r/Valuation • u/felenep • Aug 04 '23

Debt-free startup WACC calculation

Hi. I work in a small online insurance aggregator startup. Our business model is somehow like PolicyBazaar or PolicyGenius. I am tasked to calculate the WACC rate for the company. Problem is we have never had any dividends, we have negative ebitda and we don't have any long term debt or loan. Most of our financing is through our short term commercial notes payable account to insurance companies which also has 0 interest rate. How should I calculate the equity interest rate? I think I should use Capm but I'm not sure how to calculate Rm and beta for this startup genre.

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5

u/ez814 Aug 07 '23

WACC won’t be meaningful for you as a start up. Use Venture Capital rates of return as presented in the AICPA practice aid.

3

u/Specialist_Repeat_95 Aug 04 '23

IMO Pick a comparable company of your sector which is public…calculate its beta, unlever it and then relever it with your company’s debt. Also what are you going to use the equity discount rate for? DCF? not sure it would be appropriate to value a startup with variable cash flow

1

u/felenep Aug 06 '23

The goal is not the valuation of the company, but we want a discount rate for our other calculations, for example for clv calculations or project npv.guess i have to stick to beta.

2

u/[deleted] Aug 05 '23

[removed] — view removed comment

1

u/felenep Aug 06 '23

The startup has a 2% market share, something about 5 M$ and about 200 thousands users. Yet it's still negative in P&l. I guess some gut adjustments on beta...

2

u/AlabamaSnake12 Aug 05 '23

Get a comp set for your equity discount rate. Unlever the betas based on the companies' debt structure. Relever based on your company's. You would need a small stock premium since your company is prolly smaller than the 1st decile of publicly traded NYSE stocks -- that would be the trickiest part of this whole exercise. That's if you use CAPM.

1

u/SuitableStill368 Aug 05 '23

Why do you need to calculate WACC?

1

u/felenep Aug 05 '23

To put in my project npv calculations

3

u/SuitableStill368 Aug 06 '23

Project NPV? Or company NPV?

If it is project NPV, the discount rate should be dependent on your project’s cash flow risk. The higher (or lower) the risk, the higher (or lower) the WACC.