Seed Investment Proposal: A Great Example

Someone sent me an old MySQL AB Seed Investment proposal. I thought it was a great example of an investment proposal and I'm sharing it for others to see. I've removed any truly confidential information (share holdings, revenue, etc.)

MySQL Seed Investment Proposal

<insert preamble about confidentiallity & contact information here>

When You Value Your Time

MySQL is the dominant database engine in the Linux world with over 2 million installations. MySQL is extremely fast, reliable, and easy to deploy. MySQL is a free Open Source product.

The earnings model of MySQL AB is based on selling automatic tailored email updates, support, services, embedded licences and trademarked rights over the web, through partnerships, and via direct sales. Although a software company that offers services, MySQL AB is in the long run primarily a holder of the rights to the MySQL source code and trade mark.

There is traction in the roll-out of MySQL: Every major Linux distribution in the world includes MySQL. MacOS X includes MySQL. The product is being downloaded in the tens of thousands every day. It also is one of the key components in the so called LAMP configuration that is highly popular for builders of websites. Numerous books have been written, and many more are being written about MySQL.

MySQL is uniquely positioned to continue to be the dominant database player in Open Source environments and to build a lucrative derivative business around the MySQL product.

The Open Source Market

How much money can you make from free software? From annual revenue of $2 billion in 2000, WR Hambrecht + Co estimate in May 2000 the market for Linux products and services to grow to $11 billion by 2003. That is an annual compounded growth rate of 84%. WR Hambrecht + Co summarises "While the revenue opportunity presented by companies focused on Linux products and services seems large, we believe that these estimates are only the beginning."

The strength of Open Source software is based on the fact that the software gets to be "battle tested" by millions of developers and IT professionals. This means that Open Source software lends itself very well to mission-critical high volume applications. And with Linux growing faster than any other major operating system, the community of open source supporters is growing rapidly- And it must be noted that Linux is just one operating system for Open Source products. A significant part of the market of MySQL is and will be in other environments than Linux. What we are witnessing is the start of a disruptive change in the software industry that threatens to change the way business is being made. In this shift of earnings logics, MySQL is uniquely positioned to be the leading product. It is already the dominant database engine in the Linux and Open Source worlds. In addition, the ownership of the MySQL product is 100% with MySQL AB, a fact that opens revolutionary ways to do business and sell commercial licences in the market for embedded software.

Mission of MySQL AB

Our mission is to make superior data management products available and affordable for all and to contribute to building the high-volume mission-critical systems and products of tomorrow.

Total Accessible Market

As a quick calculation, for each % of the present MySQL community that orders the low-end EUR 170 support package, MySQL AB receives another EUR 24m in revenues. Add to this a rapid growth of the MySQL community, the more costly service packages, and the separate market for embedded commercial licences, and you have a sizable market opportunity.

First the MySQL Community Market

The total market for MySQL is largely determined by:

• the size of the Linux community (15-18 million now, growing rapidly)
• the number of Linux users who use a database (40% currently)
• the market share of MySQL (40% currently)

MySQL believes and has evidence for the fact that a number of these 2-4 million MySQL users are willing to pay an annual fee in return for support guarantees and automatic tailored update information. The present low-end support agreement costs EUR 170 per annum. As per now, this product has not been marketed and therefore it is subscribed to by a limited number of MySQL users only. In addition, a number of services and training can be sold to this community, and partnership fees can be levied from partners wishing to be official MySQL partners.

In direct sales, MySQL plans to focus on two key vertical segments (also see Sample References later in this document):

• large web sites
• high-volume logging systems

N.B. MySQL runs on multiple platforms, and Linux is just one of them.

Second the Embedded Market

There is another market looming around the corner- the embedded market. Producers of new products increasingly need a database to embed in their product, be it software or software plus hardware. These producers are likely to be willing to pay a fee to receive a differently licensed version of MySQL that does not carry the GNU General Public Licence (GPL) conditions.

