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Why Simulate New Financing Rounds and When You Should Do It

October 27, 2023 - 6 minute read

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:

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?

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:

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. 

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:

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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