I am looking to build out a DCF for a start up business which has 2 years of operating history and about $70,000 of LTM Revenues. Looking for seed funding. Any insights as to what would be an appropriate cost of equity? And if so why you chose that number?
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A DCF isn't really an appropriate tool for valuing a seed stage startup. Take a look at Angel List for comparable data by market sector for seed stage pre-money valuations.
Drecreasing WACC from 50% to 25% by 5%-10% every year
If you show up to pitch a VC with a DCF model, you're not going to get funding. Trust me on this.
Don't use DCF valuation to show to a seed / VC investor. A) It's not top of mind to them B) The assumptions you put into it are pretty much guesses, given the stage of the business and C) The investors know that your assumptions are just guesses.
Successful early stage pitches I've seen have built out a projected P&L (clearly subjective, given the stage) but have focused on how the unit model works, which demonstrates that they have a clear idea on the costs and headcount needed to scale.
This.
DCF is pretty much meaningless for a start-up - every input in based on your assumptions without track records to back it up (as opposed to a stable, mature company).
I believe an operating model would be much more appropriate. I'd start off with some market sizing and do some research of similar products to see how many you could sell.
You kind of have to take off your finance hat and put on a strategy consultant hat.
VC hurdle rates are pretty high, you can probably find a study on them somewhere.
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