Here is why: As an Open Source product, MySQL comes under the GPL licence scheme. GPL dictates that all software linked to the GPL software also be GPL. So a producer of embedded software would have to make his/her own software public and available to all. To avoid this, he could request the producer of the GPL software to provide an identical copy of the software that comes under a regular commercial licence (although still being open source). This is something MySQL (as one of very few players) can do and put a price tag on, as it owns 100% of the intellectual property rights of the MySQL product. So although the product is Open Source and GPL at large, it can appear under a different licence scheme in certain conditions. This is in no violation of the GPL rules or intentions.

Segments in the embedded market include: packaged software, mobile offline-enabled applications, telecom equipment, testing equipment, consumer electronics, automotive applications, monitoring applications and equipment, and many more.

LAMP as a Trend in the Market

The typical set-up for a Linux-based web server anywhere in the world is LAMP:

• Linux operating system ("L")
• Apache web server ("A")
• MySQL database ("M")
• Perl, PHP, or Python scripting language ("P")

LAMP is the default choice for anyone building a web application on Linux, and MySQL is a required component in LAMP. LAMP is the "whole product" (as defined by Geoffrey Moore) that programmers need for easily and quickly creating mission-critical web applications, and it successfully competes against highly priced commercial alternatives from Microsoft and other companies. LAMP is widespread and gaining more ground, and opting to be a killer app in web applications. O'Reilly (the publisher) recently opened a website called onLAMP.com to serve the vast LAMP community and potential LAMP users.

Sample References

Large web sites

• Mobile.de serves 60 million transactions per month
• NASA Acquisition Internet Service
• Yahoo! Finance

High-end logging systems

• Telia logs 60 million phone calls per day
• Texas Instruments, 2 billion records

Other

• Siemens
• Silicon Graphics
• Andover.net

Linux Journal Readers' Choice 3 years in a row

Positioning and Unique Selling Points

MySQL already has the position of clear market leader in Linux and ()pen Source based environments. The value proposition "When You Value Your Time" points at the speed of MySQL but also at the speed and ease of deployment and maintenance of the product, and the speed of updates of the MySQL product.

The uniqueness of the MySQL architecture has been cultivated for many years with focus on speed of the system and compactness of the program code. This has resulted in a product that is extremely compact, very fast, and remarkably bug-free. About 95% of all code has been programmed or personally inspected by Michael "Mont)'" Widenius, co-founder and CTO of MySQL AB. Many competitors have added features that MySQL doesn't support, but none of them has been able to replicate the streamlined and powerful design of MySQL.

MySQL is primarily distinguished by three unique selling points:

• Speed - MySQL ranks as one of the fastest databases
• Design - MySQL is designed for easy deployment and low maintenance
• Price - MySQL is available and affordable for all

Competition

Database engines that compete with MySQL can be divided into three categories:

• Legacy database management systems (DBMSs), such as Oracle, Microsoft SQL Server, Sybase, Informix and IBM DB/2.
• Linux or Open Source databases, such as PostgreSQL and Interbase.
• Embedded databases, such as Oracle Lite, Sybase variations, Progress, Centura, Pervasive, Solid, Timesten, Informix Cloudscape and many other.

Legacy DBMS

In the legacy DBMS market, Oracle is the dominant gorilla, and Microsoft, IBM, Sybase and Informix are chimpanzees. MySQL is not actively pursuing this market, but a certain worldwide slippage from legacy into Linux is happening all the time, and the legacy DBMSs are feeling the threat to their margins.

On a broader scale, Microsoft is the main opponent of the Open Source movement, and its SQL Server must in light of this be seen as a competitor, although if plays no role in Open Source.

Linux and Open Source DBMS

In the Linux and Open Source worlds, MySQL is the gorilla, and Oracle and PostgreSQL the chimpanzees. This is the key market for MySQL. It will be pursued with full force. It should be noted that not all Linux databases are Open Source and that MySQL as an Open Source product is used on many platforms besides Linux.

