Welcome to Part #2 of the series on Metrics for evaluating ASX tech.

• You can find Part #1 on Product Market Fit (PMF) here

• Ensure you’re subscribed to not miss further insights on ASX tech

#2. Growth: the different aspects and companies growing ~200% in the Mopoke Cloud Index

The value of something is the present value of future cash flows. 

The larger the cash flows are over the life of the company, the higher the value - so growth is often the most significant driver of company valuation.

For companies with high, compounding growth in big markets - paying higher valuations can make sense. 

In A16Z’s When Entry Multiples Don’t Matter, they looked at exit valuations of their investments and found that while entry prices (and implied multiples) are helpful, what really mattered was growth.   

Decomposing ‘growth’ brings three implicit points:

1. Rate of growth to capture cash flows are important

2. Endurance of growth identifies the ability to compound that growth of multiple years

3. Market size is the ultimate constraint - there are only so many units to be sold - so Total Addressable Market (TAM) is important to build big companies 

We looked at all three in building the Mopoke Cloud Index.

i. Rate of growth

The first growth filter we use is for companies growing revenue >20% annually (normalizing for any COVID-related disruptions). 

There is a lot of growth in the Mopoke Cloud Index with the median growth rate of 30% across the 88 companies. The top 10 companies will grow on average at 196% this year through a combination of explosive organic and acquisitive growth 🚀.

ii. Endurance of growth

Growth endurance is the retention of growth that companies experience from one year to the next. 

It is calculated by dividing this year’s growth by last years growth, and is simply to interpret:

• >1x: growth is accelerating

• Around 1x: growth is at similar rates year on year

• <1x: growth is decelerating

In BVP’s State of the Cloud 2021, they found that emerging cloud leaders were able to retain 80% of their growth rate from the prior year. 

Those companies are at far bigger scale than those in the Mopoke Cloud Index, but the takeaway is the same - enduring growth is key to building big companies. 

On the ASX, one of the reasons Afterpay is such a great success story was the incredible growth endurance the business delivered - taking only three years (2018 - 2021) to go from $100m to ~$1bn in revenue by compounding at nearly 💯 % for three years.

For us, we find the most exciting places to look are companies that have clear PMF and are seeing transformative growth. 

As an example, we can segment the sixteen companies in the vertical software segment of the Mopoke Cloud Index by their current growth endurance. 

Transformative growth can make some companies exciting to follow, but it’s important to assess how long that growth can continue.

iii. Market size is the ultimate constraint

Given Australia is a comparatively small market, companies generally need to find new markets to achieve high growth endurance, which brings us to the last growth filter - market size.

The majority of ASX technology companies are based in Australia, so companies generally look offshore into new geographies to find bigger addressable markets in their core offerings.

In the Mopoke Cloud Index, while roughly half are already ‘global’ - a number of companies have specific growth narratives focused on the US, Asia, UK and EMEA.

ASX technology companies are going after these geographic markets with several common themes such as:

• Recruiting advisors: to bring reputational capital and expertise (e.g. Damstra’s North American advisory board)

• Building partnerships: to enable broader distribution (e.g. Dropsuite’s reseller network)

• Acquiring smaller players: to gain initial market presence (e.g. Airtasker’s acquisition of Zaarly) 

• Focusing on specific customers: to support underserved market segments (i.e Whispir’s SMB strategy in the US)

We plan on publishing a piece on these key strategies in the future.

Subscribe to be notified about Part#3

Thanks for reading Part #2 on PMF! In Part #3, we’re going to cover Unit Economics: where investors go wrong on margins and LTV. Subscribe here so you don’t miss it.

We’d also love your feedback so that the newsletter can continue to grow and improve. If you have a question or data set you’re interested in ASX tech - ask us here or email andy@andycrebar.com