Question

How is a venture’s WACC likely to change as it moves through a successful life cycle? What discount rates are typically used for development- stage, startup-stage, survival-stage, and early-growth-stage ventures?

Answer 1

A venture’s WACC is likely to change as it moves through a successful life cycle due to the fact that the nature of financing changes and the capital structure changes for an organization or a venture as it moves through the different stages of its lifecycle. Early stage for a venture mostly consists of equity financing and this is high costs (as there are no tax savings here like in case of debt where interest paid is tax deductible). When a venture progresses through its life cycle it gets opportunity to use less expensive debt for expansion and hence its WACC declines. Thus a venture, as it moves through a successful life cycle, makes use of incremental debts and as a result its WACC is likely to decrease over this time frame.

Discount rate for development stage is above 40%, for startup stage is between 30% to 50%, for survival stage is between 25% to 45% and for early growth stage is between 25% to 35%.