VC & PE Glossary
What Is First Chicago Method?
Updated
Definition
The First Chicago Method is a venture valuation approach combining multiple exit scenarios—bad, base, and good—with probability weights to estimate expected present value of an investment.
Useful for: Founders, Investors
The First Chicago Method is a scenario-weighted valuation technique—originating with First Chicago Corporation’s venture practice—that estimates investment value by discounting several discrete exit outcomes back to present value and combining them with assigned probabilities.
How it works
Analysts build three (or more) cases: conservative exit (low multiple, delayed timing), base case, and upside case. Each projects revenue, margins, capital needs, and exit multiple through an exit scenario modeling waterfall. They assign probabilities—perhaps 25% / 50% / 25%—compute MOIC or IRR per case, and take the weighted average to infer fair entry price or current mark.
The method suits early-stage companies where single-point DCF misleads. It complements comparables and recent round pricing. Limitations: probabilities are subjective and teams may anchor cases narrowly around current narrative.
Later practitioners extended the framework with more scenarios and simulation, but “First Chicago” remains shorthand for multi-scenario VC valuation.
Why it matters
- Founders: When investors walk through bear/base/bull, recognize First Chicago logic—push back on probabilities if your operating plan supports a different mix.
- Investors: Documents valuation discipline for LP reporting and reserves; highlights which scenarios must occur to return the fund.
Common mistake
Treating probability weights as precision. Small changes in upside probability swing present value dramatically—sensitivity tables matter more than false decimal accuracy.
Related ideas
See exit scenario modeling, exit multiple, DCF, and MOIC.
Related terms
- Exit Multiple — Exit multiple is the ratio of exit value to a baseline financial metric—often revenue or EBITDA—used to summarize how richly a company sold relative to its performance at exit.
- Exit Scenario Modeling — Exit scenario modeling is the practice of building bear, base, and bull cases for how a company might exit—price, timing, and form—to estimate investor returns and inform reserve and follow-on decisions.
Common questions
Short answers for founders, LPs, and operators