I was really surprised at how valuable the company is when analyzed in this manner. And there’s no bullshit. You assume a churn rate and randomly try it out over thousands of scenarios.
So essentially it's taking the average churn for a given customer, and running a monte carlo simulation to see what the expected scenario is?
Turns out, low churn and high margin companies are worth a ton! Especially with low interest rates and a public equities market that shouldn't return more than 4% real over the next few decades. Not a lot of other places to put your capital.
What margins qualify as "high?" I have a SaaS offering I'm working on, and I was going to charge as a multiple of my compute and network costs. Is 85.7% "high" for SaaS? Or is that meh?
And it is prone to many of the flaws of a DCF/NPV approach - that is, it is dependent on the assumptions made.
Not to diminish OP’s work but for those not familiar, there is a simple name/explanation
The increase worked, and churn was lower than expected.
It is dangerous because it is not accurate. DCFs are very sensitive to assumptions, and confidence intervals for most assumptions are very wide. Two DCF models with credible, but different assumptions can yield hugely different valuations.
DCFs are also dangerous because stocks are not valued solely based on fundamental cash flows. In startups especially, if you do a typical DCF with conservative assumptions, you will miss outlier returns when an acquirer's thesis hinges upon very aggressive assumptions or synergies that a DCF wouldn't capture. This happens all the time in biotech.
It is not true that DCFs are independent of how the market values things. Many key inputs into the DCF, especially the discount rate and terminal value, are calculated in part based on how the market values things.
In practice, investment bankers and investors use several different methodologies, all somewhat flawed, to triangulate around a valuation. Often the DCF yields the highest valuation of these methodologies.
* P/E (trailing or forward earnings)
* Enterprise value / EBITDA (trailing or forward)
* Enterprise value / revenue (trailing or forward)
If comparable companies trade at 15x next-twelve months earnings, and the company you're valuing is expected to earn $10M in the next year, you value the company at equity value of $150M.
Enterprise value = total debt of a company + total market value of equity - cash
EBITDA is Earnings before Interest, Taxes Depreciation and Amortization and is a proxy for a business' operating cash flow (as opposed to profits, which are not always the same as cash flows).
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.
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.
Ahrefs recently announced a similar growth rate: https://medium.com/swlh/how-we-achieve-65-yoy-growth-by-igno...
