Technology touches everything that we do, and it is evermore integrated in our daily routine, making previously tedious processes such as ordering food, or commuting much simpler. However, the IT infrastructure of many global companies still functions poorly. For example, DHL’s website still appears as if it is from 2002 and Home Depot’s internal software freezes while querying the inventory database. What is going on?
The reality is that while we have more tools, and IT engineers at our disposal than ever before, it is still not enough to meet demand. Engineers ask for wages that are very high in countries like the US, but headhunters continue their relentless pursuit to hire them – as companies desperately continue growing their technology teams.
One solution to solve this problem has been to outsource IT services to India and China, however, issues arise when it comes to communication, expectation setting, and quality. Nonetheless, with the IT market growing every year, there is a huge need for engineers. Quality engineers have great opportunities – especially those living in places with a lower cost of living as they are able to charge more competitive wages. Demand for specialists from Eastern Europe is growing fast alongside the IT-services market.
Here are a few things to keep in mind when looking to thrive in this environment:
Who does the market benefit?
Educated and remote engineers from countries with advanced technical schools. Countries in Eastern and Central Europe like Russia, Ukraine, Belarus, Poland, and Bulgaria are very interesting prospects.
The IT services market will grow 3–5% in 2017 and 2018, reaching $966 billion according to data from Gartner. Analysts from Wall Street anticipate that sales of EPAM Systems, an IT-services company with roots in Belorussia, will grow more than 20% per year to $1.76 billion. A growth rate that outpaces the market means that the company is taking business from its competitors – such as lower-skilled IT companies in Asia. Other competitors are also growing rapidly by offering high quality and a fair price, and driving out of business low cost, low quality providers.
What are IT engineers doing in Central and Eastern Europe?
Creating IT boutiques with the goal of serving large Western clients. Industry-standard revenues on a single engineer for a successful IT outsourcing company is $65,000 per year, and for a highly specialized engineer can reach up to $200,000.
Russians in the Valley
Rumors and fears about Russian hackers are largely exaggerated
Our company, Enter Capital, last year facilitated a transaction between a Silicon Valley game development firm with an offshore team located in Russia and a publicly-traded European services company. Of all the potential buyers (mostly Western, public IT companies or large funds) not one raised the issue.
Global companies know about hotshot Russian engineers
Thanks to EPAM, Luxoft, and their smaller competitors from Central Europe DataArt and BulPros, major companies like Google, NASDAQ, and Boeing know about the high quality of engineers that exist in the region. Western clients’ imperfect IT infrastructures coupled with large IT budgets and ambitious development projects, increases the demand for quality engineers at a fair price.
These businesses can be sold
IT services are growing and selling well. The Riordan, Lewis & Haden investment company, founded by the former mayor of Los Angeles, is aiming for 40–50% revenue growth per year on portfolio companies with revenues in the $10 million range. Russia Partners and VTB Capital are also finding successes in this industry. Their successful investments include Luxoft Holding and EPAM, with subsequent “exits” through IPOs. American investors withdraw from the capital of small companies usually through M & A (take-overs) – the market is so hot that Accenture is planning to spend around $1 billion on acquisitions yearly, mostly in the IT sector.
Where the best IT specialists are trained
- Massachusetts Institute of Technology (MIT), USA
- Stanford, USA
- Oxford, UK
- Harvard, USA
- Cambridge, UK
- University of California, Berkeley (UCB), USA
- ETH Zurich (Swiss Higher Technical School of Zurich), Switzerland
- National University of Singapore (NUS), Singapore
- Princeton, USA
What kind of business volume interests trade buyers?
Revenues of $5–10 million, corresponding to a team of 25 professionals (if the company has managed to find its niche) and up to 150 engineers on the public profile. Companies must build trusting relationships with large clients, close long-term contracts, and continue to impress with their high quality. Thus, a business development and sales team consisting of 2–3 people minimum (often the founders) located where the customers are – in the USA or Europe – increases the value and chance of sale.
How much do they pay for a business?
For companies selling services in the USA and UK, trading multiples are in the range of 6 to 12 of operating profits. This is calculated in different ways, and, unfortunately, the founders of companies often give big, unintentional discounts to the buyer by not knowing how to correctly calculate and adjust this indicator. Another trading multiple used is one to two times yearly revenues (it can be more if a company is growing quickly). One and one-half of revenues is the average benchmark.
This means, a company with revenues of $10 million per year can be worth $10–20 million.
How long does it takes for a business to grow to this size?
It varies. Some need 10 years and others 4 to 6 years. It depends on the proactivity of the founders and whether they are energetic about attending conferences, giving presentations, and monitoring their team and quality of services.
Lifehacks
Focus on niches
This can be specific services or industries: Focusing on cloud software or helping clients only in medicine or other in-demand segments, for example.
Focus on western corporations with revenues higher than $3–5 billion per year
Fortune 500–1000 companies with potentially large budgets are the sweet spot. However, you can begin with low-value projects from $20,000 to $100,000. This is the industry norm for Western companies who are open to small-budget experiments with new players. Therefore, if you show that your quality and speed is more than what is expected, you will receive larger contracts. The goal is to grow your clients to $1 million per year or more.
Why big clients and not startups or medium-sized businesses?
Because potential buyers are interested in your existing relationships with clients, often to sell them additional services and build contracts with them in the tens of millions of dollars.
Published By: Andrew Ponomar (CEO of Enter Capital)
