Probabilistic Scenario Weighting for Biotech and Deeptech: Budgeting Against Expected Value

The Foundation: Moving Beyond a Single "Best Guess" Forecast

The financial forecast for an early-stage company often lives in a single spreadsheet. It’s a column of numbers representing the “best guess” plan, a path stretching 18 to 24 months into the future. For founders in capital-intensive sectors like Biotech or Deeptech, this single forecast feels particularly fragile. Key milestones, such as a successful experiment or a regulatory submission, are often binary. Success unlocks the next stage; failure can be existential. Relying on one version of the future is not just optimistic, it’s a high-stakes gamble with your cash runway. This is the core challenge that scenario planning aims to solve.

The first step beyond a single forecast is creating multiple scenarios. Most startups begin with three: a Downside case (things go wrong), a Base case (the plan we are aiming for), and an Upside case (things go exceptionally well). While this is a significant improvement, the critical question remains: which one should you use for your actual budget? The answer is none of them. Instead, you should plan against the “Expected Value”.

Expected Value is the probability-weighted average of all possible outcomes. It provides a more robust planning target than the single Base case, which might only have a 50% or 60% chance of happening. The calculation is straightforward and can be done in any spreadsheet model.

Consider a startup forecasting its end-of-year revenue. The scenarios could be:

• Downside: $500,000 in revenue, with a 30% probability.
• Base: $1,000,000 in revenue, with a 50% probability.
• Upside: $1,500,000 in revenue, with a 20% probability.

The Expected Value calculation would be: (0.30 * $500,000) + (0.50 * $1,000,000) + (0.20 * $1,500,000) = $150,000 + $500,000 + $300,000 = $950,000.

This $950,000 figure is the most realistic, mathematically sound basis for your budget. Planning your spending against the $1,000,000 Base case introduces a systemic risk. You are budgeting against an outcome that is more likely to be missed than hit when all possibilities are considered. This distinction between a “best guess” and a calculated Expected Value is the foundation of sound startup financial planning.

How to Assign Probabilities to Financial Scenarios With No Historical Data

A common and valid challenge for founders is the lack of internal historical data. How can you assign a credible probability to a technical milestone that has never been attempted before? This is a classic problem where sparse data makes it difficult to develop reliable probability modeling. The solution lies in shifting your perspective from the “Inside View” to the “Outside View.”

The "Inside View" vs. The "Outside View"

The Inside View is your internal narrative. It is based on your team’s specific talents, your unique technology, and your ambition. It is naturally optimistic because it is shaped by the very passion and belief necessary to start a company. While essential for motivation, it is a poor foundation for objective forecasting.

The Outside View, a concept developed by psychologists Daniel Kahneman and Amos Tversky, ignores these internal details. Instead, it asks a powerful question: what happened when other companies were in a similar situation? This approach, known as Reference Class Forecasting, uses external benchmarks to ground your assumptions in reality. For Pre-Seed to Series B companies in the UK and USA, this is the most effective way to develop defensible probabilities.

Applying Reference Class Forecasting in Practice

Here is how to apply this approach to find credible probabilities:

• For a Biotech Startup: You are developing a new oncology drug. Your internal team is brilliant, but the Inside View is not enough for a credible forecast. The Outside View requires looking at industry data. Research from the 'Clinical Development Success Rates 2011-2020,' BIO/Informa report shows that the probability of success for a drug from Phase 1 to approval can be as low as 7.9% overall. The same report notes that drug development success rates vary dramatically by therapeutic area, with oncology being lower and hematology being higher. This external data point provides a sobering, defensible starting probability for your “technical success” scenario, far more credible than a gut feeling. For UK-based firms, you can find further resources from the MHRA guidance on clinical trial authorisation in the UK.
• For a B2B SaaS Startup: You need to forecast future revenue, and a key driver is customer churn. With only a few months of data, your internal numbers are not statistically significant. Using the Outside View, you can find reliable benchmarks. According to data from OpenView and KBCM Technology Group, for early-stage B2B SaaS, gross dollar churn is often 1.5% to 2.5% monthly. You can use 2.5% for your Downside case, 2.0% for your Base case, and 1.5% for your Upside, instantly making your financial forecasting techniques more robust.
• For an E-commerce Startup: Your growth depends on paid advertising, making Customer Acquisition Cost (CAC) a critical assumption. Instead of plucking a number from thin air, research industry benchmarks for your specific category. A CAC of $40 might be high for cosmetics but low for furniture. This external data anchors your model in an external reality, a crucial step for risk assessment for startups.

