A DCF (Discounted Cash Flow) model values a business or investment by summing the
present value of all expected future cash flows. It is the foundational valuation
methodology in corporate finance.
The DCF formula
Enterprise Value = Σ (FCF_t / (1 + r)^t) + Terminal Value / (1 + r)^n
Where FCF_t = free cash flow in year t, r = discount rate (WACC), n = forecast years.
Terminal Value (Gordon Growth model (which assumes cash flows grow at a constant rate forever)) = FCF_n × (1 + g) / (r − g)
Where g = terminal growth rate (must be < r).
Discount rate guidance
Company type
Typical discount rate
Public large-cap
8–10%
Public mid-cap
10–14%
Private growth stage
15–25%
Early-stage startup
25–40%
Seed / pre-revenue
40–60%
The importance of terminal value
In a 10-year DCF, terminal value often accounts for 70–90% of total enterprise value.
This makes the terminal growth rate assumption the single most sensitive variable.
Small changes in g (terminal growth) produce large changes in value — always
sensitise your model.
DCF limitations
DCF is only as good as your cash flow projections. It is most reliable for:
- Stable, mature businesses with predictable cash flows
- Businesses you can project 5–10 years with reasonable confidence
It is least reliable for: pre-revenue companies, highly cyclical businesses, and
companies where intangible value dominates.
DCF Valuation for Startups: What Discount Rate to Use
How to apply DCF analysis to an early-stage startup — choosing a discount rate, handling terminal value uncertainty, and why DCF is hard for pre-revenue companies.
DCF analysis is difficult for startups but not impossible. Here is how to apply it
thoughtfully when cash flows are uncertain.
Choosing a discount rate for a startup
Standard CAPM-derived WACC doesn't work well for pre-revenue companies because:
- There is no public beta to reference
- Debt is minimal or nonexistent
- Equity risk is extreme
Practical approaches:
VC hurdle rate method: use the expected VC return (25–40% for early stage)
as your cost of equity. This reflects what investors actually require.
Stage-based discount rates (venture capital method):
- Seed: 50–80%
- Series A: 35–50%
- Series B: 25–35%
- Series C+: 18–25%
- Growth equity: 15–20%
The problem with high discount rates
At 40% discount rate, cash flows in Year 5 are worth only 18 cents on the dollar
(1/(1.4^5) = 0.186). Year 10 flows are worth 3 cents. This means early-stage DCF
models are almost entirely driven by terminal value, which is extremely sensitive
to growth assumptions.
A more honest approach for startups
Many practitioners use reverse DCF instead: start with the current market price
(or the target exit valuation), and solve for the implied growth/margin assumptions.
Then ask: are these assumptions realistic?
Use the DCF calculator for the forward version,
keeping terminal value sensitivity in mind.
DCF vs Comparable Company Analysis: Which Valuation Method to Use
When to use DCF vs. comparable company analysis (comps) for business valuation — the strengths, weaknesses, and when each method produces reliable results.
Every valuation uses at least two methods and triangulates between them. Here is
when each method is most reliable.
DCF (Intrinsic Value)
Use when: you have reliable cash flow projections, the business has a stable
model, and you want to understand fundamental value independent of market sentiment.
Strengths: forces explicit assumptions about growth and margins; shows the
present value of future economics; useful for acquisitions and LBO analysis.
Weaknesses: garbage in, garbage out — small changes in discount rate or
terminal growth produce large valuation swings; hard to use for pre-revenue
or unprofitable companies.
Comparable Company Analysis (Comps)
Use when: there are good public comparables with similar growth profiles,
you want a market-validated sanity check, or you're pitching a fundraise.
Strengths: reflects what buyers are actually paying right now; easy to communicate.
Weaknesses: multiplies can compress or expand with market conditions;
"comparable" companies may not be truly comparable.
Best practice: triangulate
Use DCF as your intrinsic anchor, comps as your market reality check.
If DCF says $50M and comps say $25M, either your assumptions are aggressive
or the market is pricing a discount to fundamentals.
Use the DCF calculator to build your intrinsic value case.