Morgan Stanley-Thematics Venture Vision The Rule of 40 - Asia-109518629
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Thematics
Venture Vision: The Rule of 40 -
Asia
Edward Stanley
! "#$%&""#'&% (()*+(),-*.(*
Matias Ovrum
/0%$%&""#'&% (()*+(),-11*)
2024 will be a turbulent year for private
markets. We have arranged calls to discuss
valuations, cash burn, innovation and
competition for assets. On the back of our
Earthshots piece, many of these calls will have
a CleanTech slant.
Our Venture Vision weeklies look at (1) early-
stage cross-theme funding patterns; (2)
relative valuations between themes; (3) public
versus private valuations; and (4) the resulting
anomalies within certain themes. Please let us
know if you would like our excel database of
>45,000 VC deals categorised by theme,
country, value and date. We also send this file as
a weekly distribution if you would like to receive
it regularly. See here for our global market
synopsis. See here for our longer analysis on the
state of the VC market, particularly as it relates
to non-US Venture and innovation acceleration.
Don't underestimate the power of simplicity. Venture investors
swear by the "Rule of 40". Meanwhile, public market investors
are generally unaware of it. This global mini-series aims to cast a
light on its importance for active managers.
•
•
Compared to the S&P Asia 50, which has delivered a c70% return since 2010, the
Rule of 40 stocks in Asia have delivered a c3.8x return over the same period and the
Asia Tech Rule of 40 names have delivered an over 10x return. While the headline
index is down by a third from peak, the Rule of 40 groupings of stocks are down just
5% from their respective 2021 peaks.
Exhibit 1:23&%"'&345#&3(*&'6"78#'%6
0
200
400
600
800
1000
1200
1400
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
Jan 15
Jan 16
Jan 17
Jan 18
Jan 19
Jan 20
Jan 21
Jan 22
Jan 23
Jan 24
Rule of 40 Top stocks Rule of 40 Tech Stocks S&P Asia 50
&'953"06&":&""#5'4
What is the Rule of 40?: The Rule of 40 is a rule of thumb in venture/growth
markets (predominantly used for SaaS businesses) that simply ranks businesses on a
combination of revenue growth YoY and EBITDA margin or cash margin (i.e. 60%
revenue YoY and 15% EBITDA margin = 45%). Other iterations include the Rule of
20 and Rule of 60, where the same principle applies. It is a blunt tool – a high-level
screen to homogenise and benchmark thousands of otherwise incomparable
businesses. Principally it matters because it allows Venture GPs to screen but also
to focus on corrective measures for those falling below this hurdle. But to what
degree do public market companies deliver on this threshold and how does it
translate into annualised returns?
In Asia, the annual average outperformance of the Rule of 40 strategy has been 7%
or a median benchmark outperformance of 8% annually. When taking just those
Rule of 40 stocks from the tech sector, the average annual outperformance of the
benchmark since 2010 has been 17% albeit skewed by a handful of years; the median
Morgan Stanley does and seeks to do business with
companies covered in Morgan Stanley Research. As a result,
investors should be aware that the firm may have a conflict of
interest that could affect the objectivity of Morgan Stanley
Research. Investors should consider Morgan Stanley
Research as only a single factor in making their investment
decision.
For analyst certification and other important disclosures,
refer to the Disclosure Section, located at the end of this
report.
+= Analysts employed by non-U.S. affiliates are not registered
with FINRA, may not be associated persons of the member
and may not be subject to FINRA restrictions on
communications with a subject company, public appearances
and trading securities held by a research analyst account.
July 30, 2024 01:00 PM GMT
M
2
outperformance over the benchmark was 7%.
