always see other motivation. To me, it looks like more services are advance than in Japan.  EdTech start-ups in Asia, Southeast Asia they are very much innovative and one step ahead than us in Japan, sometimes. I see that market place is coming up in Southeast Asia, people started to sell their time to each other people and people are willing to pay for that. So, Clear is also going into that way. To provide a market place for someone who wants to sell their time and contents.

Tim: Let’s talk a bit about your global strategy because as mentioned, you do have users inside and outside of Japan so where else is Clear being used?

Go: So, Clear is now used in starting in Japan, we went to Thailand, Taiwan, China and last week we launched in Indonesia.

Tim: How are you reaching these countries? What’s your approach to the entering those markets?

Go: So, in each countries, we have part time team members, we have a lot    university students for our marketing team members. The reason we work with those people they are the people who knows what the students in those country like, how do they study.

Tim: You’re also targeting high school students in these other countries as well?

Go: Yes. Mainly high school students, middle school students. University students they know how to market to high school students because they were high school students two three years ago.

Tim: Now before we were talking about how Japan is very strict government control of a junior high school and junior curriculum makes Clear a really good fit for Japan. Is that the case where the countries you are expanding to as well?

Go: Yes. Also, the criteria for choosing the country the culture of helping each other the students needs to be helpful to other people, they’re happy to post their notebook and get positive reaction to them.

Tim: Now I would’ve thought it would’ve been kind of like a universal idea. Which countries invest more cooperative and maybe more competitive among these students?

Go: There are several countries we enter and we gave up. They didn’t understand the concept of sharing notebooks. They used to ask me what is the point of all publish my notebooks to other people. They are my competitors.

Tim: Which countries?

Go: Even China and Taiwan is competitive for students to get into universities. The students are very helpful to each other and they are happy to post their notebook for other students. But the students in Singapore and Korea they were not so willing to share their notebook to other people and the service didn’t pick up for them.

Tim: Interesting. Do you plan on expanding outside of Asia?

Go: Yes, we’re planning to expand in India and we are also planning to expand to South America.

Tim: Okay. So it’s that magic combination of tight government of a curriculum and a very helpful attitude among the students.

Go: Yes.

Tim: Actually back here in Japan, you’ve recently announced a number of partnerships with publishers Ikunshinsha, Asahi, Z-Kai. What does this mean? Is this new sales channel or are we going to expect new products to come out of Arcterus?

Go: So they’re all content holders. So Asahi newspaper company they have brilliant articles that the students want to read. So we are going to distribute their contents through Clear. Z-Kai is one of the largest company to publish textbooks and distant learning. So we are also going to distribute their contents to and Ikunshinsha as well.

Tim: Right. So this is a clear direction. Clear will both have the student’s notebooks and the publisher’s textbooks on the same platform?

Go: Yes so Clear is going to be a market place for the learners so they can push the contents from peers or the publishers and also we have been asked by users that they want to do the problems after they see the notebooks so we can provide problem sets.

 

Tim: Well, that’s one of the things I was asking it seems like would enable you the publishers to sell additional problem sets, new content like that.

Go: Yes, and also when you do the problems that we provide they can come back to notebooks. When they cannot solve the problem they can go back to the notebook and review the notebook and do the problem again.

Tim: Since you’ve got a lot of user base who are evaluating and ranking notebooks, are you providing the data to the textbook publishers so they can approve the quality of the notebooks and the quality of their textbooks?

Go: Yes, that’s exactly what we would like to do with them.

Tim: I’m sure the market place being able to sell additional problem sets and additional study notebooks of their own is very attractive as well. But what I see here, if you’re looking five years ten years into the future, so you’ve got the whole nation of Japan, lots of students uploading their notebooks, their own study text, their own advice, you got publishers that are putting up their textbooks and their content kind of following your own vision of tailoring the learning experience to each individual user. Do you see Clear as something that eventually be able to kind of replace textbooks and pull the ideal information from different notebooks and different parts of different textbooks and present a customized textbook to each user?

Go: Yes. Clear is just a platform. It can help the content provider to how do you say it customize the content perfectly of customized for each users, it can be audios, it can be videos, any kind of format can be distributed through Clear.

Tim: But at the moment, Clear is scanned copies of physical notebooks.

Go: Yes, right now only that but we can expand to that kind of audios, videos or the type documents. We can also share powerpoint documents.

Tim: Let’s talk a bit about start-ups in Japan in general. Based on your experience of starting Arcterus, what’s the best advice that you could give to someone who’s thinking of leaving the company and starting their own and maybe their family thinks it’s not a good idea. What’s the best advice you could give them?

Go: So recently, it’s becoming more easy and easier to start a start-up the funding the environment of cost of running a service is getting lower and lower. Becoming easier to start-up doesn’t mean it’s easier to become successful.

