ASANA S1 analysis

Overview

Asana was started in 2008 by Ex Co-Founder of Facebook Dustin Moskovitz and Joseph Rosenstein. It is incorporated in Delaware and headquartered in San Francisco, California. Company has raised total $413M in private market till date as per Crunchbase. Asana began trading on 30th Sep 2020 on NYSE at a share price of $27. Asana is currently trading at a share price of $26.48 (down 1.9%). Currently, Asana has a market capitalization of $4.1B, more than double its last private valuation of $1.5B in Nov18. 

Pain points

In any organisation, team members need to co-ordinate and communicate effectively in order to complete tasks and projects. New product launch requires co-ordination from multiple teams/departments. However, teams are spending more time co-ordinating about work than actually doing the work. Over 60% of knowledge workers spend time on work about work such as status updates, long email threads, manually updating spreadsheets, asynchronous communication across various messaging applications. They use multiple disparate tools for communication such as Slack, Skype, Email, Spreadsheets. While these apps help teams communicate, they are not designed for project management. Spreadsheets lack automation capabilities or multi-dimensional view of projects or real-time insight into how work is done. Email cannot build workflows, assign tasks, or track progress across individuals or teams. It is difficult to keep track of who is assigned responsibility for task at any given point of time, is the work completed in stipulated timeline or are there any gaps in communication that is delaying the progress further. Information is siloed in different tools which breaks down the entire flow of communication. Employees need more clarity on the tasks, organisation goals in order to be productive at work.

To minimize work about work, reduce chaos, and give individuals time back to focus on the work that matters, teams need a purpose-built solution for project planning and collaboration. That’s where Asana comes in. Founders have faced the problem of lack of co-ordination and accountability among team members at Facebook as it scaled. Soon, they realise that this problem is universal across organisations especially those managing large cross-functional teams. Back then, there was no platform available in the market addressing this problem. So, they decided to build Asana.

With remote office culture gaining momentum and rise of digital nomads, teams are collaborating entirely online. Team’s productivity is super critical and thus, collaboration tools like Asana will see wider adoption across organisations. 

Source – BVP remote work

Product

Asana can be thought of as a digital workspace where teams can collaborate and get work done faster. Asana is a system of record of past, current and future work. All data gets captured at centralised location in real-time as the work progresses. Tasks are prioritized, team members get complete clarity on their daily goals. Teams are more productive and processes are streamlined.

Platform is built on proprietary, multi-dimensional data model which is called as work graph inspired by the social graph which founders had helped create for Facebook. The work graph is a data model built by breaking down work into 3 components as follows –

·       People responsible for completing it

·       Processes to follow to finish the work – rules, templates

·       Information about work – files, comment, status, metadata.

Tying up all of this together under a business workflow which measures the relationship across and within this data. The work graph enables each Asana user to see information in the format that makes most sense for them.

·       Individual team members can view task list in various formats (List view, Board view like Trello, Calendar view, Timeline view) and see their progress in real time

·       Team leads can view and mange workloads (assign new tasks) of their team members

·       Executives get birds eye view of all business workflows, get real-time updates and track progress as per goals/objective defined.

Asana also offers ready to use templates for common processes such as marketing, HR, IT, sales, engineering in an organisation. Teams can configure business logic/rules to automate repetitive manual tasks which will trigger actions to complete the task without human intervention. In addition to this, Asana offers reporting capabilities and integrations with over 100 third-party apps.

GTM

Asana adopts hybrid self-service and direct sales model. Currently, it is used in over 190 countries. Over 59% of revenue is coming from US and 41% revenue coming from international market which is incredible given that there is limited dedicated direct sales team and limited customisation in international regions.

Majority of customers initially start using Asana through self-service and free trials. Once customers derive productivity benefits by using Asana, they upgrade their plan either through self-service or with the assistance of direct sales team. Free to paid conversion rate of registered users is 4.8% as of Jan20. Users can also invite other users within or outside the organisation. With mix of product led growth in its earlier days, Asana was able to seed the market with Asana users.

Land and expand strategy has worked well for Asana. This is evident in company’s overall net dollar retention rate which is 120% as of Jan20, up from 110% in FY19. Company is focused on expanding its direct sales team in US and international markets which will further increase expansion opportunities and positively impact revenue and net dollar retention rate.

Pricing

Company offers freemium pricing plan with 3 tier paid subscription plans – Premium, Business and Enterprise. Basic plan is free for teams comprising of < 15 people with limited access to premium features. Pricing is based on the number on users and increases with each subscription plan as more features and functionality are added. 

