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Valuing early-stage companies can be more of an art than a science. Here I'll explain the basics behind discounted cash flow (DCF) and multiple-based valuation, and detail how they are implemented in Foresight's models.

Valuation is tricky. Valuing a company take a combination of art and science: the math isn’t hard, but applying the math correctly takes some experience to understand the real-life, practical thinking and context behind the math. It’s easy to put the calculations to create a discounted cash flow valuation (DCF) in a spreadsheet, but much harder to make sense of it and apply it to real-life situations.

That’s why I’ve always resisted putting company valuations into the model templates, but after feedback from users I reconsidered and decided to build a structure for valuation into the model. The Valuation sheet in the Standard Model will do a discounted cash flow and EBITDA multiple valuation based on the projections in the model, and for informational purposes provides a VC Method valuation to help think about valuation and funding needs. 1

Using the valuation methods

Please tred carefully into using the Valuation forecast. Valuations are highly dependent on the industry-specific assumptions and the variability of the underlying cash flows, and using these methods could help, hurt, or distract you from the meaningful components of a valuation conversation.

Often when sharing the model with investors I advise entrepreneurs to remove the Valuation sheet - it won’t impact anything other than the Cap Table - just to focus the discussion on the business, not the exits.

The Valuation assumptions are on the Get Started - Financial Model sheet, and consist of:

Discounted Cash Flow (DCF) Method 2

  • WACC (used as NPV Discount Rate - WACC = Weighted Average Cost of Capital. Good data source for industry-specific WACC ›
  • WACC (NPV Discount Rate, quarterly) - converted to a quarterly rate for NPV calculations
  • WACC (NPV Discount Rate, monthly) - converted to a monthly rate for NPV calculations

Terminal Value Calculation (for DCF)

  • Discount Rate (WACC)
  • Long-Term Growth Rate - Choose long-term growth rate applicable for your company or your industry. Good dataset here ›

EBITDA Multiple Valuation Method

  • Valuation Multiple: X multiple of Revenue - Multiple of trailing 12 months net revenues. Industry-based comparable multiples require research and analyis for your industry. Questions, contact me.
  • Valuation Multiple: X multiple of EBITDA - Multiple of trailing 12 months EBITDA (earnings before interest, taxes, depreciation, and amortization). Industry-based comparable multiples require research and analyis for your industry. Questions, contact me.

VC Method

  • Consult VC Method for details on how to use this for your specific situation.

The model uses these valuations in the Cap Table to forecast a sales price and the proceeds to investors, and you can apply a weighting to the valuations in deciding which method to use or potentially blend the methods together. This is done on the Cap Table tab.

Background on how the methods work

Here’s a good overview on valuation methods in general and how they are typically used in different situations ›

A primer on multiples-based valuations ›

A primer on discounted cash flow (DCF) valuations ›

Valuing crypto assets? Start here for an overview on valuing crypto ›

  1. By default, the valuation ties to the exit value on the Cap Table, and the model will automatically calculate the distribution of exit proceeds to all shareholders and calculate returns. Just be careful; don’t forget the art to valuation behind the math. 

  2. Good explanation of the discounted cash flow method › 

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