• Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint
Share this Page URL
Help

Chapter 9. Valuation of Companies > The Discount Rate Used by Venture Capital F...

The Discount Rate Used by Venture Capital Funds

Introduction

In principle, in every valuation method based on discounting future anticipated flows of free cash flows, earnings, dividends, or residual income, the discount rate has a crucial effect on the derived value and may determine the fate of investments, since a change in the interest rate used for discounting may stamp a project as unprofitable. Obviously, the discount rate used by venture capital funds to discount the future value of cash flows also has a crucial effect on the value of the assessed company and hence on the percentage of ownership which the investors will require.

Historically, the discount rate by which venture capital funds calculate the value of companies lies in the range of 20–80% per year, depending on where the company stands in its lifecycle. This rate is materially higher than the customary discount rate for equity investments or for investments in other traded securities, even if the latter are very risky.


PREVIEW

                                                                          

Not a subscriber?

Start A Free Trial


  
  • Creative Edge
  • Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint