Whether you're a startup founder or just starting as an equity investor, financing rounds are essential for the growth of your company, or to extend your portfolio. The decisions you need to take are crucial to your success, and to do this, you will discover that it is essential to know how to simulate new financing rounds. In this article, we'll break down what these simulations are, why you need them, and how to go about it.

What is a Simulation (Scenario) for Financing Rounds?

A financing round simulation, also known as scenario analysis, is a financial modelling technique that involves predicting the financial outcomes of various funding scenarios. At its core, a financing round simulation is like a dress rehearsal for a business's future equity structure. Running scenarios, changing assumptions and seeing what the effect of each change will be represents a tried-and-true method that helps you predict and plan for the financial consequences of potential funding scenarios.

Why Do You Need Simulations?

Picture this: you're on a cross-country road trip, and your GPS isn't working. Would you just wing it and hope you'll get there? If the trip is important to you, probably not. Simulating financing rounds is like having a working GPS to make sure you reach your goal – completing the financing round - safely. Here's what simulating a financing round before it happens will bring you:

• Risk Mitigation: Simulations let you test scenarios and identify potential roadblocks or funding shortfalls before they become real problems.
• Decision Confidence: Scenarios provide you with insights based on real numbers and data, helping you make informed decisions about the business's equity structure, or, if you are an investor, about your future shareholding in the company.
•  Investor Attraction: If you are an entrepreneur, being able to present well-thought-out financing scenarios will make your business more appealing to investors.

When Could You Do It on Your Own?

We are all familiar with quick calculations, eventually scribbled on a napkin, to just have a quick and dirty estimation. Does this work for financing rounds? And if yes, when?

• Simple equity round: Some financing rounds are as easy as pie (or maybe easier). If all you need to do is see how much you will be diluted in a pure equity financing round, you only need to know the value of your company (not always easy), and the newly invested amount. It doesn't get easier than that, and yet … many investors discover that it’s not that simple. It matters if the amount is invested in the company, or it’s a shares buyout in which the money goes to the shareholder in exchange of existing shares, or … maybe it’s a combination. Even for this simple case, you may still discover you need a bigger napkin.
• Early-Stage Startups: Simple simulations are great for early-stage companies seeking their first rounds of funding. Straight equity rounds could be evaluated easily if the situation is not complicated by option pools or pre-existing convertible debt.
• Quick Decisions: If you just need a rough idea of how much you should ask for and at what valuation, a basic simulation can help.

Of course, even simple calculations like the ones mentioned would require that you are at least familiar with financing terms and conditions, and you do understand basic concepts such as equity, shares issuing and sale.

At What Moment Do You Need to Use Simulation Tools?

Ok, let's be real; most of the financing rounds are anything but simple. And even if they are, any mistake matters and may cost a lot. That's why it’s good advice to use bigger guns, like spreadsheets or dedicated tools. You should definitely put things in a model, even if quite simple, if you find yourself in one of the following cases:

• Complex Equity Structure: if your company has grown beyond the initial phase, when a small number of founders were owning all the company by dividing the shares, you definitely need to have all the information in a clearly structured cap table (here Nimity.com could definitely help), and then run scenarios in which you could see how each type of equity, option, convertible financing, option pools and such fares before and after the financing round.
• Complex Financing: If you're dealing with multiple funding sources, with complex instruments such as SAFEs, convertible notes, preferred stock, and debt, it's time for the spreadsheet wizardry.
• Scaling Up: As your business grows and you start talking bigger numbers, the stakes get higher. Simulations help you keep up with the increasing complexity and keep you from misunderstandings and mistakes which could count you dearly.

Benefits of Using a Dedicated Tool

Now, if you're ready to kick things up a notch, dedicated simulation tools are your best friend. Let’s face it; even if you could do all this and then some more in a spreadsheet, if you’re not both a financial-savvy expert and a top spreadsheet user, building financial models and simulations may not be your cup of tea. Of course, you could have somebody do it for you, but again, understanding all this may be easier if you just play with a good simulation tool and understand the effect of each of your changes. 

• Accuracy and Precision: These tools can crunch numbers with incredible accuracy, helping you avoid costly miscalculations.
• Scenario Testing: A good simulation tool lets you explore a variety of "what if" scenarios, which is invaluable for business planning and investor presentations.
• More types of financing instruments: Dedicated tools should allow you to use at least the typical financing instruments and equity categories as option pools, equity financing, SAFE rounds and convertible notes.

When is a Simulation Tool Not Enough Anymore?

 Simulation tools walk a tightrope between being simple and easy to use by company owners and non-professional investors, while being complex enough to allow most, if not all, funding scenarios to be reflected with precision and accuracy. However, there may come a point in the growth of your business or the complexity of your financing rounds when a simulation tool may no longer be enough. Here are some cases in which you might find that you have outgrown your simulation tool:

• Highly Complex Financing Structures: dealing with intricate funding structures that involve multiple investor classes, convertible instruments, complex term sheets, and various rounds of financing. Simulating these multi-layered scenarios in a single tool may lead to a lack of precision and an increased risk of errors.
• Real-Time Data Analysis: continuously analysing real-time data as share prices of listed companies to make instantaneous financial decisions, adapt to market changes, or provide live updates to stakeholders. Traditional simulation tools typically work with static data, and integrating real-time data feeds is done in more complex tools.
• Customization and Scalability: for businesses requiring highly customised financial models to reflect unique equity structures, multiple entities, or custom financing tools. Standard simulation tools may not offer the level of customization needed, making them less effective for tailored financial modelling.

When you encounter these challenges, it's a sign that your business has outgrown the capabilities of simple simulation tools. In such cases, you should consider specialised financial modelling and analytics software, potentially created specifically for your industry or financial needs.

… But until you get there, simulating new financing rounds is your financial safety harness, ensuring a smoother ride. From napkin estimates to dedicated tools, there definitely is a good place for easy-to-use simulation tools as the one offered by Nimity. Visit us now, embrace the power of prediction and take control of your financial journey.

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