Exhibit 2:5#&3(*" ';""#5"" &73&%"'02;,*
Rule of 40 Indices Asia
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 1H 2024 Avg
Asia Rule of 40 Large Cap 3% -10% 28% 28% 19% -7% 22% 53% -13% 27% 22% -3% -23% 21% 40% 12%
Asia Rule of 40 Mid Cap 14% -19% 10% 19% 11% 21% 5% 43% -6% 21% 89% 13% -17% 10% 9% 15%
Asia Rule of 40 Small Cap 14% -13% 11% 29% 5% -11% 6% 35% -11% 21% 59% 13% -18% 1% -13% 10%
Asia Rule of 40 Top stocks 11% -15% 15% 24% 11% 4% 9% 43% -10% 23% 62% 9% -19% 10% 11% 13%
Asia Rule of 40 Tech Stocks 11% -16% 22% 44% 6% 10% 13% 61% -15% 32% 127% 14% -32% 28% 16% 22%
Rule of 40 Indices Asia
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 1H24 Avg
Asia Rule of 40 Large Cap -14% 5% 7% 27% 19% 2% 12% 12% 2% 8% -10% 9% 3% 18% 24% 7%
Asia Rule of 40 Mid Cap -2% -4% -10% 18% 12% 29% -5% 2% 10% 2% 57% 25% 9% 7% -7% 11%
Asia Rule of 40 Small Cap -3% 2% -10% 29% 6% -2% -4% -6% 4% 2% 27% 24% 7% -2% -29% 5%
Asia Rule of 40 Top stocks -5% 1% -6% 24% 12% 12% 0% 2% 6% 4% 30% 20% 7% 7% -5% 8%
Asia Rule of 40 Tech Stocks -5% 0% 1% 44% 7% 19% 4% 20% 1% 13% 95% 25% -6% 25% 0% 17%
Outperformance vs S&P Asia 50
Annual Returns
&'953"06&":&""#5'4
!"#"$%&"'According to SVB's latest
figures, the median company in private markets is now back into Rule of 40 territory
(albeit based on US companies given greater numbers and disclosure). At peak in
2021, 20% of companies were achieving greater than the rule of 40. By early 2023
the median privately funded company had dropped below the rule of 40 as focus on
cutting burn, extending runway and moderating growth were the top priorities being
pushed by GPs. Since then, a more resilient US consumer and rising hopes of rate
cuts have propelled the number of companies surpassing the rule of 40 back to
more normal levels. Particularly as the S&P500 has recovered, the pivot back to a
growth focus in private markets has become clear. However, just as private markets
are rebounding on rule of 40, public companies surpassing this level have fallen
back to pre-Covid levels.
Exhibit 3:5#&3(*"78#'" 70%6
Private companies meeting Rule of 40 vs S&P500 performance
Public vs Private companies meeting Rule of 40
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
Q1 2019
Q3 2019
Q1 2020
Q3 2020
Q1 2021
Q3 2021
Q1 2022
Q3 2022
Q1 2023
Q3 2023
Private companies > Rule of 40
S&P500 YoY [R]
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
Q1 2019
Q2 2019
Q3 2019
Q4 2019
Q1 2020
Q2 2020
Q3 2020
Q4 2020
Q1 2021
Q2 2021
Q3 2021
Q4 2021
Q1 2022
Q2 2022
Q3 2022
Q4 2022
Q1 2023
Q2 2023
Q3 2023
Q4 2023
Private companies > Rule of 40
% US stocks > Rule of 40
&'9<=:=#&&%8:&""#5'4
Which companies have beaten the hurdle most over 15 years? Below are the
companies that have – since 2010 – most regularly surpassed the Rule of 40 and
60. We are making no comment as to these companies' likelihood of continuing to
surpass these 40/60 hurdles – and which most public market investors would not
typically use as a screening method for stocks anyway.
M
Morgan Stanley Research 3
Exhibit 4:;"&'6%&3"#7"4#&3(*" >*4 #
"')*?*
0
2
4
6
8
10
12
14
16
40 60
&'953"06&":&""#5'4
How does 2024 look compared to prior years? Despite the Rule of 40 being
formed of a combination of a revenue growth and an EBITDA margin component,
through time it is the former that largely dictates the outcome of the overall score.
In 2021 – the peak year of "growth at all costs – 19 companies in the S&P Asia 50
managed to surpass the Rule of 40. This compares to consensus estimates showing
only 10 companies – a near halving – likely to surpass the Rule of 40 in the S&P
Asia 50 by the end of 2024. Revenue growth is the largest factor of this change.
Exhibit 5:2;,*&'6#0#'&%7&""05#&3(*@AB)(C'&""
D7'&"E
-30%
-10%
10%
30%
50%
70%
90%
30.0% 10.0% 10.0% 30.0% 50.0% 70.0% 90.0%
EBITDA margin
Revenue Growth
2021 2024
&'9F4&%&":&""#5'4
Strong outperformance: Unlike the US Rule of 40 stocks where the last 5 years
have been weaker relative to the headline index (given the AI trade and market cap
weights of the index), Asia has been more promising on a shorter-term Rule of 40
return versus the index. Much of this performance has come from Asia's AI winners
rather than from its eCommerce and traditional wider TMT sector. We do, however,
caveat that particularly given the relatively smaller population of stocks the rule of
40 metrics in Asia have exhibited both shorter- and longer-term volatility.
摘要：
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时间：2024-08-15