Tim: Yeah, yeah. It’s easier to start it doesn’t mean it’s easier to finish.

Go: Yes. It’s rather the competition is getting higher because more start-ups are coming out so even if it seems easy for you to start a start-up, don’t start a start-up.

Tim: I think you are right. There are a lot of people especially young founders who view getting funded as a measure of success. I mean to some extent, it is an important step but that really is just a very first step. It sounds like it’s really important to understand the whole process and to know what your path is going to be like for those next couple of years.

Go: Yes I agree. Normally the life is much more richer, life is easier and happier if you work for large company. In general, it’s easier.

Tim: Both of us chose to leave large companies and start a start-up so what do you think that one thing is that makes you want to run a start-up rather than work for a large company?

Go: I think that’s a very good question. So, I started my start-up because there was something I wanted to do. I wanted to realize my thought that people would perform much better if they can learn in their own way and that’s why I started my start up. If you have something and if you are tough enough, you will enjoy what you are doing.

Tim: Excellent. Now, before we wrap up, I want to ask you what I call my magic wand question. If I gave you a magic wand and I said I could change one thing about Japan. Anything at all, you could change the legal system, the education system, the way people think about risk, anything at all to make things better for start-ups in Japan. What would you change?

Go: The problem of Japan for start-ups for governments for young people is the preparation is the birth ratio, I think. I’d say Japanese people needs to have more sex. Have more kids.

Tim: I mean I know there’s politicians saying that Japan needs to have more babies –

Go: They are helping their moms to work.

Tim: How does it help start-ups?

Go: To have more kids Japanese people needs to have more sex and sex habits needs to be changed. Did you know the number of Japanese people have sex is one of the lowest in the world? Yeah, I’ve heard it. So, it needs to be improved. The reason is important for start-ups, is quite simple the market is shrinking.  Not every product and go over the boundary of country for example for the start-ups in the States is quite easy. The whole nation of the States is their market and that’s enough to be successful. For Japanese start-ups, is becoming more small and small.

Tim: So the most important thing would be to grow the market.

Go: The most important thing is to change the sex habits of these people and have more babies and the grow market size?

Tim: There’s also I think a shift in attitude when you’re looking at a country with shrinking or slow growth demographics with Japan or Kore and you’re looking at a country that is expanding at a large younger population, say, Indonesia or Vietnam, you do get a lot of innovation and risk taking in those younger populations.

Go: Yes, that’s right. Which means it’s better to have a younger –

Tim: So you’re magic wand would be more sex, more babies, more creativity. In that order.

Go: Yes, in that order. Is that okay answer?

Tim: I think that’s a great answer.

Tim: Well, listen though thanks for sitting down with me.

Go: Thank you so much for giving me this great opportunity. Thank you.

And we’re back.

I think it’s interesting that the strictness of the Japanese education system which has been cited by so many guests here in Disrupting Japan as a force that is stifling innovation and the creation of startups here was actually enabled Arcterus to launch and to grow.

The fact that all Japanese students are learning the exactly same things at exactly the same pace is what makes the notebook sharing model possible. The fact that they’re running their own cram school struck me as somewhat useful but a bit risky for such a small company. It’s hard enough growing one business without worrying about a second.

But still, Go seems to have structured things so that it’s an independent business unit that requires no attention from the Clear team; and they seem to be making it work.

There is something else that is unusual and notable about Arcterus as an EdTech start-ups. In fact, they are making a success doing something I usually advise EdTech startups against doing. Marketing directly to the students. Test preparation and study tools is a massive and competitive market in Japan. When launching a new product, it usually makes sense to target either through the cram schools, who will buy in bulk, or the parents who make the buying decisions and who are often more, how can I put this, who are often more motivated to have the students study than the students themselves are.

Against all odds, however, Arcterus has created a viable, rapidly growing business based on the desire of high school students to help each other study.

If you’ve got a story about trying to pass a test or otherwise cram information into your brain, Go and I would love to hear from you. So go to disruptingjapan.com/show087 and tell us about it. When you visit the site, you’ll see the links and notes that Go and I talked about and much much more in the resource section of the post.

And by the way, please take the time to follow Disrupting Japan on Twitter and like us on Facebook. It takes me a while sometimes but I try to be part of all conversations that go on there. So, feel free to ask me anything. If you get the chance, check out our LinkedIn group. Our poor, poor, LinkedIn group. You see, a so-called known bug in LinkedIn prevents me from sending invitations, so the group is growing slowly. But there’s a lot of good info on Japanese startups and innovation there so, come by and check it out and if you like it, maybe you can invite a few connections on my behalf.

But most of all, thanks for listening, and thank you for letting people interested in Japanse startups throughout the show.

I’m Tim Romero, thanks for listening to Disrupting Japan.