DCF valuation for startups: when discounted cash flow makes sense
Free cash flow, WACC by CAPM, terminal value and the two warnings every founder should know.
Discounted cash flow (DCF) values a company by the cash it will generate, brought back to today. At pre-seed and seed the cash flows are too uncertain — that's where the VC Method belongs. But for startups with predictable revenue and margins heading positive, DCF becomes a reference in late rounds, M&A and IPOs.
The pieces
- Free cash flow (FCF) = EBIT × (1 − tax) + depreciation − capex − change in working capital.
- Discount rate (WACC): the weighted average of the cost of equity and the after-tax cost of debt.
- Cost of equity (CAPM) = risk-free rate + beta × equity risk premium.
- Terminal value = final-year FCF × (1 + g) ÷ (WACC − g), where g is perpetual growth.
Country risk
For a company operating in an emerging market, add a country risk premium when the risk-free rate is the US Treasury. If you use the local government bond yield instead, country risk is already priced in — don't add it twice.
Two warnings
- If more than 75% of the value comes from the terminal value, your valuation rests almost entirely on the distant future.
- WACC must exceed perpetual growth, or the formula breaks.
The DCF calculator forecasts 5 years, computes WACC, enterprise and equity value, and shows a WACC × growth sensitivity table.