Discounted cash flow (DCF)
Last updated
Quick Answer
A discounted cash flow values a business as the present value of the cash it is forecast to generate, discounted at a rate reflecting the risk of that forecast.1,2
What it is
It sits inside IVS 105's income approach alongside capitalization methods. In practice it resolves into three separable arguments: the forecast, the discount rate, and the terminal value — and in a transaction each of those is negotiated separately, because each is a different kind of claim.1,2
Operational context
What good looks like
Why It Matters
In a live deal a DCF is rarely the number anyone pays; it is the argument for why a number is defensible. Which is why the questions that decide an outcome are about the terminal value assumption and the discount rate build-up, not about the model's arithmetic.1
Frequently Asked Questions
What is Discounted cash flow (DCF) in venture capital?
It sits inside IVS 105's income approach alongside capitalization methods. In practice it resolves into three separable arguments: the forecast, the discount rate, and the terminal value — and in a transaction each of those is negotiated separately, because each is a different kind of claim.
Why is Discounted cash flow (DCF) important for startups?
Understanding Discounted cash flow (DCF) is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Sources & References
- 1.T1-08 — International Valuation Standards CouncilIVS 105 — Valuation Approaches and MethodsInternational Valuation Standards Council(A discounted cash flow values a business as the present value of the cash it is forecast to generate, discounted at a rate reflecting the risk of that forecast.)primary · T1 · valuation · method
- 2.T1-10 — IVSCIVS 200 — Business and Business InterestsIVSC(A discounted cash flow values a business as the present value of the cash it is forecast to generate, discounted at a rate reflecting the risk of that forecast.)primary · T1 · valuation · method
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