Despite Oracle's undisputable leadership in the legacy DBMS market, the company has been unable or uninterested to really penetrate the Linux market. Excessive total cost of ownership; complicated installation, maintenance and deployment; complex licence agreements; the fact that the code is closed are all factors that inhibit Oracle in the Linux world. This total difference in positioning actually means that Oracle might be a potential partner of MySQL rather than a competitor.

PostgreSQL is an Open Source database with a fairly rich set of features, calling itself "The world's most advanced Open Source Database". It lacks in speed and reliability and has been unable to gain acceptance the way MySQL has, although the marketing budget of MySQL has been near zero. There are some hard-coded limits like an 8k row size limit (which probably dates back to its earliest days). Also, by default, Postgres is compiled to only support 32 connections, which is not enough for a high-traffic web site. There have also been problems with Postgres where you can wind up with "half-baked" indexes, tables, etc. that you cannot drop or get rid of. One other limitation may bug a lot of PHP users - Postgres has no equivalent to MySQL's mysql_insertid() function call. That is, if you insert a row into a MySQL database, MySQL will hand you back the primary key ID for that row. There is an extremely round-about way of doing this in Postgres, but it's a headache and is probably slow if used a lot.

Some of the technical comments above are quoted from an article by Tim Perdue of PHPBuilder.com, who concludes his analysis by the following:

"Finally, for the hardest-core developers, Postgres could be pretty slick. Foreign keys, views, subselects, and transactions can all be pretty cool - if you need them and you will make any use of them. If you don't need them or won't use them, then you're probably better off with MySQL and its superior performance."

-Tim

MySQL plans to maintain the lead on the competitors by continuing to focus on compact, clever, error-free code that results in very fast database operation. The fact that MySQL AB controls all MySQL development ensures coherence and speed of development. The development work has been headed by Michael "Mont)'" Widenius for the last decade.

Embedded DBMS

We believe there is a certain segment within the embedded DBMS market where MySQL can be the leader because of its proven track record in high-volume mission-critical web, logging and other systems and thanks to the vast masses of MySQL programmers worldwide. Most competitors in this segment have chosen to or been forced to differentiate to a high degree. That is why the market is scattered and no market leader - gorilla - has emerged so far, and may never emerge. Competitors include Bowerbird, Centura / db.star, Empress, IBM / DB2 Everyplace, Informix / Cloudscape, InterSystems, NitroEDB (formerly Sage), Oracle Lite, Pervasive, POET / Fast Objects, Pointbase, Polyhedra, Progress, Sleepycat / Berkeley DB, Solid / Solid FlowEngine, Sybase / Anywhere, Timesten.

Customer Acquisition and Retention

The broad range of customers for support and services are acquired through the highly popular mystjl.com website. In addition, MySQL is included in every major Linux distribution in the world.

Top-tier customers will be approached through direct contact from MySQL AB and its few local offices (to be set up). Partner candidates abound, and these will be enrolled on different levels of importance (through a gold, silver, bronze system). Partners pay a fee for certification and for the right to sell officially branded MySQL products and services such as support, training and consulting services. Partners also get visibility on the mysql.com website.

Customer retention is based on the strong value of the MySQL brand the high level of quality it is associated with. Customers will know that only MySQL AB can offer in-depth services in relation to the MySQL product. The attitude and values of the MySQL people also mean that customers are given superior services, mainly through fast e-mail responses.

Revenue Model

The MySQL product is Open Source and free in its entirety, and will so remain.

Employing dual licensing, MySQL is able to sell commercial licences for embedded and other use. For a description of the dual licence scheme, see section "Second the Embedded Market" earlier in this document.

There are four types of revenue streams:

• LICENCES: Fees for embedded and other commercial licences of the MySQL product (sold over the web, directly or indirectly)
• SERVICES: Tailored update notifications and services sold to users of the MySQL product, and royalties for such services sold by partners
• RIGHTS: Fees and licences from partners and resellers for using the MySQL trademark and for MySQL certification
• SPONSORS: Sponsorship fees for visibility on the mysql.com website and other media that reach the MySQL community

MySQL AB plans to follow existing pricing schemes until 31 August 2001 and then switch to a new and more comprehensive price list. Unit prices are unlikely to change much, but new price levels for entry-level and high-end customers will be introduced.