As Asana usage expands within the organisation, its average revenue per account (ARPA) will increase significantly. This is evident in the numbers. Enterprise and Business plans were introduced in Dec16 and Nov18 and within short period of time these plans have grown to represent 42% of total revenues during 3 months ended Jan20, up from 11% during 3 months ending Jan19. This is the flywheel effect Tomasz Tunguz (VC at Redpoint) refers to in his blog on how organisations focus on marketing to acquire customers (small or large) and later focus on upselling and expanding the platform usage with the acquired customer, thus gaining higher share of customer’s wallet. Thus, Asana’s self-service freemium pricing model has worked well even to onboard large accounts. Over 100 largest customers have used free trial of paid plans or upgraded from basic plan. 

Customers

Asana has large diverse customer base comprising of over 75K paying customers (1.2M paying users) across all industry verticals. Average contract value (ACV) is $2321. 30% of the paying customers are Fortune 500 companies and over 207 paying customers pay $50K+ on annualised basis. No single customer accounted for more than 1% of our revenues, and top 100 customers accounted for approximately 9% of revenues for FY2020. Thus, there is no dependency on single or high paying customer/s. 

Market Size

Market for collaborative application, project and portfolio management is expected to grow from $23B in 2020 to $32B in 2023 as per IDC 2019 report. There are 1.25B global knowledge workers estimated as of Sep19 as per Forrester report. Asana has penetrated less than 3% of addressable market of knowledge workers and this represents significant whitespace for company to tap into. 

Competition

Source – Forrester Q4 2018 – Collaborative work management tools for the enterprise

The market for work management platform is highly competitive, fragmented with low entry barriers. Increasing no. of platforms with better product either in terms of functionality or design enter the market. Legacy project management tools like MS Projects are designed for dedicated project managers and difficult for many users to adopt. There is a steep learning curve, no drag and drop functionalities.

Smartsheet is one of the direct competitors of Asana. It has spreadsheet like interface. Slack is communication tool for organisations and not ideal for workflows. Both Slack and Asana complement each other and best benefits can be derived by using them in conjunction. Trello (acquired by Atlassian) can be thought of as digital board of sticky notes in Kanban style. It’s not ideal for complex projects and it lacks some dependency management features present in Asana. Vertical applications are purpose-built for specific use cases and not designed for teams to collaborate cross-functionally. E.g. Jira by Atlassian is best suited for developers for software development, ticketing, etc. Atlassian is focused on building operating system for team collaboration with products like Jira, Trello and wiki product - Confluence. Monday has more comprehensive set of features and cheaper than Asana. However, it has limited no. of integrations over 20+ whereas Asana has over 100+ integrations. As per Forrester research 2018, Monday product is still evolving and needs to build AI and ML capabilities.

New solutions are always entering the market which can be potential threat. Case in point Notion. Notion is an all-in-one digital workspace which has rebundled Evernote, Asana and Confluence in a single piece. Thus, distribution becomes utmost important. This is not a winner takes all market. Market is ripe for disruption as more teams are going remote. Organisations will gradually be willing to purchase project management tools instead of managing their entire workflow on emails and spreadsheets.

At Gemba Capital, we have invested in Zestl, Pune based company which is no-code workflow automation platform targeting mid-market and large enterprises. Users can create and modify complex workflows on the go. It leverages RPA (robotic process automation) technology which uses bots for integration and automating complex processes with business logic.

Why Asana wins

Product – Asana is easy for an entire team to adopt. Users can import existing workflows from Asana in few clicks, intuitive interactive with drag and drop functionalities makes it easy to create and customise workflows on the go. It is adaptable to multiple use cases across many departments and industries with cross functional teams such as marketing campaigns, product launch, HR, strategic planning for CXO and executives. After initial adoption, teams often expand their usage of Asana to new use cases and departments. Users can also easily create workflows on the go or used ready made templates. 

Moat – Switching costs are high as workflows built are central to entire operations of the business and entire data is captured by the system on which AI driven insights will be generated. Switching means rebuilding all processes and groups that have developed over times and also losing past communication data. Also, there are inherent network effects as an individual user or team start using the product, they invite others to collaborate and work together and thus, Asana becomes valuable with each additional user.

GTM – Hybrid self-service and direct sales model leveraging flywheel effect. Customers start using the product with free trial or lower subscription plan and later upgrade to higher plan or more no. of seats as the platform usage expands within the organisation. This helps Asana retain existing customers and increase its ARPA.

