Sunday, August 9, 2009

Small firms should go global for a shot at better valuation multiples

Economic Map of the World: Emerging Markets an...Image via Wikipedia

I was recently watching a presentation delivered by a Tepper School of Business Alum (my alma mater) and was throughly impressed by how much growth and expansion is happening in emerging markets. The speaker mentioned the importance of local knowledge using a nice anecdote - grasshoppers are considered pests, say, in the US and China, but is considered a tasty delicacy in northern Thailand. Venture-financed firms today need to have a global plan with a global marketing workforce. With IPOs and M&As in emerging markets having higher multiples, it is extremely profitable to add a global component to your business as it could push up the value of your company. More than half the world's population live in countries whose GDPs are growing at a rate greater than 7% . There are 60 million babies, say, in India that are NOT on diapers. Does anyone smell an opportunity here? Another example given was only 25% of population in Eastern Europe and Russia have a washing machine - seems like a huge potential here as well. By 2020, Africa will have more mobile phones than North America - mobile applications in Swahili, anyone? Another interesting factor - more than 2/3rd of world population is non-bankable. Maybe micro loan and micro insurance companies are the next biggest things in financial services.
The point I want to communicate is that purely North American based companies - start-up or otherwise - will command conservative valuation multiples. Valuation multiples are largely based on market share, operating margins and sustainable free cash flow. Today, we have a sizable IPO/M&A market in emerging markets to use for comparison purposes. Selling to conservative consumers in these economies also forces a firm to operate in a lean and efficient environment - key ingredients that command higher valuation multiples.
As competition in developed economies becomes more costly, small businesses, by their very nature, face operating costs that may become unsustainable. Developing economies enable an organization to learn how to become lean and efficient in the delivery of services to extremely competitive customers. Technology, by definition, helps deliver such services and therefore technology companies have a greater obligation to reach out globally. That key learning aspect is critical for the growth of a small business, especially venture-financed technology companies, in the US. While health care reforms and labor reforms will aid a little bit in managing small business budgets, the key is to understand that flat to negative growth is here to stay in saturated and demographically disadvantaged economies such as the US and western Europe.
Reblog this post [with Zemanta]

1 comment:

Anonymous said...

I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.