First Chicago Method: Scenario Valuation With an Example

The First Chicago method is a startup valuation technique that builds three separate forecasts for a company (a downside case, a base case, and an upside case), values each one, assigns each a probability, and takes the probability-weighted sum as the valuation. It exists because a single-point forecast for an early-stage company is rarely right, and because venture outcomes tend to be lopsided: most investments return little, a few return a great deal.

One forecast is a wish. Three forecasts, with odds attached, start to look like a view. The method pushes an investor to write down what failure, survival, and success would each be worth, and how likely each is.

Definition: The First Chicago method values a company as the sum of each scenario's present value multiplied by that scenario's probability, where the scenarios (typically a success case, a base case, and a failure or downside case) are modeled separately and the probabilities sum to 100 percent.

Worked example (illustrative figures): A seed investor models a software company at exit in six years.

Discounting each exit at a 40 percent annual required return over six years means dividing by 1.4 to the 6th power, a factor of 7.53. The weighted total, $13.58M, is the post-money value the investor can justify today. A $2M check therefore buys 14.7 percent of the company at closing (a $11.58M pre-money). That 14.7 percent is a pre-dilution figure: after two more priced rounds it would be worth about 10.4 percent of the company at exit.

Where the First Chicago method comes from

The method takes its name from the venture capital arm of First Chicago Corporation, according to Venionaire Capital's DealMatrix guide, which also dates its first appearance in academic discussion to 1987. That group's alumni went on to found major private equity firms. Madison Dearborn Partners says its founders built a $2.6 billion buyout and venture portfolio at First Chicago Venture Capital before setting up MDP as an independent firm in 1992. PitchBook notes that Stanley Golder made his name at First Chicago before leaving in 1980 to form Golder Thoma (today's GTCR) with Carl Thoma.

Unlike the simpler venture capital method valuation, which uses a single exit scenario and one target return, the First Chicago approach was designed to capture the range of outcomes an investor actually faces.

How the First Chicago method works, step by step

Wall Street Prep's guide walks through the mechanics in four steps. Expanded for a venture context, with a fund check added as a fifth:

1. Build three scenarios. Each needs its own revenue path, margin path, capital needs, exit year, and exit type. We'd write the downside as a different story, not "base case minus 20 percent": for example, the product finds a small niche and the company is sold for the value of its team and customers.
2. Value each scenario. For each case, estimate the exit value by applying an exit multiple to exit-year revenue or earnings (or run a DCF where cash flows are forecastable). Then discount that exit value to today at the investor's required return, and model the effect of future dilution.
3. Assign probabilities. By definition they sum to 100 percent. Wall Street Prep's illustration for a growth-stage company uses 60 percent base, 25 percent upside, and 15 percent downside. For seed-stage companies many practitioners weight the downside much more heavily, often 50 percent or more, because many seed investments don't return capital.
4. Multiply and sum. Each scenario's present value times its probability, added together, is the valuation.
5. Sanity-check against the fund. Compare the implied ownership at your check size with the ownership the fund needs. Then compare the upside case alone with the fund size: if this deal works, could it matter?

Wall Street Prep's own illustration values the growth-stage company at $120M in the base case, $180M in the upside and $50M in the downside. At 60, 25 and 15 percent, that weights out to $124.5M, which the guide rounds to about $125M. Notice how close that is to the base case. With mild weights the method mostly confirms what you already thought. At seed, with a heavy downside weight, it produces a number well below the base case, which is arguably the point.

Choosing the scenarios

A First Chicago valuation is only as good as its scenarios. One pattern we find useful for early-stage companies:

• Downside (loss or small return). The company fails to find product-market fit or runs out of money. Exit value is zero, or an acqui-hire in the low single-digit millions. For many seed deals this is the most likely case.
• Base (survival and modest exit). The company grows, raises two more rounds, and is acquired at a moderate multiple. Investors get 1x to 3x.
• Upside (category winner). The company reaches scale and exits via a large acquisition or IPO. Model this one as carefully as the others, because it can drive the result: in the worked example above, the 15 percent upside case supplies 70 percent of the weighted value. That's the power law showing up inside a single spreadsheet.

Market data, in our reading, supports heavy downside weights. Cambridge Associates' investment-level study of private equity funds (it excludes venture), published in February 2017 on data as of December 31, 2015 covering 1986 to 2014 vintages, found that even in top-quartile funds, 26 percent of investments returned less than 1.0x and 6 percent were complete write-offs. In bottom-quartile funds, 55 percent registered at least some loss of capital and 12 percent were written off entirely. Early-stage venture deals generally fail more often than buyouts, so we'd expect a seed-stage downside weight to be at least as heavy.

Carta's Q1 2026 State of Private Markets report shows 11.4 percent of rounds were down rounds. It's a reminder not to build a base case that assumes every future round is priced up.

Setting the discount rate and dilution

Two inputs trip up first-time users.

Discount rate. Some practitioners discount each scenario at a scenario-specific rate; others use one rate for all three and let the probabilities carry the risk. A fund's own target return is the usual anchor, and it varies. The NBER survey of 885 venture capitalists found an average required IRR of 31 percent, with late-stage and larger funds at 28 to 29 percent and smaller, earlier-stage funds requiring more. Seed investors commonly work in the 30 to 50 percent range, but the number is a firm-by-firm choice rather than a market standard. Venionaire's guide suggests estimating market risk for the industry, stage, and region, then setting a risk premium for each company individually.

