Metrics & Performance
Free Cash Flow
Last updated
Quick Answer
Cash generated by a business after accounting for capital expenditures — a measure of true financial health and the basis for many valuation models.
Free Cash Flow
FCF = Operating Cash Flow - Capital Expenditures
Where
- OCF
- = Cash from operating activities
- CapEx
- = Capital expenditures (PP&E, etc.)
Free Cash Flow (FCF) is the cash a company generates from operations minus capital expenditures (CapEx) required to maintain or grow the business. FCF = Operating Cash Flow - CapEx. Unlike EBITDA (which adds back depreciation and amortization but not CapEx), FCF reflects actual cash available to the company. For VC-backed growth companies, FCF is typically negative (they're investing aggressively in growth). FCF becomes critically important as companies scale toward profitability — investors evaluate 'free cash flow inflection' as a key milestone. Public software companies are increasingly valued on FCF multiples rather than revenue multiples. Strong FCF generation gives companies flexibility: fund growth internally, return capital to investors, or make acquisitions.
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Further Reading
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Tools & Resources
Frequently Asked Questions
What is Free Cash Flow in venture capital?
Free Cash Flow (FCF) is the cash a company generates from operations minus capital expenditures (CapEx) required to maintain or grow the business. FCF = Operating Cash Flow - CapEx.
Why is Free Cash Flow important for startups?
Understanding Free Cash Flow is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
What category does Free Cash Flow fall under in VC?
Free Cash Flow falls under the metrics category in venture capital. This area covers concepts related to the quantitative measures used to evaluate fund and company performance.
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