DCF Valuation Walkthrough: Valuing a SaaS Startup Step-by-Step
Discounted Cash Flow analysis is the gold standard for startup valuation — but getting it right for a SaaS company requires deep understanding of recurring revenue economics, churn dynamics, and scaling margins. This case study walks through a complete DCF valuation of a hypothetical Chennai-based B2B SaaS startup, "CloudBooks," from revenue projection to final equity value.
The Case: CloudBooks — B2B SaaS Accounting Platform
Company Profile (Illustrative)
Stage: Series A ready | Founded: 2023 | Location: Chennai
Product: Cloud-based accounting and invoicing platform for Indian SMEs
Current ARR: ₹1.8 Crores | MRR: ₹15 Lakhs | Customers: 420
ARPU: ₹3,570/month | Monthly Churn: 3.2% | Gross Margin: 78%
Burn Rate: ₹18 Lakhs/month | Cash Runway: 14 months
Valuation Purpose: Series A fundraise of ₹8-10 Crores
Step 1: SaaS Metrics Assessment
Before projecting cash flows, a thorough analysis of unit economics establishes the foundation for growth assumptions.
| Metric | CloudBooks | Industry Benchmark | Assessment |
|---|---|---|---|
| ARR Growth (YoY) | 120% | 80–150% | Strong |
| Gross Margin | 78% | 70–85% | Healthy |
| Net Revenue Retention | 108% | 100–130% | Good (room for upsell) |
| Monthly Churn | 3.2% | 2–5% | Moderate |
| LTV/CAC Ratio | 3.8x | >3x | Viable |
| CAC Payback | 11 months | 12–18 months | Efficient |
| Rule of 40 | 95% (120-25) | >40 | Excellent |
Step 2: Revenue Projections (5-Year Forecast)
Revenue is projected bottom-up using three drivers: new customer acquisition, expansion revenue from existing customers, and churn. We model declining growth rates as the base matures.
| Year | Customers (EOY) | ARPU (₹/yr) | ARR (₹ Cr) | Growth |
|---|---|---|---|---|
| Year 1 (Current) | 420 | 42,840 | 1.80 | — |
| Year 2 | 780 | 47,100 | 3.67 | 104% |
| Year 3 | 1,250 | 51,800 | 6.48 | 76% |
| Year 4 | 1,800 | 56,000 | 10.08 | 56% |
| Year 5 | 2,400 | 60,500 | 14.52 | 44% |
Step 3: Free Cash Flow Projection
Converting revenue to free cash flow requires modelling operating expenses, working capital changes, and capital expenditure. SaaS companies typically achieve operating leverage as revenue scales.
| Component | Year 2 | Year 3 | Year 4 | Year 5 |
|---|---|---|---|---|
| Revenue (₹ Cr) | 3.67 | 6.48 | 10.08 | 14.52 |
| COGS (22%) | (0.81) | (1.43) | (2.02) | (2.76) |
| Gross Profit | 2.86 | 5.05 | 8.06 | 11.76 |
| S&M (35%→25%) | (1.28) | (2.07) | (2.82) | (3.63) |
| R&D (25%→18%) | (0.92) | (1.46) | (2.02) | (2.61) |
| G&A (15%→10%) | (0.55) | (0.84) | (1.11) | (1.45) |
| EBITDA | 0.11 | 0.68 | 2.11 | 4.07 |
| Tax (25.17%) | (0.03) | (0.17) | (0.53) | (1.02) |
| CapEx + WC | (0.15) | (0.22) | (0.30) | (0.38) |
| Free Cash Flow | (0.07) | 0.29 | 1.28 | 2.67 |
Step 4: Discount Rate (WACC) Determination
📐 WACC Build-Up
Risk-free rate: 7.2% (10-year GOI bond)
Equity risk premium: 7.5% (India market)
Size premium: 4.0% (micro-cap)
Company-specific risk: 3.5%
Beta (unlevered): 1.35 (SaaS sector)
Cost of equity (CAPM + adjustments): 24.8%
🎯 Why 24.8%?
At Series A stage, the company has demonstrated product-market fit but still carries significant execution risk. The discount rate reflects the early stage, customer concentration risk (top 10 clients = 35% of ARR), competitive intensity in Indian SME accounting space, and pre-profitability cash burn.
