DCF (Discounted Cash Flow) valuation estimates a company's value based on projected future cash flows discounted to present value. It's the most theoretically rigorous valuation method. For startups, it's supplementary to comparables-based methods due to high uncertainty.
DCF Enterprise Value
EV = Σ [FCF_t / (1+WACC)^t] + Terminal Value / (1+WACC)^n
FCF = Free Cash Flow, WACC = Weighted Average Cost of Capital, TV = value beyond projection period.
Terminal Value
TV = FCF_n × (1+g) / (WACC - g)
g = long-term growth rate (typically 2-3%). Gordon Growth Model.
Key Takeaways
- DCF = PV of projected cash flows + terminal value.
- Terminal value often represents 60-80% of total DCF value.
- Use 15-25% discount rate for startups.
- DCF is supplementary for startups — too sensitive to assumptions.