Investing in tech? Want a few simple avenues to understand how tech performance affects valuation? CTO Labs are Australia's leading advisors in M&A tech with a strong focus on asset performance. We're technologists who've lived in the trenches in the start-up, scale-up, and the already set-up space. Recently we partnered with Letter of Intent to unpack a few tech deal themes for readers.
First up: Velocity: Think of this as your 'Tech meets compound interest'.
Velocity
Ok, let’s run through that in a bit more detail. So, you’ve found your unicorn, and formed a pretty strong conviction about it and it’s time to put it through its paces. Let’s see how your thesis stacks up, using a B2C/Revenue multiple valuation example.
One of the primary measures we use when modelling performance on a B2C technology investment is Velocity.
WTF: Why should I care?
Simply put, this is the ability of a tech team to execute features that delight a customer, at a speed that outperforms their competition to a reasonable quality for a reasonable cost.
Or for those that like a good formula, here’s one we prepared earlier...
“Customer aligned features x speed of release x size of release x quality / R&D spend”
Let’s break it down...
As a founder, owner or investor driving customer value via 'features' that improve our position in market is key
As a tech team we can assume that “working code (that generates revenue) is a primary measure of progress”
And if this is the case then, “the speed at which we release code (to market) is important...
Actually it is really important because “it allows the product/feature to be validated and commercialised in the market faster”
In doing so this gives us "a greater chance to outperform competitors and build an economic moat in the process"
And in the process contribute to revenue growth, therefore affecting our overall valuation
What the market says... in the last 3 years
Recent industry reports showed in 2018, we had just 3% of the surveyed tech business' releasing code multiple times per day. In 2021, we have 26% of these businesses releasing multiple times per day. What this tells us is that the industry is picking up pace overall and this is beginning to separate the have's and have nots.
So does size matter...?
Some of you may now be wondering do the “big eat the small”, or the “fast eat the slow” in tech? Short answer - it goes both ways.
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And now, back to velocity...
Okay back to it... we were saying "speed counts, yes it surely does but so does the size of the feature release". IE: our unicorn has to be releasing something meaningful that leads to a higher conversion or referral rate, lower churn or.. umm... more revenue please ;)
This drive toward feature delivery creates a natural tension in the tech development team between driving speed of release and quality of code. It brings us to an interesting consideration "Quality, we need to be considering quality through two POVs"
The quality of the feature to meet the user needs/please the user; (User experience)
The quality of the code to meet the technical requirements (Scalability, Defect Levels et al).
Tech meets Compound Interest?
The ability of a team to release features in a rapid manner, leverage data to validate those features in market and continue to build on those features has a material impact when compared to traditional software teams who release software less often. See an example below
So, loosely... because we are techsperts not the valuation guys ;) the ability to materially improve revenue growth in this example is driven largely by speed to market and the alignment of features to customer needs. The compound effect of high-velocity tech teams leaders to increased revenue growth as well as the investment's economic boat, both of which have an impact on valuation.
Got a tech itch, want to scratch it, always wanted to bounce tech ideas off someone or simply want a view on a deal inflight?
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