There are three main sales channels:

• Web-based sales on mysql.com and related sites (high volume, low unit prices)
• Sales via partners (for faster expansion and for more complete offering)
• Direct sales to top tier of customers (low volume, high unit prices)

Licences

Commercial and embedded licences apply when the user does not want to use the free GPL licence. This is the case for vendors of software packages and for manufacturers of equipment that includes software and database capabilities (such as set-top boxes, telecom equipment, consumer goods, medical equipment, mobile devices, logging and monitoring equipment, etc.)

Current prices range from USD 200 for a single copy to USD 20 a copy when volumes exceed 2,500 copies. The pricing scheme will be extended to cover volumes up to millions of copies, although in such instances the price is typically agreed on a case-by-case basis. Specifically, the goal is to capture the high-volume end of the market with big attractive deals for vast shipment volumes at highly competitive unit prices (down to single-digit prices per copy.

Services

Services include the following products:

• Support Services
• MySQL Training
• Professional Services
• Custom Programming

Support Services are currently priced as follows:

• Basic e-mail support EUR 170 pa.
• Extended e-mail support EUR 1,000 pa.
• Login support EUR 2,000 p.a.
• Extended login support EUR 5,000 p.a.

As a comparison, PostgreSQL has a bronze level at USD 995 and a silver level at USD 1,995 per annum. A new entry-level support form that includes a monthly tailored automatic update newsletter at some USD 80 p.a. will be introduced. Several high-end support levels will be introduced as well with prices up to USD 50,000 p.a. or higher for 24 by 7 support. Partners wishing to provide official and certified MySQL support will go through a certification process and then pay a royalty of 10-25% on the revenue depending on volume.

MySQL Training will be sold at market prices. The company aims to outsource training to partners in return for a 5-10% royalty on the revenue depending on volume

Professional Services are sold against a daily fee ranging from USD 1,000 to USD 2,500 per day. Partners wishing to provide MySQL Certified Professional Services will go through a certification process and then pay a royalty of 3-10% on the revenue depending on volume

Custom Programming projects are agreed case by case and normally include a yearly maintenance fee to ensure that the piece of software is kept up to date. Custom code undergoes reviews by senior programmers of MySQL. and hence the pricing can be upscale.

Rights

MySQL plans to market the following types of rights to its worldwide partners:

• Certification of partner companies as Certified MySQL Support Partner, Certified MySQL. Training Partner, Certified MySQL Professional Service Partner
• Certification of partner employees as Certified MySQL Engineer (various levels). Certified MySQL. Trainer, Certified MySQL. Consultant
• Certification of partner products as Runs With MySQL, Powered by MySQL, etc.
• Partner programmes in levels ("Bronze", "Sliver", "Gold") with fixed annual partnership fees

N.B. Although rights and certifications are offerings with a price tag, there will still be numerous distribution channels where MySQL is included free of charge for the partner. The principle is that the base product is free to use for anyone, but that the use of the official logotype and trade mark must be paid for.

Sponsorship

Sponsorship fees and banner ads form a minor but not insignificant part of MySQL's revenue streams. This business opportunity will be exercised with utmost care, as it is critical that the MySQL community is not overexploited. Consequently, only advertisers with a real relevance to the MySQL community and who subscribe to the Open Source philosophy will be allowed to place ads on the myscjl.com website and other media.

The Web Channel

The website mysql.com and other related electronic media such as email and mobile technologies are used to serve all high-volume customer and partner needs.

The web is used to serve all free use of MySQL. and MySQL services. In addition, deals of whatever type that are less than USD 10,000 each will be channelled to the website.

