« GP Consolidation Part Two | Main | AsktheVC: How Do You Calculate Operating Cash Flow »

April 24, 2007


Hey Matt,

I wonder if trying to look at the appropriate discount rate for a valuation is always the correct question to ask in the first place. Why does valuation need to be determined in 21st century via discounted cash flows only? As you rightly point out, this method falls if the forcasting exercise is a high beta one. What I have always used when I write business plans is a valuation matrix that shows the valuation under lots of different methods and a high, medium, and low for each i.e.
Discounted Cash flows_______Value1___Value 2__Value 3
EBITDA Multiple_____________Value4___Value 5__Value 6
Sales Multiple______________Value7___Value 8__Value 9

Average of all methods______ValueX___ValueY___ValueZ
Median of all methods_______ValueQ__ValueR___ValueS
Low Valuation________________________Value 1
High Valuation_______________________Value 2

Etc. (and by the way I typically use a 70%, 50%, and 40% discount rate for the above Low, Medium, and High scenarios for the discounted c-f method)

In so doing we have a more robust picture of what the value might be. I guess you could say I use Meta-Valuation approach. This is helpful, since if for example one thinks the company is likely be sold quickly, it is more likely a buyer will use a multiple method based on other comparables, whereas if the company is felt to require lots of capital in later years and not be a easily flipped, discounted cash flows might be more appropriate. Most importantly, if there is a huge range of valuations, one may want to examine the underlying revenue and expense assumptions.
Valuation is always a tricky thing, especially in the early days. When we did our Series A round at LiquidTalk with our VC's, we avoided the topic entirely and just said to our investors "we are willing to dilute by X%; you can decide how much capital to put in and that will in effect set the valuation". Kind of a backwards way to do it, but avoided alot of debate about valuation and it worked as we were generally in the same ballpark about what range the business needed to get to the next level.

Hope this is helpful.



You might want to check out the area of valuation known as Real Option Theory. I think this is where the industry is headed for this type of analysis. It's the only thing I have seen that makes sense of the VC style of investing...

The comments to this entry are closed.


  • For many entrepreneurs, the venture world is needlessly opaque and confusing. Venture capital is both art and science with karma mixed in. With a synchronistic twist, this blog will try to shed light on the world "behind the curtain" as well as how key entrepreneurial lessons are mirrored in everyday life.


  • Subscribe by RSS

    Enter your email address:

    Delivered by FeedBurner