This level of rigor often becomes critical when raising a Series A round. Investors will scrutinize the assumptions underpinning your financial model, and citing external benchmarks demonstrates maturity and diligence.

Sanity-Checking Your Optimism: Scenario Analysis Methods for Founders

Even with external data, cognitive biases and internal pressures can skew probability estimates toward over-optimism. The Inside View is powerful and persistent. Founders need structured techniques to challenge their own hopes and create a more balanced view of the future. The lesson that emerges across cases we see is that simple, structured team exercises are more effective than asking people to “be more realistic.”

Two practical scenario analysis methods can be implemented without a dedicated finance team to improve your decision making under uncertainty.

Technique 1: The Pre-Mortem Exercise

This is a low-cost, high-impact exercise ideal for Pre-Seed and Seed-stage companies. The process is simple and designed to surface risks in a psychologically safe way.

1. Set the Scene: Gather your core team and present this prompt: “Imagine it is one year from today, and our startup has failed. We have run out of money and the project is over.”
2. Brainstorm Causes: Ask everyone to take 15 minutes to silently write down all the reasons why they think this failure happened. The anonymity of writing first is key.
3. Consolidate and Discuss: Collect the reasons and discuss them as a group. By framing failure as a certainty in the past, the exercise liberates people to voice concerns without seeming negative or disloyal.

The anonymous list of “causes of death” will often include risks like a key technology integration taking twice as long as expected, a competitor launching a killer feature, or the inability to hire a critical role. These specific, tangible risks become direct inputs for defining your Downside scenario and assigning it a credible, non-trivial probability. It is a structured way to confront wishful thinking. You can find more details in our scenario planning workshops guide.

Technique 2: The Simplified Delphi Method

For slightly later-stage teams (Seed to Series A), this approach uses the wisdom of the crowd to refine probabilities. It is a structured process for aggregating expert opinions.

1. Independent Polling: Ask three to five key leaders from different functions (e.g., Engineering, Sales, Product) to independently and anonymously assign percentage probabilities to the Downside, Base, and Upside scenarios. For example, "What is the probability we hit our $2M ARR target by year-end?"
2. Aggregate and Reveal: The results are then aggregated and presented back to the group. Invariably, there will be a range. The Head of Sales might assign a 70% probability to the Base case, while the Head of Engineering assigns only 40%.
3. Facilitate Discussion: The subsequent discussion is where the value lies. The engineer might reveal a known dependency on a fragile API that the sales team is unaware of. This process de-personalizes the challenge and surfaces hidden information, leading to more robust and aligned probability estimates.

From Analysis to Action: Building a Budget That Works

Having well-defined, weighted scenarios is a major step. However, the final challenge is converting this analysis into a concrete budget and a cash runway plan that satisfies your board and investors. This is often where the process breaks down, as teams revert to budgeting against the optimistic Base case. The reality for most early-stage startups is more pragmatic: your spending plan must reflect the weighted reality, not just your hopes.

Budget Committed Costs Against Your Expected Value Outcome

The most important rule is to budget your committed costs against your Expected Value outcome. Committed costs are the expenses you must pay regardless of performance. These include salaries, rent, insurance, and essential software subscriptions (like your accounting package, whether QuickBooks in the US or Xero in the UK). Aligning these fixed costs with your probability-weighted revenue or funding scenario is the hallmark of a mature financial plan. This is a crucial, actionable takeaway.

This means you might hire one fewer engineer or delay a non-essential office expansion compared to the Base case plan. It is a disciplined choice that builds resilience into your financial structure, ensuring your core operations can survive if you begin trending toward your Downside case.

