Michael Blake | VC-List
Business valuation has for a long time been perceived as more art than science, which is a polite way of saying, “It’s a big, fat guess.”
Nowhere is this perception more prevalent than when the discussion turns to the valuation of startups.
If the appraisal of established companies in established industries is challenging and fraught with uncertainty, then the appraisal of startups truly seems to many like a turn at a roulette table.
Startups present unique challenges to appraise because:
- Many startups have little to no operating history;
- Whereas the appraisals of most companies begin with the inherent premise that they are worth something, many startups are worth nothing;
- The market for interests in startups is both illiquid and inefficient;
- The risk of outright failure for a startup is high;
- Startups rarely have significant tangible assets;
- The startup’s addressable market is often uncertain;
- Many competitors are invisible (Google isn’t afraid of Microsoft—They are afraid of what’s happening in a closed garage a couple of miles away).
- Startups are believed to have few or no comparables.
The standard playbook for valuing startups in the appraisal community is, for the most part, to use the discounted cash-flow (“DCF”) model.
The DCF model’s output ultimately depends on two inputs—the discount rate and the projected cash flows over a period of many years
The problem with using a DCF model to value a startup is …