First Chicago Method Calculator

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.