Explaining the Different Sources of Start-Up Capital
After explaining the different sources of start-up capital and some key terms, the consultant stated that the next step
should be to determine AFC’s value. He believed that this value would be very important in ranking different financing
proposals. Five common methods are used to value the equity position in start-up firms: Discounted Cash Flow Approach.
The discounted cash flow approach to valuation recognizes that the value of a business is a function of the timing,
riskiness, and amounts of cash flow that a business generates. The method entails a three-step process. First, historical
financial data and current trends are used to forecast a venture’s future cash flows to equity holders. In a start-up
situation, the forecasting of cash flows is complicated by a lack of historical data. Therefore, good judgment and market
research is very important.
Cash flow is an important part of every business’s valuation because of its time, risk, and size. The discounted-cash-flow method to valuation takes this into account. A three-step procedure is included in the approach. To begin, projections of future cash flows to equity holders are based on past financial data and present patterns. There is a lot going on with a start-up.
The absence of previous data makes it difficult to make accurate cash flow projections. Good judgment and the ability to analyze the market are essential to success.
It is critical to do research.