The discount rate creates “one of the most controversial areas in my practice,” said Mike Pellegrino (Pellegrino & Associates), during his recent BVR webinar “Valuing Early Stage Companies,” the latest addition to our Desktop Learning Center and our newest Training Pack.
“We don’t look to public companies for discount rates,” Pellegrino added. “We don’t find that they are representative of the market for early stage companies,” due to the “remarkable” survivorship and other selection biases. “Our view—and this is heresy, I understand—is that the regression-based models are ‘Flat Earth’ thinking.” Consider: Implied discount rates currently developed using regression-based analyses are at historic lows. “My question—and it has been a question I have enjoyed asking over the last three-and-a-half years—is why is there a credit shortage among early stage companies?”
The answer: Investors and institutions are not willing to lend a significant amount of capital to startups unless they get a personal guaranty or “something on the side,” Pellegrino observed. “The reason is because the implied rates of return are actually much greater.”
When asked whether he uses a proprietary or prepackaged modeling software, Pellegrino generously offered the simple, one-page worksheet his firm uses to calculate the discount rate, not only to webinar listeners but to the broader BV community, via our free resources page. Download the Pellegrino & Associates’ Discount Rate Calculator here.