Venture Capital Valuation Question
Hey everyone,
I have a question related to DCFs in Venture Capital and was hoping for some guidance:
- When doing a DCF for a new VC round, after discounting the cash flows and summing them to the PV of Terminal Value you would get to your Enterprise Value. Then you deduct the pro forma Net Debt (accounting for the new cash from the investment) to get to the Post-Money value of the business.
- This valuation clearly depends on the VC round being successful, because the Company needs the cash to generate future revenues - so the Company would be worth less without the new capital from the current VC round (and likely go bankrupt).
- My question is, how do you account for future VC rounds in the current valuation? If future rounds are necessary to generate revenues then, by the previous logic, the Company today would be worth less without that incremental capital. But if you have revenue / cash flow projections, then you are assuming you will be able to raise that new capital. If your model assumes 2 rounds after the current round, wouldn't your DCF be giving you a "post-post-post" money valuation?
Any help is highly appreciated.
Imma be real... as someone who just closed a big pre-seed, valuation with VCs is a game of BS half the time.
I shit u not, i got a 5mm valuation, told other investors it was 10mm (they bought it and bought in), and suddenly it was universally 10mm.
No one did any DD or said any shit. Kinda crazy tbh
I'm telling u VC is a bunch of idiots who keep throwing money at shit and it keeps sticking. idk enough but always feel like that is ripe for correction. also just got some non dilutive funding for my venture mind if I pm?
^^^
Also yeah feel free to pm
.
Sorry couldn’t get past “when doing a DCF in venture”
Lmfao
LOL
Can’t use DCF. Use EV/Big Chungis multiple. (25x)
This methodology is complete nonsense. A vanilla DCF has almost no utility for a venture round. Discount rate is a finger in the air and you have no meaningful forward visibility on cash flows.
Valuation in VC is a bit of a dark art - but it’s focussed on low probability, high payout scenarios which a vanilla DCF is terrible at capturing (power law distribution of returns on venture assets).
If someone is forcing you to use this silly method, I would:
1) calculate the current pre-money valuation using a DCF. Tbh - use comparable multiples to get a valuation you think is reasonable and then back into that for the DCF.
2) Perform standalone exit analysis account for dilution/follow on across additional rounds. So assume investment at the pre-money from the DCF to get your FD % holding, then come to a view on future capital requirements and model that out until exit. I.e. invest 10m at 90m pre, then assume a follow on 50m round at 200m pre where you do your pro rata. Company then exits at 700m. You can then calculate anticipated MOIC and IRR. These projected returns give you an insight into the reasonableness of your entry valuation.
Hey, I'm not sure if you're still active here, but if you (or anyone else) sees this and is willing to help, I'd be curious what your preferred framework for modeling these "low probability, high payout, power law distribution" type situations is.
Coming from public equities, my approach would be closer to your #2. Sort of an inverse DCF, where I assume pre-money valuation is fixed, and I have a IRR hurdle I want to earn in a bull / base / bear case, then figure out what assumptions on the cash flows (i.e. TAM, share, margins) I need to pencil out for the deal to hurdle in each scenario and how reasonable those are.
But the distribution of returns in public equities is obviously a good bit different from venture, so perhaps there is an entirely different philosophical framework you would use in an ideal world?
Very difficult. I have seen a paper that tries to price them as a call option (unlimited upside, etc) but it's a dark art.
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