Visualize and Communicate Your Plan with a Runway Chart

To make this tangible for your board, visualise it on a multi-scenario cash runway chart. This is not a complex task and can be built in any spreadsheet program. The chart should clearly show:

• An x-axis representing time (e.g., the next 24 months).
• A y-axis representing your cash balance.
• Four descending lines starting from your current cash position: one line each for the Upside, Base, and Downside cash burn, and a fourth, most important line showing the cash burn based on the Expected Value case.

This chart transforms the conversation. Instead of a single line hitting zero on a specific date, you present a cone of possibilities. The Expected Value line shows your most likely runway. The Downside line shows your "drop-dead" date, the point at which you must have new funding or have made significant cuts. This visual directly answers the key investor question: how much runway this funding round really buys us? It demonstrates that you understand the risks and are not just hoping for the best but actively planning for a range of potential realities. It provides a clear framework for deciding when to accelerate spending or when to conserve cash.

Your Step-by-Step Guide to Probabilistic Forecasting

Integrating probabilistic forecasting into your startup does not require a CFO or complex software. It is a mindset shift that can be implemented progressively using the tools you already have, like Google Sheets or Microsoft Excel. The goal is to build a more resilient financial plan that acknowledges uncertainty.

1. Start with Scenarios: At the Pre-Seed or Seed stage, simply moving from one forecast to three (Downside, Base, Upside) is a significant improvement. Use a Pre-Mortem exercise with your core leadership team to bring your Downside case to life with specific, plausible risks.
2. Anchor Your Assumptions in Reality: As you approach a Series A fundraise, incorporate the Outside View. Identify the one or two key drivers of your model, such as churn rate for a SaaS company or development success for a Biotech firm. Find credible industry benchmarks to inform the assumptions in your scenarios. This makes your plan far more defensible.
3. Calculate and Track Expected Value: Introduce an Expected Value calculation as a Key Performance Indicator (KPI) in your financial model. This figure, not the Base case, should become your primary planning target for revenue and cash flow. It represents the most mathematically sound central point of all possible futures.
4. Budget Against the Weighted Outcome: Make the disciplined shift to budgeting your committed, fixed costs against your Expected Value plan. This ensures your core operations are funded based on a realistic assessment of future performance, preserving runway if you start to deviate from your Base case.
5. Visualize and Communicate Your Plan: Use a multi-scenario cash runway chart in every board meeting and investor update. This single visual communicates a sophisticated understanding of risk and provides a clear framework for making strategic decisions. You are showing that you have a plan that works across a range of outcomes, which builds immense confidence.

By adopting these techniques, you move from a fragile, single-point forecast to a dynamic, resilient financial strategy. You are not just hoping for the best; you are planning for reality. Continue at the scenario planning hub.

Frequently Asked Questions

Q: Isn't this too complex for an early-stage startup?
A: It doesn't have to be. Start simply by creating three scenarios (Downside, Base, Upside) and using a Pre-Mortem to define your risks. You can introduce more sophisticated probability weighting and external benchmarks as you grow and approach later funding rounds. The complexity should match your company's stage.

Q: How often should we update these probabilities?
A: Probabilities should be reviewed on a regular cycle, such as quarterly, and always after a significant event. This could be a major clinical trial result, the launch of a key product feature, or a substantial change in the competitive landscape. The model should be a living document, not a static one.

Q: What if my investors just want to see an optimistic plan?
A: Show them the Upside case to communicate your ambition, but present the Expected Value case as your operational budget. This demonstrates both strategic vision and fiscal discipline. Sophisticated investors appreciate a founder who plans for reality while aiming for the best possible outcome.

Q: How is probabilistic scenario weighting different from a sensitivity analysis?
A: Sensitivity analysis typically tests the impact of changing one variable at a time (e.g., "what happens if churn increases by 0.5%?"). Scenario planning combines multiple related changes into coherent narratives. Probabilistic weighting adds a crucial third layer, estimating the likelihood of each of those narratives actually happening.