Financial models in Investment banks focused on small software firms.
Dear Bankers:
Which models do Tech bankers build if they are focused on small-cap software sector? E.g. software firms in the below $10MM revenue stage.
1) sell side small-cap software sector deals ? 2) buy side small-cap software sector deals ?
My hunch is that they will build a lot of trading comps and transaction comps. I am curious to know - how frequently they use DCF ?
Well, first off, it depends if the company is cash flowing. If FCF 0, as it often is for smaller/early stage companies in tech, then you can't do a DCF. Additionally, it will depend on growth trajectory of the company. If the company is growing rapidly or has difficult to predict cash flows, then a DCF doesn't make sense. More often than not, most of the companies that my firm works with fall into either of these buckets. In some circumstances, you may occasionally build a DCF, but on the lower end of the middle market in tech, it is not used all that often.
Not really "models." Small-cap software = high % FCF0.
So usage: Transaction comps -> company comps -> dcf
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