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First Chicago Method Calculator

Scenario-based startup valuation using probability-weighted expected outcomes

Based on Smith & Smith, Entrepreneurial Finance

Scenario Inputs

Success Scenario
$ M
%
Sideways Scenario
$ M
%
Failure Scenario
$ M
%

Investment Parameters

%
yrs
$ M

Valuation Results

Expected Exit Value $62.00M Probability-weighted
Post-Money Valuation $20.32M Present value
Pre-Money Valuation $15.32M Positive
Required Ownership 24.61% Typical

Probability Check

Total Probability: 100.0% Valid
Success: 25% Sideways: 40% Failure: 35%

Calculation Steps

Post-Money = E[V] / (1 + r)n
Where E[V] = Σ Pi × Vi

Ownership Interpretation

Ownership Range Interpretation Signal
< 30% Typical Standard minority VC stake
30% - 50% Aggressive Down round or difficult terms
> 50% Control Investor majority, unusual for VC

Understanding the First Chicago Method

The First Chicago Method, developed at First Chicago Corporation's venture capital arm in the 1970s, provides a more nuanced approach to startup valuation than single-point estimates. By explicitly modeling multiple outcome scenarios with assigned probabilities, investors can account for the wide distribution of potential outcomes inherent in early-stage ventures.

The Three Scenarios

Success

Company achieves or exceeds business plan targets. Typically valued using comparable exits or growth multiples.

Sideways

Company survives but underperforms. Often valued at invested capital or modest multiple.

Failure

Company fails to achieve viability. Value typically zero or small salvage amount.

Expected Value Formula
E[V] = Psuccess x Vsuccess + Psideways x Vsideways + Pfailure x Vfailure

Model Assumptions

  • Fixed three-scenario framework (success, sideways, failure)
  • Single-period analysis with terminal exit values
  • Discrete compounding for present value calculation
  • No taxes or transaction costs included
  • Probabilities must sum to 100% for meaningful results

Frequently Asked Questions

The First Chicago Method is a scenario-based valuation approach developed for venture capital investments. Unlike single-point estimates, it explicitly models multiple potential outcomes (success, sideways, failure), assigns probabilities to each, and calculates a probability-weighted expected value. This expected value is then discounted to present value using a risk-adjusted discount rate.

Probability estimates should be based on historical data for similar ventures, industry benchmarks, and judgment about the specific company's strengths and risks. For early-stage ventures, typical ranges might be: Success 15-30%, Sideways 25-40%, Failure 35-60%. More mature companies would have higher success probabilities. The key is that probabilities must sum to 100%.

Discount rates for early-stage ventures typically range from 25-50% or higher, reflecting the illiquidity, operational risk, and long time horizons. Seed stage ventures might use 50-70%, Series A 40-50%, and later stages 25-35%. The rate should reflect the time value of money and any systematic risk not already captured in the scenario probabilities.

The VC Method uses a single exit value estimate and embeds all risk adjustments in a high target return multiple. The First Chicago Method explicitly separates outcome scenarios from the discount rate, providing more transparency about assumptions. First Chicago is particularly useful when outcomes have a wide distribution or when you want to stress-test different probability assumptions.

Historical VC data suggests: Seed stage - 10-20% success, 20-30% sideways, 50-70% failure. Series A - 20-30% success, 30-40% sideways, 30-50% failure. Series B and later - 30-40% success, 35-45% sideways, 20-35% failure. These are rough benchmarks; actual probabilities depend on the specific venture, team, market, and competitive dynamics.

Required ownership below 30% is typical for early-stage minority investments. Between 30-50% suggests aggressive terms, possibly indicating a down round or difficult negotiating position. Above 50% means the investor would have majority control, which is unusual for traditional VC and may signal distressed circumstances or a buyout structure rather than growth equity.
Disclaimer

This calculator is for educational purposes only and should not be used as the sole basis for investment decisions. Actual valuations require professional analysis, due diligence, and consideration of factors not captured in this simplified model. Past performance of similar ventures does not guarantee future results.

Ryan O'Connell, CFA, FRM
Calculator by Ryan O'Connell, CFA, FRM

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