First Chicago Method

A single forecast for a start-up is really a guess dressed up as a number. The First Chicago Method deals with this by refusing to rely on just one guess.

Instead, it builds three separate scenarios for the company: a best case, a worst case, and a middle survival case. Each scenario gets its own valuation. The method then blends the three into a single weighted-average valuation, based on how likely each scenario is judged to be.

That blended value is discounted back to today, using an appropriate discount rate, to arrive at the present value the investor uses to negotiate a stake.

The workbook introduces the First Chicago Method as "a variation" of the Venture Capitalist Method of valuation: instead of one terminal value, "three scenarios, the best, the worst and the survival scenarios are plotted to get three different valuations." These are "assigned appropriate weights to arrive at a weighted average valuation," which is then "discounted to arrive at the present value and the stake to be offered."

The workbook gives no specific weighting percentages or worked numerical illustration for the First Chicago Method itself — the worked illustration that follows in the same section applies to the plain Venture Capitalist Method's single-scenario formula, not to First Chicago's three-scenario blend. The stake formula it does give, for the underlying Venture Capitalist Method, is:

Percentage stake = Investment proposed ÷ Post-money valuation

where the post-money valuation is the future (terminal) value discounted back at the chosen discount rate over the expected number of years to exit.

An AIF is evaluating a Rs 8 crore investment in a fintech start-up. Using three scenarios for the company's value at a five-year exit:

Discounting Rs 91 crore back five years at a 25% hurdle rate gives a present value of roughly Rs 30 crore (Rs 91 crore ÷ 1.25 to the power 5). Against an Rs 8 crore investment, the AIF would need roughly a 27% stake (Rs 8 crore ÷ Rs 30 crore) today to justify the deal on this blended basis — before any further adjustment for dilution from future funding rounds.

Chapter 11 (Valuation), in the discussion of the Venture Capitalist Method for start-up valuation, introduces the First Chicago Method as a three-scenario variant. Expect a question identifying the three scenarios by name — best, worst and survival — or distinguishing First Chicago from the single-scenario Venture Capitalist Method it builds on.

• First Chicago is a variation of the Venture Capitalist Method, not a separate stand-alone formula. The stake calculation still runs through the same post-money valuation logic; only the terminal value input changes, from one scenario to a weighted blend of three.
• The three scenarios have fixed names in the workbook: best, worst and survival — not 'base case', a common but different label used elsewhere in valuation practice.
• The workbook assigns no specific weights. Any percentage weighting in a question is illustrative unless the question states otherwise.
• Weighting and discounting are two separate steps. The three valuations are blended first, and the blended figure is discounted to present value afterward — not the other way round.