Intrinsic valuation (DCF) estimates what a business is worth from the cash flows it can generate, while relative valuation (trading comparables and precedent transactions) estimates what the market is paying for similar assets. The venture capital method borrows from both: it applies a market multiple to a forecast exit-year metric and discounts that value back at a high target return. Each answers a different question, so professionals usually triangulate across several.
In this lesson you will
- Distinguish intrinsic valuation from relative valuation and explain why they can diverge
- Describe how trading comparables and precedent transactions differ
- Walk through the four steps of the venture capital method
- Explain why private-company valuers calibrate models to recent transaction prices
Two questions, two families of methods
Damodaran groups valuation into four broad approaches: discounted cash flow valuation, liquidation and accounting valuation, relative valuation, and contingent claim (option-based) valuation [1]. In practice, deal work leans mostly on the first and third. Discounted cash flow valuation relates the value of an asset to the present value of its expected future cash flows, while relative valuation estimates value by looking at how comparable assets are priced relative to a common variable such as earnings, cash flow, book value, or sales [1].
The philosophical difference matters. A DCF is an attempt to estimate intrinsic value from a business's capacity to generate cash, whereas relative valuation accepts the market's pricing of similar assets and asks how the target compares [1]. If the market prices a sector correctly on average, the two approaches may converge; if the market is systematically over- or under-pricing a sector, DCF values can deviate from relative values [1]. Relative valuation is the more common of the two: Damodaran cites an estimate that almost 90% of equity research valuations and 50% of acquisition valuations use some combination of multiples and comparable companies [1].
Intrinsic valuation: the DCF
In the most common form of DCF, expected cash flows are discounted at a risk-adjusted rate, with riskier assets discounted at higher rates [1]. When valuing the whole business, analysts use free cash flow to the firm — cash flow before debt payments but after reinvestment — and discount it at the cost of capital, the blended cost of all financing sources [1]. Lesson 2 builds this out in detail. The strength of a DCF is that it forces explicit assumptions about growth, margins, reinvestment, and risk; its weakness is that small changes in those assumptions can move the answer a long way.
Relative valuation: trading comps and precedent transactions
Relative valuation has three steps: find comparable assets that the market prices, scale those prices to a common variable to create standardized multiples, and adjust for differences between the comparables and the target [1]. The private equity and venture capital industry's valuation guidelines describe deriving multiples either from the market valuations of quoted companies or from the prices at which companies have changed ownership [2]. Those two sources are what bankers call trading comparables and precedent transactions.
- Trading comparables: multiples of publicly traded peers today. They reflect current market conditions but price minority, freely traded stakes.
- Precedent transactions: multiples paid in past acquisitions of similar companies. They capture what buyers paid for control, but they may be stale and reflect the market at the time of each deal.
- Why precedents often run higher: acquirers may pay a premium because they believe they can run the business differently and better, which is the source of the value of control [4].
The venture capital method
For young companies with little revenue and negative earnings, the most common approach is the venture capital method, which has four steps [3]. First, forecast revenue or earnings two to five years out, usually to the expected exit date [3]. Second, multiply that forecast by a multiple at which comparable public companies trade, or that recent acquisitions or IPOs fetched, to estimate the exit value [3]. Third, discount the exit value back at a target rate of return that is set high enough to reflect both business risk and the chance the company fails [3]. Fourth, add the new capital to that pre-money value to get the post-money value, and divide the investment by the post-money value to get the investor's ownership [3].
Damodaran's paper lists typical target returns ranging from 50–70% for start-ups to 25–35% for bridge or pre-IPO companies, and argues the method can turn projections into a bargaining point rather than an estimate [3]. For example, if a company might earn $20 million in five years and peers trade at 15 times earnings, the exit value is $300 million; at a 50% target return, the present value is $300 million ÷ 1.5^5 ≈ $39.5 million pre-money.
How funds value private holdings: calibration
Venture and private equity funds report holdings at fair value. The December 2025 International Private Equity and Venture Capital Valuation Guidelines list market approaches (multiples, industry benchmarks, available market prices), an income approach (discounted cash flows), and a replacement cost approach (net assets) [2]. Those guidelines supersede the 2022 edition and apply to quarterly reporting periods beginning on or after 1 April 2026 [2]. They state that the price of a recent investment should be used to calibrate model inputs, but is not automatically deemed fair value and should not be treated as a standalone valuation technique [2].
The practical lesson: no single method is right. A careful analyst runs a DCF, checks it against trading and transaction multiples, and — for a private company — reconciles both to the price of the most recent arm's-length round.
Key terms
- Intrinsic value
- The value of an asset based on its ability to generate future cash flows, typically estimated with a discounted cash flow model.
- Relative valuation
- Valuing an asset by comparing it to how the market prices similar assets, using standardized multiples.
- Trading comparables
- Valuation multiples derived from the current market prices of similar publicly traded companies.
- Precedent transactions
- Valuation multiples derived from prices paid in past acquisitions of similar companies.
- Venture capital method
- A method that applies a multiple to a forecast exit-year metric and discounts the result at a high target rate of return to estimate pre-money value.
- Target rate of return
- The return a venture investor requires, set high enough to cover both business risk and the probability of failure.
- Calibration
- Adjusting valuation model inputs so the model reproduces the price of a recent orderly transaction, then carrying those inputs forward.
Check your understanding
Sources
- [1]Aswath Damodaran, NYU Stern School of Business, “Valuation Approaches and Metrics: A Survey of the Theory and Evidence,” November 2006.
- [2]IPEV Board, “International Private Equity and Venture Capital Valuation Guidelines,” December 2025.
- [3]Aswath Damodaran, NYU Stern School of Business, “Valuing Young, Start-up and Growth Companies: Estimation Issues and Valuation Challenges,” May 2009.
- [4]Aswath Damodaran, NYU Stern School of Business, “The Value of Control: Implications for Control Premia, Minority Discounts and Voting Share Differentials,” June 2005.
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