Section outline

  • In this section, we discussĀ how to adjust the standard discounted cash flow (DCF) approach to get a rough assessment of the potential value of a startup firm.

    1. We start by revisiting the main elements of the DCF approach.
    2. Second, we discuss ways how to compile the financial plan to incorporate the vast uncertainty many startups face.
    3. Third, we look at how to estimate risk-adjusted discount rates for innovative firms.
    4. Fourth, we show how to adjust the DCF approach to handle the many additional risks that investments in startup companies bring about. In particular, we discuss the use of hurdle rates as well as the modelling of survival probabilities. We also briefly show how to handle cash flows with different risks in any given year.
    5. Fifth, we turn to continuing value and show how to roughly assess the long-term value of young firms. We present three popular approaches to estimate continuing value: Liquidation values, exit multiples, and a growing-perpetuity model.
    • This section's reading assignment and review questions are listed below: