American History 1988
Chapter 132 - 126 Valuation? Settled in One Stroke!

Chapter 132: Chapter 126 Valuation? Settled in One Stroke!

Menlo Park, located by the side of Coastal Highway 84, at a café called "Jack in the Box," David, his son, and Dean, the three founders, were sitting around a round table, initiating Byte Software’s first financing communication.

"Mr. Morgentaler, the latest information about Byte Software is right here." Dean pushed the documents Anna had prepared in advance toward the man across from him, "It not only includes the sales data of the Teams software but also our detailed cost expenditures."

As a startup that had already been profitable before financing, Dean, of course, wanted to showcase his data.

Especially since, thanks to the makeshift team of Byte Software, their cost expenditures were astonishingly low.

Of course, Dean wouldn’t fully disclose the money they had already distributed privately; that figure had been diluted somewhat.

Conversely, the investments in magazines like "Global Overview" had been significantly exaggerated by Dean.

In any case, the sales figures for Byte software were very attractive. Aside from one-time investments like advertising, the expected future profits would become incredibly substantial.

Although the materials prepared by Dean had undergone some adjustments in the data, David Morgentaler was still surprised by the achievements of Byte Software after reviewing the documents.

"Dean, the market expectation for Teams software is indeed more optimistic than I had thought." David wouldn’t underestimate the value of Teams just because he was a venture capitalist; that would be a very amateur move.

The current situation was that Byte Software had proven its value, and he might also face competition from other potential venture capitalists.

So David needed to get Dean’s approval, so that Morgentaler could secure as much of the investment share as possible in the upcoming financing. This approval could come from shared values or creative resonance.

Of course, to the average person, it might seem more like deliberate flattery or buttering up.

But such is the case when your startup has the potential to grow into a future unicorn. Roles are reversed, and venture capitalists come to you, waving their checks.

Facing David’s praise, Dean cooperatively brought the topic to their mutual relationship. "Gary and I knew each other back in Cleveland. Teams software received his help in the early days, so Morgentaler was the first venture capital firm we spoke with."

"Good!" David was very satisfied with Dean’s reciprocal approach in terms of personal connections, "So I think we should talk about the future development of Byte Software next."

"Certainly," that was exactly what Dean had been hoping for.

"Dean, although Byte Software has had impressive sales numbers in the past month, its operations in many areas are abysmal," David casually began his critique, pointing at a spot in the documents in front of him.

"From this disastrous financial statement, I have reason to doubt whether Byte Software’s financial personnel are professional or even if you have any financial specialists at all."

"Moreover, your marketing investments are also very rough, with advertisements in a magazine costing upwards of hundreds of thousands of US Dollars. That’s enough to hire a Hollywood celebrity for a TV commercial.

Additionally, your advertising approach is very one-dimensional. I can see magazine ads, but there seems to be no sign of radio, TV, outdoor billboards, direct mail, telemarketing, point-of-sale advertising, and so on."

"The sales approach is also quite baffling. I can’t imagine how you managed to sell nearly ten thousand copies of Teams without any distribution channels.

If that sole brick-and-mortar store called Computer Shack contributed the main sales volume, I’m surprised no one has tried to steal your business."

"The most fatal point," David flipped to the last page of the documents, "I didn’t see any information about cooperation between Byte Software and a law firm!"

"Oh~OMG," David spread his hands helplessly, "Perhaps I should be glad that Byte Software has miraculously survived to its first round of financing?"

After David’s torrential scolding, Dean and Marcus exchanged very awkward glances.

Alright, compared to mature companies, Byte Software was indeed a bit hasty.

"Uh... Mr. Morgentaler," as a representative of the founders, Dean naturally had the responsibility to handle the upcoming negotiations, "Isn’t this exactly why we are meeting here?

We hope to install Teams across offices with computers in North America and, eventually, the world. We aspire for Byte Software to become the next lucky one on Nasdaq. That’s our common goal for sitting here today, isn’t it?"

"That’s right, Dean~" David liked his directness. Founders should not be overly idealistic. Those who balance passion with profitability are the exceptional founders.

"So regarding the operations of Byte Software, I suppose, Mr. Morgentaler, you will give us some advice?" Dean wasn’t almighty.

He knew technology and how to commercialize it, but he was also learning how to be a qualified CEO.

"Okay, first, you need to learn how to manage a company, how to rent office space, how to select health insurance plans, how to discover sales prospects, and how to make widespread use of various essential services.

Of course, you can’t expect to do all this work alone; that’s impossible, and no one can achieve it.

