[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).