We have worked with hundreds of companies that have raised over $2 billion in venture and seed financing, and have seen a ton of startup pitch decks, capitalization tables and, of course, venture dollars. But what we haven’t seen a ton of are DCFs - discounted cash flow valuations - during these investment rounds.
What is a DCF, and does a startup need one?
DCFs attempt to project a company’s cash flows, then discount them back to the present day to calculate a total cash flow (and existing assets/liabilities) into a net present value. Basically, what are all of the company’s projected cash flows worth, in today’s dollars?
Startups do not generally need a DCF during a fundraise. In fact, it is usually only unsophisticated investors who request a DCF. Why? Experienced venture capitalists realize that there are too many assumptions that go into a DCF for it to be reasonable - the future cash flows being one, but also choosing an appropriate discount rate. VCs are more concerned with the probability that any given startup can crack into a big market and generate solid revenue (and eventually, hopefully, profits). A huge variable in a DCF is the timing of the cash flows and the discount rate. Minor tweaks can dramatically change the current value.
When might a startup “get” a DCF?
It is possible that a startup could have a discounted cash flow done during a 409A valuation. 409A’s are used to value a company’s stock options, so a strike price can be set for option grants to employees. Not all 409A’s do a DCF, for very similar reasons that a VC wouldn’t use one during an investment.