Metrics & Performance
Last updated
Quick Answer
Weighted Average Cost of Capital — the blended cost of a company's debt and equity financing.
WACC represents the average rate of return a company must earn on its existing assets to satisfy all capital providers (debt holders and equity investors). It's calculated by weighting the cost of each capital component by its proportion in the company's capital structure. While more commonly used in mature company valuation, WACC concepts inform venture investors' required return thresholds.
In Practice
A company with 30% debt at 6% interest and 70% equity with a 15% required return has a WACC of (0.3 × 6%) + (0.7 × 15%) = 12.3%.
Why It Matters
WACC serves as the discount rate in DCF valuations and the hurdle rate for investment decisions. Understanding WACC helps VCs evaluate later-stage companies considering IPO or acquisition.
VC Beast Take
Most VCs don't obsess over WACC calculations for early-stage deals—they're more focused on market size and team quality. But savvy investors use WACC as a sanity check for later-stage valuations, especially when comparing venture returns to public market alternatives. The real insight? Companies with lower WACC have more flexibility in capital allocation decisions.
WACC represents the average rate of return a company must earn on its existing assets to satisfy all capital providers (debt holders and equity investors). It's calculated by weighting the cost of each capital component by its proportion in the company's capital structure.
Understanding WACC is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
WACC 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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