Discounted cash flow
Can you gain a clear picture of a startup’s future cash flow movements? The future return on investment (ROI) can then be calculated using a “discount rate”, which is typically quite high for startups due to the higher risk involved. For instance, suppose for simplicity that a startup is set to pay 7 cash flows - each at around £100 - over 7 years. Using a 5% hurdle rate, the investor might calculate a value of £578.64 (compared to a non-discounted rate of £700). In essence, here the individual is saying that they do not have a preference between receiving £578.64 today or £100 over 7 years. However, an investor may be open to a startup paying, say, £200 per year over 7 years - depending on the perceived risk of the investment.
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