Subject: Re: Thoughts on GPL
From: "Jonathan S. Shapiro" <>
Date: Wed, 25 Feb 1998 10:18:36 -0500


   Proof: Cygnus was started with $6000 cash, and 7 years later, we
   received a $6.25M cash investment.  I won't tell what % of the company
   we sold for that amount, but in worst case, let's pretend it was 100%.
   That's a 1000x ROI.  If we can do that in the next 7 years, we'll have a
   $6 _billion_ dollar valuation!

Uhh, Mike? Check your arithmetic?

   6000 * (1+ROI)^7 = 6,250,000

Based on a 100% sale (your idea), this would give an ROI of 270%, not

However, one needs to count your sweat equity as part of the original
investment.  My valuation on that, given my (fuzzy) recall of the
circumstances, was about $500,000, so the right calculation is more

   506000 * (1+ROI)^7 = 6,250,000

That would give an ROI of 43%.

If the investor bought 33%, that means you had to make $18.75M in year
7.  My recollection is that you did, or if not, you weren't off by
much.  It therefore would have been a good thing (in retrospect) to
have invested in the early stage.

August Greylock is a fairly typical investor.  Their question from the
year 7 perspective was whether you could sustain the growth, and what
your P/E ratio ought to be.

Cygnus's P/E ratio, in my opinion, assesses fairly low.  First, you
are a services company with no asset value.  Under the GPL model, you
have minimal retained value in your expertise, because you give the
results away after a short period of time.  My take is that a P/E
ratio of around 2.5 is about right *in the absence of a proprietary
code base.* The market will assess higher because you are a software
company and most investors won't examine the prospectus carefully.

So let's look forward based on a 33% investment at $6,250,000.  This
means that by year 10 you need to have a valuation of $51,450,000
(revenues of $25M+).  That is probably doable, but my sense is that
you won't get much past year 13 on this model.  At that point your
valuation needs to be $141,178,800.  You can probably get that on
paper, but I don't think the company could actually be sold for that
in practice.