Vose SoftwareModelChoice decision tree · Corporate finance
Venture Capital Investment Decision
After 18 months, put $2 million into the next round or pass?
From the model’s decision tree
Best first decision: Invest $2M
The expected value of each first option when every later decision is also made well (the tree rolled back).
| First decision | Expected value | |
|---|---|---|
| Invest $2M | $4,156,250 | ✔ best |
| Pass | $0 |
| Measure | Value |
|---|---|
| Expected value of the best strategy | $4,156,250 |
| Chance of a loss on the best strategy | 45.8% |
| Best outcome on the best strategy | $28,000,000 |
| Worst outcome on the best strategy | −$4,000,000 |
S-curve (cumulative probability) of Invest $2M from the saved simulation.
The decision
A venture capital fund is evaluating a Series A investment in an enterprise SaaS startup. The company has a working product, initial customers, and is seeking $8M at a $30M pre-money valuation. The fund would invest $2M for a significant minority stake.
This is a multi-stage investment with follow-on decisions. After 18 months, the fund observes company progress and must decide whether to invest more in the next round or hold/sell its position.
Objective
Maximize expected return. This model demonstrates how staged investment decisions allow investors to limit downside by waiting for new information before committing additional capital (real options value of VC investing).
The options
- Stage 1: Initial Investment
Invest $2M in Series A. After 18 months, the company will show one of four outcomes: Exceeds Targets (25%), Meets Targets (40%), Below Targets (25%), or Company Fails (10%).
- Stage 2: Follow-On Decisions
- If Exceeds: Lead Series B ($5M more) or sell stake now ($6M)
- If Meets: Participate in Series B ($3M more) or hold without follow-on
- If Below: Provide bridge loan ($1M) or write off the investment
- If Fails: Total loss
- Stage 3: Exit Events
Depending on company trajectory, the fund may exit via IPO, acquisition, secondary sale, or complete loss. Returns range from $0 to $35M.
The decision tree
The tree has 4 decisions, 5 chance events and 16 outcomes. The best path is open: at every decision the best choice is marked, and the expected value beside each branch counts every cash flow from the start. Open any other branch to see what follows it.
DecisionChance event+$ cash flow on the branch
Invest $2M −$2,000,000expected $4,156,250 ✔ best
Chance: Company Progress (18 mo)25% Exceeds Targetsexpected $12,600,000
Decision: Follow-On (Strong)Lead Series B ($5M) −$5,000,000expected $12,600,000 ✔ best
Chance: Exit Outcome (Strong)- 35% IPO / Large Acq +$35,000,000payoff $28,000,000
- 45% Mid-Size Acquisition +$15,000,000payoff $8,000,000
- 20% Down Round / Recap +$3,000,000payoff −$4,000,000
- Sell Stake Now +$6,000,000payoff $4,000,000
40% Meets Targetsexpected $3,600,000
Decision: Follow-On (Moderate)Participate Series B ($3M) −$3,000,000expected $3,600,000 ✔ best
Chance: Exit Outcome (Follow-On)- 20% Strong Exit +$20,000,000payoff $15,000,000
- 50% Moderate Exit +$8,000,000payoff $3,000,000
- 30% Weak Exit +$2,000,000payoff −$3,000,000
Hold (No Follow-On)expected $650,000
Chance: Exit Outcome (No Follow-On)- 30% Acquired Anyway +$5,000,000payoff $3,000,000
- 40% Modest Return +$2,500,000payoff $500,000
- 30% Diluted Out +$500,000payoff −$1,500,000
25% Below Targetsexpected −$935,000
Decision: Follow-On (Weak)Bridge Loan ($1M) −$1,000,000expected −$935,000 ✔ best
Chance: Bridge Outcome- 25% Turnaround +$6,000,000payoff $3,000,000
- 35% Acqui-Hire +$1,500,000payoff −$1,500,000
- 40% Shutdown +$100,000payoff −$2,900,000
- Write Off +$200,000payoff −$1,800,000
- 10% Company Failspayoff −$2,000,000
- Passpayoff $0
Change the numbers. Open the workbook with ModelChoice, change a probability or a cost in the tree, and the best decision updates at once.
Key assumptions
| Assumption | Value | Notes |
|---|---|---|
| Series A Investment | $2,000,000 | Initial stake at $30M pre-money |
| Series B (Lead) | $5,000,000 | If company exceeds targets |
| Series B (Participate) | $3,000,000 | If company meets targets |
| Bridge Loan | $1,000,000 | Rescue financing if below targets |
| Exceeds Targets Probability | 25% | Revenue growth >3x, strong unit economics |
| Meets Targets Probability | 40% | Revenue growth 1.5-3x |
| Below Targets Probability | 25% | Growth stalls, burn rate concerns |
| Company Fails Probability | 10% | Product-market fit not achieved |
| IPO Return (Best Case) | $35,000,000 | 17.5x return on initial $2M |
| Total Capital at Risk | $2M - $7M | Depends on follow-on decisions |
The figures are illustrative: the companies and numbers are invented for teaching.
Try it in ModelChoice
- Strategy Table. Compare all 8 investment strategies with risk-return frontier
- Sensitivity Analysis. How do exit multiples and success probabilities affect EV?
- Risk Profile. Visualize the wide range of VC outcomes (power law returns)
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Further reading
Download the workbook and open it with ModelChoice. The free trial opens every example.
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An illustrative example: the figures are invented for teaching. Last updated 9 October 2026.