First Chicago Method
Three-Scenario Valuation — Success, Survival, and Failure
The First Chicago Method combines DCF and market multiples across three explicitly modeled scenarios — upside, base, and downside — weighted by their probability to produce a single expected value. It is the most rigorous approach for early-stage and high-uncertainty businesses, capturing both the potential and the risk in a single, intellectually honest number.
What Is the First Chicago Method?
The First Chicago Method — named after the First Chicago venture capital practice that developed it — is a hybrid valuation approach that explicitly models three distinct scenarios (success, survival, and failure), values the company under each scenario using DCF or market multiples, assigns probabilities to each scenario, and computes a probability-weighted expected value. It is the dominant framework for valuing early-stage and high-uncertainty businesses where a single-point projection is intellectually dishonest.
Unlike the standard DCF, which buries uncertainty in the discount rate, the First Chicago Method makes uncertainty explicit. By modeling the actual range of outcomes and attaching real probabilities, it produces a value that reflects both the upside potential and the genuine risk of failure — giving investors, founders, and advisors a far more complete and transparent picture than any single-scenario model can provide.
In Equitest, the First Chicago Method is implemented in Chapter 33 with a full three-scenario financial model, separate valuation computations per scenario (DCF for success, market multiples for survival, asset or liquidation value for failure), and a clearly displayed probability-weighted value conclusion — with the scenario weights fully disclosed and justified.
The Three Scenarios
Each scenario is valued independently using the most appropriate method for that outcome.
The Bull Case
The company achieves or exceeds its business plan — capturing the projected market share, reaching target margins, and executing a successful exit at the expected valuation.
The Base Case
The company survives and reaches modest profitability, but does not achieve breakout growth or a premium exit. It generates modest ongoing earnings without reaching the original scale ambitions.
The Bear Case
The company fails to gain traction, exhausts its capital, and is wound down — returning whatever residual value remains in assets to investors after all obligations are met.
The First Chicago Formula
The result is a single expected enterprise value that honestly reflects both the opportunity and the risk — a number no single-scenario model can produce.
How Equitest Implements the First Chicago Method
Equitest's Chapter 33 module is a complete three-scenario financial modeling and valuation engine — not a simple weighted average of three guesses. Each scenario is independently projected, independently valued using the appropriate method, and independently documented — then combined into a fully auditable probability-weighted conclusion.
Separate Financial Models per Scenario
Equitest builds separate revenue, margin, and cash flow projections for each of the three scenarios — not a single projection scaled up or down by a percentage. The success case reflects the full business plan; the survival case reflects a scaled-back but viable outcome; the failure case reflects wind-down with residual asset recovery. Each has its own projection table in the report.
Right Method for Each Outcome
Each scenario is valued using the most theoretically appropriate method for that outcome: the success scenario uses DCF (drawing on Equitest's Chapter 24 engine) or an exit multiple; the survival scenario uses EBITDA or revenue multiples from Chapters 13–18; the failure scenario uses the asset-based liquidation value from Chapter 30. The methodology is consistent across the three outputs.
Transparent Probability Weighting
Equitest guides the appraiser through the probability assignment for each scenario, cross-referencing industry base rates (startup survival statistics by stage and sector), the company's specific risk factors, and the stage of development. The assigned probabilities are shown explicitly in the report with the justification — not hidden inside a model assumption.
VC Method + First Chicago + Berkus Together
The First Chicago expected value is presented alongside the VC Method pre-money valuation (Chapter 32) and the Berkus Method qualitative score (Chapter 34) in Equitest's Football Field Chart. The three methods cross-validate each other — the First Chicago E[V] should be broadly consistent with the VC pre-money valuation and the Berkus range — producing a complete startup valuation suite.
The First Chicago Process — Step by Step
Define the Three Scenario Narratives
Before any numbers, define what success, survival, and failure actually mean for this specific business. Success might be reaching $50M ARR and a strategic acquisition; survival might be reaching break-even as a small profitable business; failure might be running out of cash in year 3. The narrative specificity is what makes the probabilities meaningful.
Build the Financial Projections per Scenario
Model revenue, EBITDA, cash flow, and terminal value for each scenario independently. The success case follows the full business plan. The survival case applies more conservative growth and lower margins — a company that finds its niche but not its breakout moment. The failure case models cash burn and wind-down timing.
Value Each Scenario Independently
Apply the appropriate valuation method to each scenario: DCF or exit multiple for the success case; an EBITDA or revenue multiple for the survival case; asset-based liquidation value for the failure case. Each produces a standalone scenario value — V_success, V_survival, V_failure.
Assign Scenario Probabilities
Based on the company's stage, sector, team, market evidence, and competitive position, assign probability weights that sum to 100%. This is a judgment exercise — not a mechanical calculation — and must be disclosed and defended in the report. Industry survival rate statistics provide a useful anchor for the failure probability.
Compute the Probability-Weighted Expected Value
Multiply each scenario value by its probability and sum. The result is E[V] — the probability-weighted expected enterprise value. This is the First Chicago Method's output: a single defensible number that honestly reflects the full spectrum of outcomes rather than optimistically assuming the best case.
When to Use the First Chicago Method
Venture Capital Investment Decisions
The First Chicago Method is the preferred institutional VC valuation framework because it makes assumptions explicit, probabilities transparent, and the impact of failure on expected returns visible — exactly what LP investment committees expect in a pre-investment memo.
IRC §409A for High-Uncertainty Startups
For pre-revenue or pre-profit startups where a standard DCF is not supportable, the First Chicago Method provides a rigorous, IRS-recognized income approach that produces a defensible common stock value — often lower than preferred stock due to the failure scenario's impact on the weighted value.
Series A and B Investment Rounds
By Series A and B, enough market evidence exists to model three distinct scenarios credibly. The First Chicago Method provides the analytical rigor that lead investors and sophisticated angels expect at these stages — moving beyond gut-feel pre-money negotiation into structured valuation analysis.
M&A of High-Uncertainty Targets
When acquiring a company with binary or highly uncertain outcomes — a drug in Phase II, a technology platform pre-commercialization, a startup with regulatory risk — the First Chicago Method provides a structured framework for pricing the risk explicitly, supporting earnout structures and milestone-contingent pricing.
Board-Level Strategic Planning
The First Chicago framework is useful not only for valuation but for strategic clarity. Boards that model their three scenarios explicitly — and assign honest probabilities — develop better capital allocation decisions, more realistic milestone frameworks, and more productive investor conversations.
Convertible Note & SAFE Pricing Analysis
For investors analyzing the economics of convertible instruments — notes, SAFEs, warrants — the First Chicago Method provides the underlying enterprise value framework that supports conversion price, discount rate, and cap analysis across the realistic range of outcomes.
Strengths and Limitations
Why First Chicago Outperforms Single-Scenario Models
Known Limitations to Manage
Best practice: Use the First Chicago Method alongside the VC Method (Chapter 32) and the Berkus Method (Chapter 34) for a complete startup valuation suite. The three methods cross-validate each other and together provide the multi-perspective analytical foundation that professional investors and regulators expect for early-stage company valuations.
