Subject: Re: Valuation of Open Source companies
From: mikko puhakka <mikko.puhakka@luukku.com>
Date: Wed, 9 Nov 2005 10:32:00 +0200 (EET)

 Wed, 9 Nov 2005 10:32:00 +0200 (EET)
susan wu kirjoitti 09.11.2005 kello 01:23:
> 
> 
> > All input is welcome, but I am specifically interested in whether there is market
/ investor hype about Open Source currently and whether you have some verified data
sources for that.
> 
> Well when you are discussing valuation, hype is not exactly the term you would use.
 The size and scope of premiums paid in a transaction is what you would be looking at
to gauge investor optimism about the forward looking growth prospects of a firm.  I
speak a bit about such premiums relating to the Gluecode/IBM transaction on my blog:
http://feather.planetapache.org .  To gauge whether or not there is 
abnormal optimism (abnormal in the sense that the premiums being paid in these transactions
are not in line with transactions of similar characteristics in growth, revenue, scope,
etc) you could conduct an analysis of the various open source acquisitions that have
occurred: SuSE/Novell, Sourcefire/CheckPoint, Red Hat's acquisitions. Compare the 
 multiples paid in these transactions with multiples of acquisitions of proprietary
model firm.

**thank you Susan, good points, of course ideally we would have a lot of exists, where
we could get enough comparable data on how the companies are valued at exit, and then
a transparent way how VC's discount the risks into investments they are currently making,
however as 2004-now the money is just going into first and second round investments
we don't have that yet. One problem I see is that investors don't really seem to have
a transparent way of doing the valuation (evaluation yes, not valuation) of a investment
target, this being especially challenging to first time entrepreneurs. I believe those
transactions you mentioned have validated the investment potential of OS for VC's, but
when I have discussed with a number of them about how do they place the actual value
on a company the answers have been far from exact. 2004 the answer was that 'it is an
interesting area', 2005 the answer seems to be that 'we need some OS investments'

mikko
> 
> >
> > Further I am interested on views whether investors should place a higher,
> lower or no different value on companies based on Open Source as
>  compared
> to traditional software companies.
> 
> Again, just because a company employs open source in their business model has no bearing
on a valuation exercise. Valuation is simply anexercise in discounting the future expected
cash flows the firm is expected to generate.  How an open source model affects the expected
cash flows is as 
follows:
> 
> 1) greater capital efficiencies in marketing and R&D, i.e. greater 
> operating margins
> 2) subscription revenue streams are more predictable and hence less
>  risky 
> than license based revenue streams
> (hence cash flows could be discounted at a lower multiple)
> 3) subscription / revenue streams ostensibly can be securitized,
>  resulting 
> in lower cost of capital and theoretically more available cash (ie. 
> process of securitization turns an illiquid assets liquid)
> 
> Hope this helps,
> Susan
> 


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