Scenario Modeling: A Simple Guide for VCs to Prepare for the Unpredictable

Venture capital is an industry built on uncertainty. No one can predict the future, but you don’t have to. The most successful investors don’t rely on crystal balls; they rely on planning for a range of possible outcomes. This is where scenario modeling comes in. It’s not about predicting what will happen, but preparing for what could happen.

Scenario modeling is the process of building out different future possibilities. It’s asking: What if things go perfectly? What if they go terribly? What if they go somewhere in between? It’s taking a startup's current trajectory and asking how it changes under different conditions—whether those conditions are market downturns, skyrocketing demand, or a competitor raising $200 million next door.

For VCs, it's a tool to help you invest in the present while keeping one foot in the future.

The Problem with Certainty

We love certainty. It feels comfortable to imagine one clear outcome and then plan around it. But certainty in investing is an illusion. No matter how much research you do, how many experts you consult, or how well-connected you are, things rarely turn out exactly as you expect.

Here’s an example: At the height of the dot-com bubble, Amazon was burning cash, had razor-thin margins, and most analysts couldn’t imagine it ever turning a profit. If you were an investor building a traditional financial model back then, it probably didn’t look good. But what about a scenario where you asked, “What happens if more people start buying online? What if Amazon creates economies of scale through logistics and infrastructure that no one else can match?” That’s the future Jeff Bezos was preparing for—and the future that played out.

If you based your decisions on only the base case—what most people thought was likely at the time—you’d miss out on what actually happened. This is the lesson: the future rarely conforms to a single straight line. But by preparing for different paths, you put yourself in a position to act when one of them becomes reality.

What Scenario Modeling Really Does

Scenario modeling lets you simulate multiple outcomes, both good and bad, and it forces you to think about what you'd do if those outcomes became reality. As an investor, it’s one of the most powerful tools to help you make better decisions and guide your portfolio companies through the unpredictable nature of startups.

Think of it as your own set of parallel universes:

1. The Bull Case: Everything goes right. The startup crushes its growth projections, market demand skyrockets, and the founders execute perfectly.
2. The Base Case: Things go as expected. Growth is solid but not exceptional. The startup hits its key targets but doesn’t blow past them.
3. The Bear Case: Problems arise. There’s a market downturn. Customer acquisition slows. A competitor emerges with better funding and steals market share.

Here’s a simple truth: startups rarely follow a straight line. They zig, they zag, they surprise you at every turn. Scenario modeling forces you to think about how the company could evolve in different directions—and, more importantly, how you’ll respond.

The Real Value for VCs

The beauty of scenario modeling isn’t just about being right. It’s about being ready. It allows you to play out multiple outcomes and mentally prepare for each one. When reality lands somewhere in the middle—or even at an extreme—you’ve already mapped out a potential course of action.

Here’s how it plays out:

1. Supporting Your Portfolio Companies: Imagine you’re working with a SaaS company that’s growing steadily but is thinking about launching a new product line. A traditional model might show reasonable growth with moderate risk. But a scenario model might reveal that if customer adoption is slower than expected, the company could burn through cash much faster than planned. In a bear case, you may need to advise the founders to hold off on expansion and conserve capital. In a bull case, you might suggest doubling down on growth by raising another round to capitalize on the momentum. The point is, you’ve prepared for multiple outcomes—and are ready to act based on which one starts to materialize.
2. Raising Your Next Fund from LPs: LPs invest in you not because you can predict the future, but because they trust you to navigate it. When you present scenario models during fundraising, you’re not just selling them a vision of returns—you’re showing them how you’ll manage risk. LPs know things will go wrong, and they want to see that you’ve thought through what happens when they do. Show them your bear case: “Here’s what happens if the economy tanks and interest rates rise.” Then show them your bull case: “Here’s what happens if this AI company in our portfolio doubles revenue with minimal additional costs.” It's a way of showing that you're not betting everything on a single path—you’re ready for multiple futures.

