[vbhartia]

great write up. always been curious about this... how do you value growth... especially as Uber / Lyft IPO and face slowing growth.

What basis do you use to get the discount rate of a SaaS company? This seems fairly arbitrary and is a key part to valuing a company

[clairity]

> "What basis do you use to get the discount rate of a SaaS company? This seems fairly arbitrary and is a key part to valuing a company"

this is one of the things you learn in an MBA program. you'd generally use multiple methods to triangulate a rational estimate. for example, you'd look at industry comparables and estimate a beta to plug into CAPM (as sibling commenter touches on). you can also do full financial projections (5-7 years out) based on expected performance, do DCF, and monte carlo that to back out a discount rate. you can also do a comparative ratio analysis (https://www.investopedia.com/terms/r/ratioanalysis.asp) on profitability, cash flow, asset efficiency, turnover, and the like.

from my (limited) experience, startup valuations seem to be most sensitive to growth rate and the discount rate, so modelers spend a lot of time estimating these factors.

[pstrazzulla]

This guy is basically the god of the DCF: http://aswathdamodaran.blogspot.com/search?q=dcf

[clairity]

ha, yes, we used damodaran's book in my corporate valuation class!

i forgot to mention that you can also employ an option pricing model, like black-scholes or the binomial model (in simpler cases), in cases with multiple classes of equities, wherein you can back out a valuation (and subsequently, a discount rate) based what the various VCs involved are expecting.

[pstrazzulla]

Very true. Especially since the equity value of a startup basically looks like an out of the money call option where you're paying a small amount now for a potential large payoff of our money (but high chance of $0 outcome). Also, more volatility will increase the value of this option (whether it's founder or market volatility - aka Travis from Uber or Cypto or Cannabis).

[pstrazzulla]

Growth is important, especially if gross margins are high and >50% of new revenues goes to the bottom line to decrease losses or eventually increase profits. It's tough though, the real questions becomes when does growth stop, which is a function of market size and profitable customer acquisition channels.

The discount rate is fairly arbitrary. You can use something like the CAPM to get to your cost of equity, but it's more designed for slower growth companies. I prefer to think of the gambler analogy where you're trying to figure out the percent chance of getting paid back. Of course, it's SO HARD to figure out the probability of a startup continuing on its current path given the many variables. This is where the "artists" of the world can capture a lot of value.