WACC for startups is more art than science because the inputs — market cap, beta, cost of debt — are either unavailable or unreliable. Here is how practitioners approach it.
Why traditional WACC breaks for startups
- No market cap: equity value is private and highly uncertain
- No beta: can't observe historical price volatility
- Little or no debt: capital structure is mostly equity
- High failure probability: DCF models don't capture binary outcomes well
How VCs think about discount rates
VCs rarely use WACC explicitly. Instead, they apply a target IRR of 30–50%+ (reflecting a 10x fund return target with expected failures). This is equivalent to using a WACC of 30–50% — far above what traditional WACC models would suggest.
For DCF models
When building a DCF for a startup, practitioners typically: - Use a peer group WACC from comparable public companies (usually 8–15% for SaaS) - Add a size premium of 3–5% for private, smaller companies - Add a company-specific risk premium of 3–10% for execution risk
Effective startup discount rate: 14–30% depending on stage and sector.
Use the WACC calculator for established companies with observable equity and debt values.