Valuation estimates the economic or market worth of an asset, company, or ownership interest. Treat estimates as judgment calls rather than guaranteed prices: a third party may assign a start-up a $100 million valuation while buyers reach different conclusions or decline to buy. Public-company market capitalization multiplies share price by shares outstanding, while intrinsic value can differ from trading price. section 2.4.4 section 2.0
Choose a valuation approach according to the company’s maturity and available evidence:
- Use comparable company analysis to compare similar start-ups, or precedent transactions to examine earlier acquisitions. section 12.3.1
- Use the venture-capital method to estimate an exit value from expected returns, while recognizing that founder projections require critical review. section 12.3.1
- Use discounted cash flow (DCF) to project future cash flows and discount them to present value; early-stage discount rates may reach 20%–50%. section 12.3.1
- Use P/E and related ratios more readily for established companies with stable profits; many start-ups have negative cash flow and lack sufficient accounting history. section 2.4.4 section 12.3.1
A small DCF model
A Python model projects five years of revenue and declining expenses, calculates annual cash flows, estimates a terminal value using a 5% terminal growth rate, and discounts the results at 40%. The output is structured, but uncertain growth, burn rates, variable expenses, and an unproven business model can dominate the estimate. section 12.3.1
Listing 12.1 DCF using Python
import numpy as np
years = 5 #1
initial_revenue = 500_000 #1
growth_rate = 0.3 #1
initial_expense = 700_000 #1
expense_reduction = 0.1 #1
discount_rate = 0.4 #1
cash_flows = [] #2
for t in range(1, years + 1):
revenue = initial_revenue * (1 + growth_rate) ** t #2
expense = initial_expense *
(1 - expense_reduction) ** t #2
cash_flow = revenue - expense #2
cash_flows.append(cash_flow) #2
terminal_growth_rate = 0.05 #3
terminal_value = cash_flows[-1] *
(1 + terminal_growth_rate) /
(discount_rate –
terminal_growth_rate) #3
discounted_cash_flows = [
cf / (1 + discount_rate) ** (t+1)
for t, cf in enumerate(cash_flows)] #4
discounted_terminal_value = terminal_value / (
1 + discount_rate
) ** years #4
startup_valuation = sum(
discounted_cash_flows
) + discounted_terminal_value #4
print(f"Estimated Startup Valuation: ${startup_valuation:,.2f}")
Inspect the executable DCF listing to see assumptions, cash-flow construction, terminal value, and discounting implemented step by step. section 12.3.1