So instead, you need a good lawyer, a good banker, a good HR company, and a good accounting firm to assist you in completing these tasks."

Do venture capitalists just provide entrepreneurs with capital? NO, that’s a very superficial understanding.

Excellent VCs can help startups grow into mature companies, with the founding team growing alongside the company.

"Before we officially start these activities, we still need to reach a consensus in certain respects." The consensus David referred to, of course, was the valuation of Byte Software.

Once everyone agrees on the value of Byte Software, funding will be in place, and then the company can begin to expand its operations.

"Before we begin, I’d like to make a statement. Byte Software was able to achieve profitability so quickly not only because of Morgan Tailer but also with the help of others.

So, the current offer may not be the only one, regarding this point..."

"I understand," David had anticipated this. It would have been surprising if Byte Software had managed to secure so many orders in Silicon Valley without external assistance.

"OK~" Dean spread his hands, "So? What is Morgan Tailer’s valuation of us?"

Faced with Dean’s direct question, David did not provide an answer immediately; instead, he took out a document just the same.

"Valuation of startups is usually a highly contentious issue. Standing on different sides, the fight can become quite heated.

Therefore, to adopt as scientific an evaluation method as possible, I propose using the terminal value valuation method introduced by Professor Bill H. Sahlman of Harvard Business School in ’87."

Dean glanced through the document, which described a valuation method that refers to companies of the same type in the market.

It even had its own calculation formula: Investment Return (ROI) = Terminal Value/Post-investment Valuation.

"Given the innovativeness of Teams software, Morgan Tailer expects a 30-fold return on investment (ROI) for the future!" David did not hide his ambition, which also underscored his optimism about Byte Software’s prospects.

"As for the terminal value reference target, Morgan Tailer believes that MicroPro Software is a suitable comparison.

MicroPro’s revenue this year is 140 million US Dollars. Calculating with the software industry’s net profit margin of 15% after tax, their profit is 21 million US Dollars.

With 21 million US Dollars multiplied by the software industry’s price-to-earnings ratio of 15 times, MicroPro’s final terminal value is 315 million US Dollars!

So applying the formula, 315 million US Dollars divided by a 30-fold investment return, we arrive at a valuation for Byte Software of 10.5 million US Dollars!

This is Morgan Tailer’s offer, Dean~" Before coming, David had already coordinated with lawyers and accountants to complete a preliminary valuation of Byte Software.

Looking at the information in hand, Dean quickly ran calculations in his mind, but he soon shook his head, rejecting David Morgentaler’s offer.

"Mr. Morgentaler, setting aside whether the formula is reasonable. The fact that you use MicroPro as a reference sets a premise we cannot agree with.

Everyone knows MicroPro is on the decline; it’s only a matter of time before they go bankrupt."

MicroPro is also an office software company, with their WordStar word processor being one of their products. This software once dominated the word processor market.

But unfortunately, they met Bill Gates, they met Microsoft, and Word in the Office suite was initially modeled after it.

And in ’88, just the year before, Word had already eroded much of WordStar’s market share. Combined with the unprecedented poor reception of WordStar 5.0, MicroPro’s management was hanging by a thread.

David Morgentaler used them to calculate the valuation of Byte Software; how could Dean possibly agree?

"As a representative of office software, I believe Lotus Software is more comparable. Lotus Software had a turnover of 540 million US Dollars last year.

According to your formula, the final valuation for Byte Software should be 40.5 million US Dollars."

"That’s insane, Dean~" David also shook his head, unsurprisingly, "Not every company will become a unicorn like Lotus."

"But we are not the declining MicroPro; most importantly, Teams has a unique concept, and we have opened up a completely new market!

Among current software companies, we have no competitors. We even have a relatively mature product and are already profitable.

You know this, Mr. Morgentaler, it will significantly reduce your investment risk."

Morgan Tailer wanted to price as low as possible, while Dean aimed to elevate the valuation as much as he could.

Well, the anticipated disagreement had arrived. It’s an inevitable part of any negotiation, otherwise, it wouldn’t be a negotiation but a consultation.

After much conversation, neither side could persuade the other, and Dean ultimately decided on a compromise.

"Mr. Morgentaler, I agree to valuate in the manner you suggest. But since we can’t agree on a reference, how about we both step back?"

"Please go on~" David was tired; he wanted to hear Dean’s compromise.

"The midpoint, 25 million US Dollars!" If neither the declining nor the unicorn could serve as reference points, a balance was needed.

"20 million US Dollars!" David bargained reflexively.

"Deal!" Dean slapped the table with a "whack," sealing the agreement.

David was stunned; why had he agreed so quickly?

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