Does anyone know how to calculate the WACC (or any appropriate discount rate) for a startup service company with no debt, funded through a mix of employee capital and venture capital? I don't think this matters, but no dividends are paid over 5 year projections (it's a growing company).
WACC calculator for private companies
If attempting to find WACC for a private company with no debt, you need to solve for the capital asset pricing model. However, as a private company there will not be a beta so you will need to look at comparable public companies, take their betas and unlever them and re-lever them based on the capital structure of the company. Our users explain below:
For reference the CAPM model is: risk free rate + Beta *(market risk premium)
It's the same way you would calculate the WACC for any other company. So you have no debt, and I assume no preferred stocks, so all you need is the CAPM. You get the Beta from similar companies off of Bloomberg, unlever them, take the median, then lever back (in this case, whatever you get unlevered will be your levered beta since you have no debt)
Then you multiply the beta with market risk premium then you need to add in size premium or other thing you think is appropriate since it's a start up.
Check out a slide below for finding a private company's beta using the unlevering process. This slide comes from a deck prepared by Professor Damodaran of NYU.
Also you can learn more about the levering and unlevering of betas with the below video:
However, one user feels that calculating WACC might not be appropriate in the given situation.
Assuming this is still a small company and potentially not even profitable. I wouldn't say that it's appropriate to use a standard WACC methodology. The VC is looking for huge returns, think 40%+, as are the other investors.
Try to estimate what the value of the company will be in 5 years, then discount that value to today's estimated value (based on VC investment). The discount rate may give you a good sense of the cost of equity - and the VC's expected return on equity.
Read More About WACC on WSO
- Weighted Average Cost Of Capital (WACC) Definition
- Cost Of Capital Vs. WACC
- What Is "WACC" Or The Weighted Average Cost Of Capital?
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