Comparable SaaS transactions in India suggest implied discount rates of 22–30% for this stage.
Step 5: Terminal Value Calculation
Exit Multiple Method (Primary)
Terminal year EBITDA: ₹4.07 Cr × Exit EV/EBITDA multiple of 12x = ₹48.84 Cr
The 12x multiple reflects mature Indian SaaS companies trading at 10–15x EBITDA, adjusted for growth trajectory.
Gordon Growth Model (Cross-check)
Terminal FCF: ₹2.67 Cr × (1 + 5% growth) / (24.8% − 5%) = ₹14.16 Cr
The perpetuity model yields a more conservative figure, typical for early-stage companies where perpetuity assumptions carry higher uncertainty.
Step 6: Enterprise Value & Equity Value
| Component | Amount (₹ Cr) |
|---|---|
| PV of Year 2 FCF | (0.06) |
| PV of Year 3 FCF | 0.19 |
| PV of Year 4 FCF | 0.66 |
| PV of Year 5 FCF | 1.10 |
| PV of Terminal Value (Exit Multiple) | 20.14 |
| Enterprise Value | 22.03 |
| Less: Debt | (0.00) |
| Plus: Cash | 2.50 |
| Equity Value | ₹24.53 Cr |
Step 7: Sensitivity Analysis
A responsible valuation always tests how changes in key assumptions impact the final number. Here we vary discount rate and terminal multiple:
| WACC ↓ / Multiple → | 10x EBITDA | 12x EBITDA | 14x EBITDA |
|---|---|---|---|
| 22% | ₹21.4 Cr | ₹27.2 Cr | ₹33.0 Cr |
| 24.8% | ₹19.1 Cr | ₹24.5 Cr | ₹29.9 Cr |
| 28% | ₹16.8 Cr | ₹21.7 Cr | ₹26.6 Cr |
The valuation range of ₹19–30 Crores provides CloudBooks with a defensible negotiation corridor for Series A discussions. The midpoint aligns with roughly 13.5x current ARR, consistent with Indian B2B SaaS benchmarks.
Key Takeaways for SaaS Founders
Lessons from This Case Study
- Unit economics drive valuation: LTV/CAC above 3x and improving gross margins directly translate to higher valuations through better projected cash flows.
- Churn is the silent killer: CloudBooks' 3.2% monthly churn (34% annual) significantly impacts long-term value. Reducing churn by 1% could add ₹3–5 Cr to equity value.
- Terminal value dominates: Over 80% of value comes from terminal value — underscoring why investors focus on long-term scalability and defensibility over near-term revenue.
- Multiple methods build credibility: Cross-checking DCF with revenue multiples (13.5x ARR) and comparable transactions provides investors confidence in the valuation narrative.
- Sensitivity analysis is non-negotiable: Presenting a range rather than a single number demonstrates intellectual honesty and professional rigour.
Frequently Asked Questions
SaaS startup discount rates typically range from 15–30% depending on stage. Seed-stage companies may warrant 25–35%, Series A at 20–28%, and Series B+ at 15–22%. Key factors include revenue predictability, customer concentration, churn rate, and market risk. Indian SaaS startups add a country risk premium of 2–4%.
Terminal value is typically calculated using the exit multiple method — applying a sustainable EV/Revenue or EV/EBITDA multiple to terminal year metrics. For Indian SaaS companies, terminal EV/Revenue multiples of 4–8x are common. The perpetuity growth model with 3–5% terminal growth serves as a cross-check.
DCF can be applied to pre-revenue SaaS startups but requires careful handling. Revenue projections must be built bottom-up from addressable market and conversion assumptions. Higher discount rates (30–40%) compensate for projection uncertainty. Berkus or Scorecard methods are often more appropriate for very early-stage companies.
Critical SaaS metrics include: ARR/MRR growth rate, net revenue retention (NRR), gross margin, customer acquisition cost (CAC), lifetime value (LTV), LTV/CAC ratio, churn rate, payback period, and Rule of 40 score. These metrics directly feed into cash flow projections and risk assessment.
Need Professional DCF Valuation for Your SaaS Startup?
IBBI registered valuer with deep expertise in SaaS and technology company valuations. Monte Carlo simulation, sensitivity analysis, and investor-ready reports.