If Japan’s SmartNews is just another news app, why is it valued over $100M?

Founders Ken Suzuki (l) and Kaisei Hamamoto (c) with chief journalist Rich Jaroslovsky (r)

Japanese news apps are engaging in a war that shows no signs of stopping. SmartNews, a strong contender to emerge victorious from the fray is already looking to bolster its position with an influx of non-Japanese users. The company launched an English app earlier this month and has taken up residence in the Digital Garage office in San Francisco. Tech in Asia met up with founders Kaisei Hamamoto and Ken Suzuki, along with prize hire and creator of the Wall Street Journal’s online edition, Rich Jaroslovsky, to talk about the history of the company, its transition to a global media firm, and its future plans.

With five million total downloads, SmartNews ranks behind Gunosy (six million) but ahead of Antenna (four million). That might all seem like chump change compared to Flipboard’s more than 100 million users, but news and curation startups are attracting outsized attention in Japan now. The companies are small but cannot be ignored. Investors who end up backing the right horse will get more than bragging rights. They get in on the ground floor of the next big cash cow.

For years, Yahoo Japan has been the go-to website of choice for millions of Japanese. In the mobile space, which the new apps are attacking, Yahoo Japan is pulling in 38 million monthly active users. Those users treat Yahoo Japan as their portal to the entire web, accessing news, weather, sports, ecommerce, and more. The company’s status as a port of entry has lead to numerous advertising tie-ups and a healthy bottom line. Yahoo Japan generated JPY 80.8 billion (US$753 million) from advertising last year.

The race is on to dethrone the king. Large corporations like KDDI have created startup-heavy alliances in order to draw traffic away. Startups specializing in news or curation find themselves flush with investor cash. SmartNews rode this wave and snagged US$36 million during a September funding round. Gree and Atomico, the two leading investors, have been very tight-lipped about the total valuation but Hamamoto confirmed to Tech in Asia that his company is now worth north of US$100 million.

Investors rewarded SmartNews’ steady growth. In February, it had three million downloads, 75 percent of which were monthly active users (MAU) and 38 percent of which were daily active users (DAU). By the end of September, the download number was up to five million. Hamamoto confirmed that the overall number of downloads is increasing faster than ever but MAU and DAU percentages are only slightly lower than they were in February. Therefore SmartNews should have a little less than 3.75 million MAU and 1.9 million DAU. He attributes the dip to a rise in casual (and more fickle) users that followed the early adopters.

SmartNews is also about to turn on a major new revenue stream, another point that likely resonated with investors. From December, the company will launch its own native ad network and has already brought on social network giant cum gaming giant Mixi to be a distribution partner.

Fumbling over personalization

SmartNews is riding high on a healthy valuation now but it arrived at this point after a major false start. In 2010, after Hamamoto left corporate work behind to set out on his own, he built a real-time web crawler for social media. In discussing the project with Suzuki, he realized that the product should be focused further on gathering news information. He built the service and called it Crow’s Nest.

Crow’s Nest won a variety of awards, including second prize at TechCrunch Tokyo in 2011, but it failed to retain users or acquire new ones. Not even an appearance at South by Southwest was able to turn the tide.

Hamamoto and Suzuki still believed they had the right technology, however. They decided to restart. Crow’s Nest had emphasized personal tastes but the new product – which became SmartNews – would gather information that would be important to anyone using it.

The revamped product would still crawl social media sites to determine the major stories of the day, but now it used a more advanced algorithm and natural language processing (the technology that allows computers to understand nuance in words) to categorize and rank universally important news.

That distinction proved to be the difference maker with users, and SmartNews was named the top news app of the year for 2013 by both Apple and Google. This time the accolades were not empty as reflected by the firm’s latest valuation.

The SmartNews product was turning heads, even Jaroslovsky’s over in America.

“The notion of the ‘daily me’ – the hyper personalized news report tailored to your specific interest was the holy grail. But people are coming to the conclusion that it was a false grail. What people think they are interested in ahead of time and what they are actually interested in can be completely different,” Jaroslovsky says.

Finding serendipity