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Location does not make a successful business… or does it?

Article by David Crawford, Partner, Heidrick & Struggles London; Member, Global Technology & Services Practice

Traditional to Digitised Globalisation
Since the onset of the Covid-19 pandemic over a year ago, the world has seen traditional globalisation drastically slow down. With bans on travel, closed borders, and airlines reducing or completely halting most flight schedules altogether, more and more people have had to stay put, in order to stay safe. However, through the marvels of modern technology, it has been possible to substitute physical, traditional globalisation with digitised globalism. Global lockdowns which ensued after the first number of outbreaks drove many sectors further towards a completely digitised global network throughout the past year. Now as the world aspires to open up with the help of vaccines, and lift previous bans, the question that stands in front of many businesses is, does location still make a business successful or not?

Consider for example, the Tech industry and investment into the tech sector during this period of time. Of all of the industries affected during the pandemic, the tech industry in particular has remained relatively unscathed, alongside many Saas and communications-based services which have rapidly scaled internationally in recent months. The last year was in fact quite a remarkable one for tech investment into Europe, with a record $41 billion in venture capital activity. Now, this is still a drop in the ocean compared to the situation in American and Asian markets, but it highlights the strengthening clusters of tech innovation springing up on the map beyond the likes of Silicon Valley.

Moving Beyond Silicon Valley
According to the Financial Times: ”Great software is no longer just being written in San Francisco, Seattle, Shenzhen and Bangalore but in Lagos, Dhaka, Lima and Istanbul. Software companies have the ability to go global overnight and face far fewer obstacles in the digital world.” The ‘Silicon Valley’ office address is no longer a prerequisite for investor attention and cache with customers. 

It is certainly true in the present age that the pandemic has rendered the notion of presence in “THE place” for various sectors almost redundant. This idea has further prompted the rise of the notion of e-globalisation: being digitally global and not needing to be in a particular location. While post-covid travel processes carry risk of complications and as vaccine rollouts are yet to get fully underway, new technologies remain our greatest aid in navigating a new digitised commercial landscape. Cloud technology means software companies worldwide are enabled to take advantage of local software engineering skills, cheaper computational power, and increasingly dispersed and diverse markets for capital. 

The Valuation Gap
However, on the other hand it would be remiss not to mention that there is a huge valuation gap between the S&P 500 Index and the FTSE 100 Index. This gap exists despite many economic, political, and governance similarities between the US and the UK. In the last 10 years, the US S&P 500 index has more than tripled while the Stoxx Europe 600 index of top European shares is up only about 40 per cent. US shares now trade on a price / earnings multiple of about 23, compared with 16 for European equities.

Unsurprisingly, changes are underfoot that may impact this weighting. The €750bn post-pandemic recovery fund, which places an emphasis on green innovations could prove central to this. Not only will the recovery spending itself bolster the start-up ecosystem, but the political and financial implications of this initiative could also play an important role in establishing the continent as a global leader in tech innovation. 

Organisations in all sectors are now increasingly questioning if the way companies are valued can depend on where they are located given the shift from traditional to digitised globalisation over the pandemic. In the U.S., to calculate the worth of a company, a multiple of the company’s revenue is commonly used, whereas a multiple of EBITDA is sometimes used in Europe. This is something to bear in mind, as depending on the structure of the company, these two figures could vary widely.

Case Study – Endava
Founded in 2000, Endava started out in the U.K. with 60 staff, and has since expanded to Europe, then the United States and Latin America. The company now has a global workforce of over 7,000. It has grown both organically and inorganically –  from partnerships, such as the one with Bain, as well as the acquisition of smaller established companies to enable them to get a foot in the door. 

In 2015, three-quarters of Endava’s revenue was in the UK, with the growth of its European, US and LATAM sales, the UK accounts for closer to 40% of revenue. With this expansion, the value has skyrocketed since becoming public in 2018. Revenue for Q4 FY2020 was £90.5 million, an increase of 18.1% compared to £76.6 million in the same period in the prior year and their overall revenue for FY2020 was £351.0 million, an increase of 21.9% compared to £288 million in the prior year. Their share price has increased since Endava (NYSE:DAVA) listed in 2018 from $25.20 initially to where it stands today at $103.73.

Talent and Location
One of the most important decisions a tech company can make as it goes global is how it invests in people and location may play an important part in that process. The small team of brilliant software engineers who have created a product may not know how to market the product to ensure it is getting the attention from prospective clients needed to increase sales. Driving a creative and high-performance culture is considered particularly important in the tech industry where competition for talent is high, and as the old adage goes, culture trickles down from the top.

This is where exemplary leadership comes into play. Diversity of skills and experience are necessities for achieving continuous success – and those leaders who can surround themselves with a team with the competencies and perspectives to compensate for, and compliment their own are best primed for success. So, while it may be the case that a product or service offering can be developed from anywhere, the company may struggle to find the right talent without setting up hubs in major cities like New York and London. 

Looking to the Future
There are many entrepreneurs that would aspire to create the next Amazon or Apple but progress requires skilled leadership and advice from a strong board that also gives strategy on how to keep up to date with tech trends. Some may even say there is also an element of luck. The idea that innovation is not confined to one city or country will likely see more game-changing technological developments in the coming years. However, as the startup “geeks” take their place among the global tech giants, it may be difficult, if not impossible, to avoid the need to establish themselves in global hubs. The role that location plays in a company’s success remains relevant. 

    David Crawford is a partner in Heidrick & Struggles’ London office and a member of the global Technology & Services Practice. His focus is on advising clients in the software and services sector, both large global corporates and significant private equity-funded businesses.

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