Chicago Method of Valuation
This method of business valuation requires estimating all possible scenarios of a business' growth, viz. failure, conservative, most probable and aggressive.
Estimates of revenue, growth rates, expenses, discounting rates based on risk in each case are defined and projected cash flows are made for all such scenarios.
The Net Present Value (NPV) of all the scenarios is calculated and weightage is assigned to each scenario based on probability estimates.
Finally, you get the final NPV or value of the startup using a scenario planning, present value of cash flows method.
Pros:
- suitable to evaluate early stage businesses that have a more dynamic growth model
- takes into account all scenarios
- may provide a sense of rationality to both the founder and the investor
Cons:
- not useful for startups with no projected revenue in the next couple of years
- time-consuming and very intricate with way too many assumptions, which may be difficult for all stakeholders to agree on
- most start-ups at the early stage get valued on the basis of transaction comparables instead