The Partner Channel

MySQL aims to build up a huge partner network for two purposes:

• Firstly, to fuel the rapid worldwide proliferation of MySQL
• Secondly, to generate revenues through fees and royalties from the partners

All partnerships are to be non-exclusive. Partners may choose their level of involvement in MySQL. A small software company in Ukraine shall have the possibility to become a MySQL partner at a cost suitable to its economy, and a large software vendor in the US shall get all the top service it is prepared to pay for. Partners pay annual partnership fees, certification fees, and royalties on official MySQL services that they provide. They also get commercial licences for resale at a discounted price

The Direct Channel

MySQL serves top-tier customers in selected market segments directly. These customers pay for getting the best possible attention from MySQL AB in building or keeping up their MySQL-based systems.

In direct sales, MySQL focuses on the following vertical segments

• large web sites
• high-volume logging systems
• embedded systems with high production volumes

Financial Summary

A key driver of the revenue potential is the proliferation of Linux as a platform for mission-critical business applications. For each such addition to the user base, there will be more MySQL installations. And to a single-digit percentage of the MySQL installed base, it will be possible to sell annual services such as tailored update alerts, and various levels of support agreements at prices starting at EUR 80 per annum.

A second key driver is the size of the market for embedded databases and the percentage of that market that is accessible by MySQL. Attractive deals are for 300,000 to millions of copies of MySQL priced at EUR (confidential) each.

The third major driver of MySQL's revenues is the partner network of MySQL. and how well MySQL. can leverage from it. The company believes it can charge a 2-10% royalty on MySQL-related service revenues of partners with official certification from MySQL AB. The aggregated revenue potential of all partners can be of the order of magnitude of the turnover of MySQL AB.

With the above assumptions and with cautious assumptions on Linux growth and MySQL volumes, the turnover of the company in 2005 can be EUR 100 million. A best case scenario would yield a much higher turnover. Please note, however, that the projections herein are not agreed targets but rather first educated estimates of the potential.

Risk Analysis

It should be noted that the business of MySQL AB is connected with considerable risk and dependence on factors beyond the control of the company. The management has identified the following significant risks.

The growth of MySQL's business is directly dependant on the growth of Linux as a platform for mission-critical software applications. If the growth of Linux slows down, it may have an adverse effect on MySQL.

Open Source Proliferation

The growth of MySQL's business is directly dependant on the growth of Open Source as a paradigm for building for mission-critical software applications. If the growth of Open Source slows down, it may have an adverse effect on MySQL.

Dependence on Chief Programmer

The code of the core of the MySQL product was created by Michael Widenius almost single-handedly. If, for any reason, he would be unable to continue to oversee development, the product would be likely to suffer technically, and the MySQL community-' might react in unwanted ways.

Global Economics

If a global economic recession would take place, it is unsure how it would affect MySQL. It may have a positive effect, as MySQL is a product of very low total cost of ownership, but it may alternatively have an adverse effect.

Competitive Actions

Oracle Corporation, as the worldwide leader in database management systems, may under certain circumstances see MySQL or the Open Source world as a critical threat to its business and take enormous action to remove-competition. The same applies to Microsoft Corporation in relation to Open Source and Linux. If one of these companies, or both, would take serious action against Linux, the Open Source world, or MySQL, this is likely to have an adverse effect on the business of MySQL. Also, actions by other Open Source database vendors such as PostgreSQL and Borland Interbase may have adverse effects on MySQL.

Other Risks

In addition to the risks above, the success of MySQL may be adversely affected by other competitor actions, by management failures, by government regulations, or by intellectual property or other lawsuits, or by other major changes in the business environment. Also, any delays or other problems in raising capital as planned may have an adverse effect on the company. The management has taken all reasonable action to avoid these risks, but cannot guarantee that none of them will materialise.

Management Structure

Board of Directors

John Wattin, age 53, Chairman

John Wattin has been actively involved in the IT industry for 30 years. He is founder of or has successfully reconstructed listed or previously listed companies Enator AB, Sigma AB, Mandator AB, Astral AB, Scandiaconsult AB, and Indevo AB, and acted as President or Chairman in them. Today, John works as independent investor. He is Chairman or board member of the following companies: Akademikliniken AB, Berit AB, Cherry AB, Establish AB, Lemon Planet AB, Netentertainment AB, Novestra AB, Qbranch AB, Proventus AB, Satsafe AB, Scandecor AB, and Silentium AB. He is author of an award-winning book on running and developing service companies.