Business performance and Benchmarks

Source: Public Comps

Smartsheet went public in 2018. Since its IPO, Smartsheet has increased its market cap 2.6x to $6.3B today*. This is a positive sign for Asana and given that it is growing at higher revenue run rate than Smartsheet I believe it will be stellar IPO.

Source - *Tomasz Tunguz Asana analysis

Source: Asana S1, Smartsheet annual report 2020, Public comps

Revenue growth – Asana’s current annual revenue run rate is $191M growing at 71% Y-o-Y. Revenue growth can be attributed to increase in new paying customers and existing customers upgrading to high priced Enterprise and Business plans. Smartsheet’s current annual revenue run rate is $364 M growing at slower rate 41% than Asana.

Gross margins – Asana’s and Smartsheet’s gross margins (~86%) are very impressive. This is on the higher end which also means there is no headroom to increase these margins further to improve profitability.

Net dollar retention rate – Asana’s net dollar retention rate has improved from 110% in FY19 to 120% in FY20. Net dollar retention of 120% means company can still grow at 120% Y-o-Y without bringing in new customers. Customers who are spending more than $50K annualised basis, net dollar retention is 140% and those spending more than $5K annualised basis, net dollar retention is 125%. This indicates that Asana is able to keep its existing customers happy and able to upsell and earn more revenue from high paying customers. Smartsheet net dollar retention rate is 135% for FY20 which is higher than Asana. 

Source: Asana S1

Source: Asana S1

R&D – Asana’s R&D spend as % of Revenue is 61% higher than that of Smartsheet which has further reduced its net income margins to (83%) compared to Smartsheet (49%). Asana will continue to invest in R&D aggressively to expand product offering and enhance features and functionality of platform such as adding functional automated workflows, integrations, security, automation and org-wide use cases

Source: Asana S1

Sales efficiency – It measures for every $1 of S&M spend how much net new ARRR is generated. Comparing Asana’s sales efficiency quarterly, it has been steadily declining as company is aggressively spending on S&M given the market is very competitive and large enough addressable market to capture. Asana’s S&M margin has increased from 68% in FY19 to 74% in FY20. Even Smartsheet’s S&M margin is roughly same 72% in FY20

CAC payback period – Asana’s LTM CAC payback equals 18.6 months which is quite high given that its ACV ($2.3K) is on the lower end. If we compare it with Smartsheet, its LTM CAC payback (28.1 months) is way higher than Asana. Customers initially opt for lower subscription plan and upgrade to higher plan after using the product and realising its benefits. Also, an individual or a dept will be an early adopter of the product and later its usage expands within the organisation. Thus, CAC gets recovered over longer period of time.

Rule of 40 – Companies with Current quarter Y-o-Y growth rate (ARRR) + LTM FCF margin >40% are considered healthy. In the sense, grow at higher rate than your burn rate. Asana LTM rule of 40 equals 39% which is average compared to other high growth SaaS companies. Smartsheet’s rule of 40 equals 29%. Asana isn’t profitable but it needs to improve its revenue growth rate which is achievable as company is focused on account expansion by upselling higher subscription plans.

Asana’s Quarterly P&L/metrics

Source: Asana S1

Valuation

Asana currently does $190M in ARRR, and grew 71% Y-o-Y. Due to Covid, ARRR growth rate is expected to decline to 40-50%. On the basis of EV/NTM Revenue multiple of high growth SaaS companies, Asana valuation’s is expected to be in the range of $5-$6B. 

Annexure

SaaS Metrics calculation

·       ARR is annual recurring revenue or annual subscription billing. GAAP subscription revenue is adjusted for deferred revenue.

·       ARRR is Annualized revenue run rate = Current Quarter GAAP revenue *4

·       Net new ARRR = Current Quarter GAAP Revenue – Previous Quarter GAAP Revenue

·       (Sales efficiency) Magic no – spending $1 on S&M how much incremental rev = Net new ARRR current quarter / S&M previous quarter. Multiplying magic no. by gross margin gives CAC ratio

·       CAC payback period (months) = 12/magic no.*gross margin

·       LTM CAC payback period (months) = median payback period of last 4 quarters.

·       Rule of 40 (LTM FCF) = Current quarter Y-o-Y growth rate (ARR) + LTM FCF margin

·       FCF margin = FCF / GAAP revenue

·       S&M margin = S&M spend / GAAP revenue