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Metrics for evaluating ASX tech: Part 1/5 - PMF 🔨
Researching a company without a framework is like drinking data from a firehose. We look at five key metrics we use to analyze ASX technology companies.
This is a series covering the framework we use to evaluate the health of software-based businesses, and how they were used to build the Mopoke Cloud Index.
The series will cover:
Product Market Fit (PMF): why it’s important and why we’ve avoided 25% of recent ASX tech IPOs
Growth: a look at the different aspects of growth and the companies growing revenue ~200% in the Mopoke Cloud Index
Unit economics: where investors can go wrong on gross margins and LTV
Growth efficiency: why we ❤️ Life360’s cash burn
Customer Retention: why net dollar retention lags on the ASX, and how a handful of PLG companies are changing it
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Why we like metrics and some caveats
Metrics are the manifestation of all the different inputs that influence a company.
Things like product, market, competitive landscape and company maturity - and benchmarking these metrics can highlight company health compared to their peers.
Unfortunately, many metrics don't show up explicitly in the financial statements and management teams can be guarded about what they release.
While the trend is moving towards more disclosure, data can be patchy. In the Mopoke Cloud Index, while all companies report top line revenue - few provide the level of data we’d expect.
The above metrics are standard issue in the US given the more mature public tech markets. Nevertheless we’ve benchmarked the data that does exist and compared it to the US where we can.
Before we get underway, a few things to note.
B2B focus: the Mopoke Cloud Index is weighted towards B2B SaaS companies (70% of the index) so many of these metrics are more relevant for those companies and we’ve split out B2C where relevant
Time prioritized: we’ve ordered them from least to most time commitment. Determining a company's growth is easier than unit economics - but it doesn't mean it's a better investment indicator
Stories go with spreadsheets: metrics can be helpful benchmarks - but they shouldn't be relied on when making investment decisions. Companies are more than numbers on a spreadsheet and need a clear narrative to be fairly valued by the market 🤓
#1. PMF: avoiding 25% of recent ASX tech IPOs
While there is a history of debate about the definition of Product Market Fit (PMF), to us - PMF means there’s a product or service that sells - typically because it is better, faster or cheaper than existing solutions.
In the Mopoke Cloud Index, we focus on companies with >$10m revenue unless there is a very good story or other indicators.
This number is well above venture capital (VC) and the majority of what’s being listed in recent IPOs.
The key signal for PMF in VC has historically been $1m of revenue to raise a seed or first real investment round. This is a strong signal that the product is delivering value to customers.
Once there is a signal, digging into unit economics will provide a lot more confidence in PMF (more on this in part #2).
For public markets, the hurdles are much higher for both revenue and business maturity.
Companies going public generally need to have figured out not only PMF, but also Go-to-Market (GTM) fit - how the company will find customers repeatedly to deliver enduring growth.
Subscription software IPOs in the US since 2018 have averaged $200m of ARR, but this is much lower in the ASX technology space.
The median technology IPO on the ASX since 2018 had only $6m of revenue, with roughly 25% of what’s being listed not even having $1m of revenue 😕 .
We know that technology IPOs are booming on the ASX, but with mixed results - roughly half of new listings are down since 2018 and these declines are slightly skewed towards low revenue companies. 60% of companies that IPO’d with less than $10m of revenue in that list are currently underwater.
The lesson here is that PMF matters - and investors have higher chances of success focusing on companies that can clearly demonstrate it through material revenue.
Lastly, if revenue is not there, other indicators for PMF that you can filter for are:
Passionate user feedback (typically from online reviews or case studies)
A product or service that’s 10x better than the alternative
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Thanks for reading Part #1 on PMF! Check out Part #2 on Growth: the different aspects and companies growing ~200% in the Mopoke Cloud Index.