Michael "Monty" Widenius, age 39, Co-founder and CTO

The main author of MySQL, Monty has written about 95 % of the server code in MySQL, and examined and optimised the rest. Monty's database software programming dates back to 1978, and his working with TCX DataKonsult AB to 1981. His programming skills cover Basic, Assembler, C, LISP, Perl, SQL, C++, and PHP, in chronological order. Since 1995, Monty has been the primary force behind MySQL, devoting his time to product development, answering emails, attending conferences and educating MySQL developers.

David Axmark, age 38, Co-founder and Chief Open Sourcerer

David is one of the founders of MySQL and worked with the product well before it had a name. lie has worked as a consultant and software developer for nearly 20 years. Interested in Free Software since the early 80s, David was one of those listening to the GPL licence inventor Richard Stallman speak in Stockholm in 1986. David also had the original idea that it was possible to make money by distributing OpenSource software.

Management Team

Marten Mickos, age 38, CEO

Marten joined MySQL AB in February 2001. Me previously was CEO and co-founder of MatchON Sports Limited, CEO of Intellitel Communications Limited and Director, Channel Marketing of Solid Information Technology, and has held other sales and marketing positions in Scandinavian high-tech start-ups.

Erik Granstrom, age 44, VP Marketing and Partnering

Erik joined MySQL AB in July 2000, initially to work with the GPL release publicity. A veterinarian by education, Erik has spent the last ten years working as CIO in two universities and as CEO of a Swedish advertising agency. He was the project leader of a marketing strategy project at the National Institute of Veterinary Medicine, where he turned down an offered position as Chief Marketing and Information Officer to work with MySQL.

David Axmark, Chief Open Sourcerer

Michael Widenius, CTO

CFO, recruitment process going on

Advisory Board

An advisory board is under formation. The advisory board will consist of angel investors, venture capitalists, industry veterans and other relevant persons.

Company Ownership

List out who owns how many shares.

Stage of Development and Background

MySQL is a mature and stable product that is suitable for high-volume mission-critical applications. The first version was released in 1996., and the first database programming by the core developers happened as early as in the 80's.

The group initially started in 1996, and a new entity was formed in 2001 with some 20 employees and contractors in a worldwide virtual organisation. Finance & Administration, Sales & Marketing, Partnering & Alliances are being built up at the moment. MySQL AB owns the entire IPR:s of the MySQL product and the mysql.com domain name.

Revenues in 2000 were some EUR (info kept confidential)m. The company is profitable and without debt. There are no external investors as of 1 January 2001.

MySQL Roadmap and Exit Plan

With first round of financing

• Trim earnings logic and expansion plan
• Continue with full-force development of MySQL and growth of the MySQL open source community
• Recruit CFO
• Get management team procedures and board of director procedures in place
• Establish presence in USA and optionally in Continental Europe
• Create and start to execute partnership model
• Ramp up activities in two vertical segments (high-volume websites and logging systems)
• Finalise business plan and raise significant 2nd round
• Plan for play with or without the dinosaurs (Oracle, Microsoft)

Second round of financing of EUR (confidential) in 4Q/2001 A significant portion of this investment should come from a US-based investor.

With second round funds, expand the business to its full potential Head for IPO) in USA or Europe within 3 years.

Terms & Conditions of Seed investment Round This is a seed round of EUR (confidential)m at a pre-money valuation of EUR (confidential)m to be used to solidify the business and build the management team.

Investors are expected to

• significantly contribute to the final formulation of the business plan
• contribute to finding key management and partners with global impact
• clearly ease the second fund raising round

Investors will have

• a minor ownership that entitles to participation in the second round
• participation in a hot project that is likely to be insensitive to (or even positively dependant on) downturns in the market
• fun

MySQL intends to engage 3-5 investors and 3-5 angels.