Why selling your virtual company will make you rich

BY David Rowat

First published January, 2020.

Technical advances have recently collided to allow these agile startups to disrupt established businesses.

At Strategic Exits, we noticed a few years ago that more technology companies were starting up, growing and exiting without a physical office. These virtual (“all-remote” or “fully-remote”) companies exist only online. All employees work remotely using voice, text, email, video and document-sharing applications.

We discovered that it was much easier to sell a virtual tech company than a conventional bricks-and-mortar (B&M) business, despite the lack of physical infrastructure. We were surprised to also discover that these fully-remote companies sold for more money.

At Strategic Exits, we like to research new trends in the tech industry. The virtual business model interested us from two perspectives:

  • Why did fully-remote companies emerge?
  • Why did they sell for more money in an exit transaction?

The answer to the first question relates to the explosion in technological development since 2007. New technologies are spreading across the globe at a feverish pace. The companies that develop them are matching their speed, many growing from start-up to unicorn size in a couple of years.

One of the many life-changing developments spawned by this tech revolution has been the arrival of remote work on a massive scale. Simultaneous rapid improvements to five technologies have enabled large numbers of people, and indeed entire companies, to work virtually effectively for the first time:

  1. Ubiquitous high-speed wireless internet connections.  By 2010, slow modems and copper wires which killed the productivity of remote workers, were rapidly being replaced by faster connections. High-speed Wi-Fi hotspots began popping up in most homes, offices and coffee shops with data transmission speeds as fast as in the office. Now remote workers could also be mobile because a high-speed connection was always near.
  2. Cellphones. The bandwidth available for cellular telephones steadily increased as the 3G, 4G and 5G platformed were implemented. With the introduction of the iPhone in 2007, thousands of new business and consumer applications became instantly available on people’s cellphones. Virtual employees can now perform most applications on their mobile devices making it convenient to work full time from anywhere.
  3. Online audiovisual conferencing tools. Videoconferencing only accelerated when higher bandwidth allowed affordable high-resolution video. Recent advances now allow spatial voice and virtual reality experiences. This significantly improves the sense of connection that is lost with asynchronous tools like Zoom.
  4. Cloud Computing. Companies and remote employees can store all of their data in the cloud. Fully-remote workers can access all the corporate data as conveniently as someone in-office.
  5. Effective Cyber Security. Once companies started wirelessly transmitting important data wirelessly, they became vulnerable to hackers and thieves. Cyber security companies entered the fray with sophisticated defences. Although there is a constant cyber war between online villains and company defenders, companies accept the risk that comes with remote data exchange.

From the late 1980s to the 2010s, these technologies made incremental progress, but insufficient to affect the way most people worked. It required significant improvement in and convergence of all five technologies to allow information to be generated and shared remotely, efficiently, effectively and securely. At that point, companies could then operate completely online with no physical presence. As these technologies came together in the 2010s, full-remote companies began to sprout like flowers in spring.

Three ingredients make the virtual company worth more in this technology revolution:

  • Lower Costs: With no physical office space, fully-remote companies can reduce their expenses. The savings can increase profits or be re-invested in faster growth. Many fully-remote companies can both grow quickly, and still be profitable, a rare accomplishment. Acquirers will pay a lot more to acquire these companies than the more traditional B&M tech companies.
  • Flexibility: Virtual companies have no geographic restriction; they can source the best talent from any country or the world and entice them with the flexible work-life balance of a virtual environment. Many team members, especially working mothers, need the flexibility to work from home. The virtual environment is a godsend for them and their families.
  • Agility: their unique and lean design allows them to exploit opportunities quickly and scale up efficiently unlike conventional companies with slower internal processes. Acquirers value their ability to pivot easily at less cost.

Rapidly advancing technologies are enabling a new cohort of virtual companies to appear and quickly disrupt entire industries. With lower costs, greater agility and flexibility, full-remote companies are more valuable than comparable conventional rivals. This new paradigm is turning conventional wisdom about the tech industry and technology exits on its head.

With the ability to create these massive impacts, it is becoming apparent why virtual companies sell for more.