*Subject:* Re: Thoughts on GPL
*From:* "Jonathan S. Shapiro" <jsshapiro@earthlink.net>

*Date:* Wed, 25 Feb 1998 10:18:36 -0500

Mike:
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
1000%.
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
like:
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.
shap