Startups are typically debt-free since they are unable to produce positive cash flows or to provide adequate asset-backed guarantees in the first years of their life. Raised capital is so represented by equity, and its monetary component is the cash reservoir that keeps the firm alive until it reaches a liquidity surplus. Cash flow forecasting is crucial to estimate the financial breakeven (runway cash flow), combining the EBITDA generated (or absorbed) by the startup with its change in net working capital and CAPEX. The unlevered features of the startup imply that its opportunity cost of capital is represented just by the cost of collecting equity. In accounting terms, the EBIT tends to coincide with the net result of the income statement (in the absence of debt service and taxes, due to a negative tax base), and the operating cash flow with the net cash flow. When the startup reaches maturity and financial breakeven, it can start raising debt, so increasing its financial leverage. This represents a mighty milestone that can be reached only by the firms that survive Darwinian selection, bypassing the “Death Valley” (that indicates a cash- and equity- burn out), and overcoming the “winter of capital”. Scalable volumes, albeit appealing, are insufficient to guarantee survival, unless backed by appropriate economic marginality and consequent liquidity generation. To the extent that startup valuation is often based on Discounted Cash Flows, the forecast of its liquidity is a pre-requisite for appraisal. The risk that the real liquidity may be different from the expected one needs to be fairly incorporated in the cost of capital used to discount the risky cash flows. Forwardlooking valuations should never underestimate the importance of liquidity, remembering that “cash is king” and that … all roads bring to cash. Wise valuations cool down irrational expectations, avoiding to back exuberance, and may deflate prices after pumped listing of promising startups.

https://www.researchgate.net/publication/340574298_Cash_flow_forecasting_of_debt-free_startups

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