Scenario-based valuation values a business by modelling several distinct futures rather than relying on a single forecast. Its best-known form is the First Chicago Method, developed in venture capital practice. It builds full financial projections and a DCF value for three outcomes: success (best case), base case and failure (worst case). It then weights each value by its probability. The approach combines the rigour of a DCF with the reality that startups, growth companies and turnarounds face very different possible futures.
When to Use Scenario-based Valuation
- Fundraising for growth-stage startups with some operating history but uncertain outcomes
- Investment committee decisions: making upside and downside cases explicit
- Founder–investor negotiations: showing how value depends on executing the plan
- Turnaround and restructuring situations, where outcomes range widely
- Impairment testing and financial reporting, where IFRS 13 and IAS 36 favour expected (probability-weighted) cash flows when outcomes are uncertain
How the First Chicago Method Works
- Define three scenarios grounded in the business plan: rapid scaling (best), steady growth with challenges (base), and failure or a distressed sale (worst).
- Project each scenario: revenue, margins, capex and funding needs, with an exit or terminal value in each.
- Value each scenario using a DCF at an appropriate discount rate, or a venture-capital-style target return.
- Assign probabilities, for example 25% best, 50% base and 25% worst, supported by market evidence and the company's track record. The probabilities must add up to 100%.
- Calculate the weighted value: Σ (scenario value × probability).
- Cross-check against recent funding rounds and market multiples.
Example
Suppose a company is worth US$120 million in a best case, US$50 million in a base case and US$5 million in a worst case, with probabilities of 25%, 50% and 25%. Its scenario-weighted value is (120 × 25%) + (50 × 50%) + (5 × 25%) = US$56.25 million.
Scenario-based Valuation vs PWERM
Both methods weight scenarios by probability. The First Chicago Method focuses on operating performance scenarios to value the business as a whole. PWERM focuses on exit routes, such as an IPO, a sale or liquidation, and allocates the proceeds across share classes. The two are often used together for venture-backed companies.
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