Creative Destruction Lab Presentation: Virtual Companies are More Valuable

BY David Rowat

Presentation to the Entrepreneurship and Innovation class at the University of British Columbia Sauder School of Business. The class is associated with Creative Destruction Lab-Vancouver.

Creative Destruction Lab delivers a program for select technology and science based companies with massive scale potential. The goal of Creative Destruction Labs is to foster the development of entrepreneurial technology companies at the early growth stage.  The company founders learn from successful, very experienced entrepreneurs who start with a clear objective setting process, increasing their probability of success. I was honoured to be asked to speak to the Entrepreneurship and Innovation class affiliated with the world class organization CDL-Vancouver.

Knowing the importance of presenting highly relevant, useful information to these entrepreneurs, we selected a timely topic that had gone unnoticed.

Students in the Entrepreneurship class study innovations in technology management, which made them the ideal venue to present our research.

Strategic Exits is a boutique investment banks whose sole focus is to help tech entrepreneurs structure an optimal exit.  In our practice, we encountered a new type of company: virtual (or all-remote) companies. These innovative firms have no physical head office. All of their employees permanently work from home (WFH) or work from anywhere (WFA) completely online.

Workers communicate using Zoom, Slack, Virbela, or other leading-edge online audio-visual applications. They share documents using Dropbox, Teams, email, or other technologies. There are no geographic restrictions for virtual companies so they can recruit top talent from around the world.

We had the opportunity to sell several virtual companies in the years prior to the pandemic. So we knew that virtual companies were not a creature of the pandemic. We did see more virtual companies when the pandemic forced everyone to work remotely.

We also noticed something puzzling. Maybe only an investment banker would pick up on this trend: virtual companies were selling for higher prices in an exit transaction than comparable bricks and mortar companies.

It may seem counter-intuitive. How can a company with no physical head office be worth more than a traditional company with an established presence? It just seemed nebulous.

We were curious and started to research the question of why virtual companies attracted higher valuations in an exit transaction. It soon became apparent that virtual companies enjoyed significant advantages over conventional bricks and mortar companies.

Far from being a negative feature, the lack of office space proved to be a valuable attribute. With no facilities and maintenance costs, virtual companies spent less money. Because the companies were virtual, they were more agile. They could staff up and reorganize quickly to take advantage of new opportunities or counter threats. They weren’t slowed down with high overhead.

There was more. Because they had lower expenses, virtual companies could scale more quickly with less external financing. The executives were not spending half their time looking for money. This also meant less dilution of the equity held by the founders as the company grew.

We also discovered early on that a huge benefit of virtual companies is the ability of employees to work from anywhere on a flexible schedule. This allowed them to recover the wasted time in commuting to spend more time with their families or activities. 

When the pandemic hit and forced everyone to WFH, workers adapted. After a period of adjustment, the employees relished their new-found freedom. They could better balance work, family and other activities. Work did not have to displace everything else.

We also discovered another potential financial benefit for virtual companies. Because they only exist online, they can choose to domicile in a tax-friendly jurisdiction. This could significantly lower their tax bill on exit.

Watch my presentation to Creative Destruction Labs to learn more:

HIGHLIGHTS OF THE NEW ADVANTAGES CREATED BY VIRTUAL COMPANIES

Virtual companies:

·      Are creating new, leaner corporate structures

·      Are easily established, efficiently financed, and quickly scaled

·      Are more profitable

·      Can nimbly exploit new opportunities

·      Provide a better work-life balance, especially for women, and are better for the environment

·      Attract the best workers worldwide, and supersede geographic boundaries

·      Minimize corporate income taxes, and taxes on the sale of the company

·      Are worth substantially more to buyers and sellers

To demonstrate our research with a practical example, we review the acquisition of a 3-year-old virtual company with only 40 employees located around the world, which recently sold for over $100 million in under 60 days.