Whichever you choose, watch for double counting. A 50 percent downside probability and a 60 percent discount rate applied to the same downside case punishes the deal twice.

Dilution. The investor's stake at exit is smaller than the stake bought today. Carta's State of Private Markets: 2025 in Review reported median dilution of about 16 percent across seed through Series C rounds in 2025. Two more rounds at that level cut the worked example's 14.7 percent closing stake to about 10.4 percent by exit. It's worth modeling this per scenario; the upside case usually has more rounds and more dilution than the downside case.

"Isn't this just false precision?"

It's the most common objection, and it has teeth. Nobody knows whether the upside case is 15 percent likely or 25 percent. Multiply three guesses by three more guesses and you get a number that looks exact and isn't.

But.

The output was never the point. The value is in the argument you have to make to fill in the table: what failure actually looks like, what the upside needs to go right, and whether the price still works if you're wrong about the odds. We'd use it to pressure-test a price, not to discover one.

First Chicago method vs. other valuation approaches

The First Chicago method is arguably the most demanding of the four because it needs three coherent forecasts. In our view it's also the most candid about uncertainty. Some investors prefer simpler methods for exactly that reason, and many use the VC method for a first pass and First Chicago for the memo. Neither replaces the formal 409A valuation a company needs for option pricing, which follows different rules and is prepared for tax purposes rather than to set a round price.

Common mistakes

• Symmetric scenarios. Upside and downside that are the base case plus and minus 20 percent. Real venture outcomes tend to be skewed, and the scenarios usually should be too.
• Probabilities that flatter the deal. Assigning 40 percent to the upside case because the founder is impressive. Tie probabilities to base rates: how often do companies at this stage in this category reach the upside outcome?
• Ignoring the preference stack. In a downside exit, liquidation preferences decide what each class receives. Model proceeds to your security, not the headline exit value.
• One number, no range. Present the weighted value with the three scenarios beside it. The scenarios are the insight; the sum is a summary.
• Skipping the fund check. A well-priced deal whose upside case can't return a meaningful share of the fund may still be a poor fit for that fund.

Accredited investors who want to practice this on live companies can join 1752vc's Emerging Angels program, an 8-week live program that gives new angels a seat in a working fund's investment process, including live diligence calls, deal reviews, monthly Investment Circles, and a private community, where scenario weights and exit assumptions get argued out on real deals before an investment decision.

Where we land

The First Chicago method won't tell you what a startup is worth. It will tell you what you'd have to believe to pay a given price, and that's usually the more useful question at seed.

The weighted number goes in the memo.

The downside case is what you actually underwrite.

Key takeaways

• The First Chicago method values a startup as the probability-weighted sum of separately modeled downside, base, and upside scenarios whose probabilities sum to 100 percent.
• It is named for the venture arm of First Chicago Corporation and is more demanding than the single-scenario VC method but, in our view, better suited to skewed venture outcomes.
• In the worked example, a $13.58M weighted post-money means a $2M check buys 14.7 percent at closing, about 10.4 percent after two more rounds of dilution.
• At seed, many investors give the downside scenario 50 percent or more weight; Cambridge Associates found 26 percent of investments returned under 1.0x even in top-quartile private equity funds (data as of December 31, 2015), and venture loss rates run higher.
• It helps to avoid double counting risk in both the discount rate and the probabilities, and to model dilution and liquidation preferences per scenario.

Frequently asked questions

What is the First Chicago method?

The First Chicago method is a startup valuation approach that builds three scenarios (typically a failure or downside case, a base case, and a success case), values each, assigns each a probability, and takes the probability-weighted sum as the company's valuation. It is named after the venture capital arm of First Chicago Corporation.

How do you calculate valuation using the First Chicago method?

Model each scenario's exit value and discount it to today at your required return. Multiply each present value by its probability, with the probabilities summing to 100 percent, and add the results. That total is the post-money valuation you can justify; dividing your check by it gives the ownership you need at closing, before later dilution.

What probabilities are used in the First Chicago method?

There is no fixed rule beyond summing to 100 percent. Wall Street Prep's growth-stage illustration uses 60 percent base, 25 percent upside, and 15 percent downside. For seed-stage companies, investors usually weight the downside far more heavily, often 50 percent or more, to reflect how many early companies fail to return capital.

What is the difference between the First Chicago method and the venture capital method?

The venture capital method uses a single exit scenario and a target return multiple to solve for the ownership an investor needs today. The First Chicago method runs several scenarios with probabilities attached, so it captures the spread of outcomes rather than one assumed success case. The VC method is faster; First Chicago, in our view, is more candid about risk.

When should investors use the First Chicago method?

We find it most useful when outcomes are highly uncertain and skewed, which describes most seed and Series A deals, and when writing an investment memo that needs to show the range of results rather than a single number. For a quick first-pass price, the simpler VC method is usually enough.

Sources

• Wall Street Prep: First Chicago Method, Formula and Calculator
• Venionaire DealMatrix: The First Chicago Method
• Venionaire Capital: Venture Valuation, First Chicago Method
• Madison Dearborn Partners: About
• Cambridge Associates: A New Arrow in the Quiver, Investment-Level Benchmarks for Private Investment Performance Measurement
• NBER: How Do Venture Capitalists Make Decisions? (Working Paper 22587, PDF)
• Carta: State of Private Markets, Q1 2026
• Carta: State of Private Markets, 2025 in Review