The AI Example: Why Scenario Modeling Matters

Let’s take the hottest sector right now: Artificial Intelligence. Everyone’s talking about it. Investors are pouring money into AI startups, hoping to catch the next OpenAI or Anthropic. But AI is a volatile space, filled with enormous potential and uncertainty.

Imagine you’re investing in a startup building AI-powered healthcare diagnostics. The bull case is obvious: AI breakthroughs improve diagnostic accuracy, hospitals and clinics adopt the technology at scale, and the company becomes a leader in the space. The company could grow 10x in just a few years.

But what’s the bear case? Perhaps regulators take longer than expected to approve AI-driven medical tools. Or maybe ethical concerns about AI in healthcare slow adoption. In this scenario, you’d want to model slower revenue growth, higher regulatory costs, and a longer runway needed to achieve profitability.

Now, let’s add a third scenario: What if a major tech company, like Google or Microsoft, enters the same space and begins offering a similar product for free? This is something you’d never find in a traditional model, but scenario modeling forces you to ask, “How does this impact market share? How should we react?”

By thinking through all of these outcomes, you’re not predicting which one will happen—you’re preparing for whichever one does.

A Step-by-Step Guide

For those new to scenario modeling, the process may seem complex, but it’s actually a structured and straightforward exercise. Here’s how to start:

Step 1: Identify Key Variables

The first step is to identify the core drivers of success for the company you're modeling. These will vary depending on the industry and business model, but common variables include:

• Revenue growth rate
• Customer acquisition cost (CAC)
• Burn rate and runway
• Funding needs
• Market size and growth
• Regulatory environment

Example: In an AI healthcare startup, key variables might be customer adoption rate, regulatory approval timelines, and competition from large tech players.

Step 2: Build Multiple Scenarios

Create three main scenarios:

• Base Case: A realistic, middle-of-the-road scenario. Use current data and growth expectations to map out what happens if the business continues on its current path.
• Bull Case: A best-case scenario where everything goes right. Assume rapid customer adoption, favorable market conditions, and smooth execution by the team.
• Bear Case: A worst-case scenario where key challenges arise. Assume slower growth, higher costs, or unexpected competition or regulation.

Example: For the AI healthcare startup, the bull case might involve hospitals rapidly adopting the technology, while the bear case could involve delays in regulatory approval that slow growth significantly.

Step 3: Incorporate Sensitivity Analysis

Once your scenarios are built, apply a sensitivity analysis. This means adjusting one variable at a time to see how much it impacts the outcome. This will help you identify which variables have the most significant effect on performance and where the greatest risks lie.

Example: In your bear case for the AI startup, increasing the customer acquisition cost by 20% might drastically reduce profitability. On the other hand, even a slight improvement in diagnostic accuracy could unlock massive market share in the bull case.

Step 4: Test Assumptions and Adjust

Good scenario modeling is iterative. Test different assumptions and adjust your model as new information comes in. For instance, if your startup suddenly secures a partnership with a major hospital chain, you may need to revise your bull case scenario to reflect higher growth potential.

Step 5: Prepare for Action

Once your scenarios are mapped out, think about what actions you’d take in each one. How would you advise the company if the bear case comes to life? What steps would you recommend to capitalize on a bull case? This foresight allows you to act decisively when one of the scenarios starts to materialize.

The Key Takeaway: Prepare for More Than One Future

Scenario modeling is one of the most underrated tools in venture capital. It forces you to accept a fundamental truth about investing: You don’t know what will happen, but you can still prepare. The best VCs don’t bet everything on a single future; they map out multiple possibilities and make sure they’re ready to act no matter which one unfolds.

You won’t be able to control the future, but with scenario modeling, you can plan for it. And that’s the closest thing to certainty you’ll ever get in an uncertain world.

About Taghash

Taghash provides an end-to-end platform for venture funds, private equity, fund of funds, and other alternative investment funds. Over the last seven years, we have served as a tech arm for top VCs, helping them manage their operations across deal flow, portfolio, fund, and LP management.

Trusted by leading fund managers like Blume Ventures, Kalaari Capital, and A91 Partners , we empower our clients to better manage their funds and achieve greater success.

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