Summary  707 reason for this gap lies in ConsuCo’s cash flow profile, and it highlights why a scenario approach is preferable to using a discount rate reflecting a country risk premium. Due to ConsuCo’s high anticipated growth and corresponding investments, its free cash flows were forecast to be negative for the first five years, pushing value creation forward in time. But the further ahead a com- pany’s positive cash flows lie, the more those cash flows are penalized by the country risk premium approach, because a markup in WACC accumulates over time. This does not happen in a scenario approach, because the scenario probabilities affect all future cash flows equally. If ConsuCo had had a lower-growth outlook, the country risk premium approach would have produced a valuation much closer to the valuation from the scenario approach. Note that irrespective of ConsuCo’s cash flow profile, a risk premium of 3 to 5 percent (as is typically used in emerging markets) would have either resulted in unrealistically low valuations relative to current share price and peer group multiples or else required an unrealistically bullish forecast of future performance. Summary To value companies in emerging markets, we use concepts similar to the ones applied to developed markets. However, it’s necessary to incorporate into valuations the unique risks of emerging markets, such as macroeconomic or political crises, by following the scenario DCF approach. This approach de- velops alternative scenarios for future cash flows, discounts the cash flows at the cost of capital without a country risk premium, and then weights the DCF values by the scenario probabilities. The cost of capital estimates for emerg- ing markets build on the assumption of a global risk-free rate, market risk premium, and beta, following guidelines similar to those used for developed markets. Since company values in emerging markets are often more volatile than values in developed markets, we recommend triangulating the scenario DCF results with two other valuations: one that is based on discounting cash flows developed in a business-as-usual projection but using a cost of capital that includes a country risk premium, and another that is based on multiples. 709 36 High-Growth Companies Valuing high-growth companies is a challenge; some practitioners even de- scribe it as hopeless. Yet we’ve found that the valuation principles in this book work well for coping with the great uncertainty that accompanies these rapid growers.1 The best way to value such companies is to start with a discounted- cash-flow (DCF) valuation and buttress it with economic fundamentals and probability-weighted scenarios. Although DCF may sound suspiciously retro, it works where other meth- ods fail, since the core principles of economics and finance apply even in un- charted territory. Alternatives, such as enterprise value multiples, generate imprecise results when earnings are highly volatile, cannot be used when earnings are negative, and provide little insight into what drives the com- pany’s valuation. More important, shorthand methods cannot account for the unique characteristics of each company in a fast-changing environment. An- other alternative, real options, requires estimates of the long-term revenue growth rate, long-term volatility of revenue growth, and profit margins—the same requirements as for discounted cash flow.2 This chapter details the differences in the order and emphasis of DCF valu- ation in the case of high-growth, rather than established, companies. Instead of starting with an analysis of the company’s and its industry’s past perfor- mance, the valuation process begins with an estimation of what the future economics of the company and industry might become. Since these long- term projections are highly uncertain, create multiple scenarios, each with its own value. If you need a single-point estimate, weight the scenario values by their probability of occurrence. In our practice, we avoid using single-point 1 We define high-growth companies as those whose organic revenue growth exceeds 15 percent ­annually. 2 In Chapter 39, we demonstrate how real options can lead to a more theoretically robust valuation than scenario analysis. But unlike scenario analysis, real-options models are complex and obscure the competitive dynamics driving a company’s value.