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Collectif CSI

How to Think about Discounted Value

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One thing very likely to be stumbled upon on the road to capitalization is discounted cash flow, or DCF. Although it was not directly addressed in the scene described in the preceding chapter, it was probably there inside the folder that the venture capitalists were holding in their hands. DCF is a method for valuing things. It is embedded in a formula where the value of something (of anything, actually) is equal to the cash flows that it will produce in the future, discounted by a certain factor based on length of time and, if applicable, the uncertainty of their occurrence and size. This yields the amount of money one should pay today to invest in the valued thing. Here is a classical rendering of this reasoning, found, for example, in Fisher (1906: 383):



The value of a piece of capital is equal to the sum of the successive installments (a) that it will generate at time intervals (t) in the future, discounted by the rate of interest (i). There are several assumptions in such a the...

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