THE VENTURE CAPITAL MODEL
Often employed in the private equity arena to value investments with negative cash flows and earnings but with future promise, the VC firm determines what return on investment is required during die holding period it desires. It then applies a P/E ratio or multiple of earnings to die estimated future value of die venture at the end of that period, which is equivalent to its terminal value. The terminal value is then discounted based on die targeted rate of return die investor is seeking