How do early-stage VCs value startups? DCF is not the right answer.
Every so often, founders ask us a question –
How do VCs value us at such an early stage, especially in Silicon Valley?
DCF at an early stage often is negative.
So do you ignore DCF then? Definitely not.
Valuation is a topic that is especially a topic of interest since we have done so many at @Prequate Advisory (300+).
And this being the most predictable question, we dedicate a whole working session to educate them on just this.
~ 50% of the time, research shows that it is multiple driven.
~ 25% of the time, it is based on their target IRR.
This means that there is some expectation (and hence some judgment on potential exit scenarios) created of when they would look at an exit as well.
NPV/ DCF is not unnecessary though.
Investors need this
to evaluate the sustainability of your business model and
identify cash draw scenarios.
Plus, NPV is used ~10% of the time.
So you don’t want to be caught unprepared right?
* Multiple Driven means that they look at revenue multiples (ARR/ MRR/ EBIT….)
** IRRs are the return they expect ranging from 25%-35%.
Would it shock you to know that 1 in 6 deals don’t use any valuation parameter at all?
It is true.