Why is the discounted cash flow (DCF) method considered less reliable for early-stage startups?

The discounted cash flow (DCF) method is less reliable for early-stage startups primarily because it requires established market positions. Established market positions provide a foundation for making more accurate projections about future cash flows. Early-stage startups often lack the historical data and market presence needed to confidently project their future cash flows, leading to greater uncertainty and potentially flawed valuations.

Additionally, the DCF method relies on accurate estimations of future revenues, expenses, and growth rates, which can be extremely difficult to ascertain for startups that have not yet established a track record. This creates a situation where the DCF model may yield unreliable results due to the inherent variability and risk associated with early-stage ventures, making it a less suitable valuation method in these cases.