Financial Scenario Modeling For Startups

Not sure which financing or exit scenario is the best for your business? This question comes to mind for many private companies looking for financing options for their future growth. Now that companies have more liquidity and financing options at their disposal, this creates the need for more sophisticated financial scenario modeling.

Even though companies have the option to stay private for longer, it can be hard for businesses and their investors to determine the kind of funding or exit scenarios that are best for the company before they go public.

What is Financial Scenario Modeling?

Scenario analysis is the process of analyzing and assessing all possible results that can take place in the future by considering multiple feasible outcomes for a given event. In financial scenario modeling, this process is normally used to determine the variations in the value of a business or cash flow, particularly when there are both favorable and unfavorable events that can impact the company.

A lot of business managers also tend to use scenario analysis during their decision-making process to determine the best and worst case scenario while anticipating potential profits. In fact, this process is not just for companies, but for individuals as well. An individual can use this process for big lifetime expenses, like setting up a business or purchasing a house. Keep reading to know more!

Generating cases to be used in Scenario Analysis

While the executives and managers are performing the scenario analysis in the company, they will also look at the different statistics of the economy, the industry, and the business. All these stats would give various scenarios which would include assumptions such as interest rates, inflation, operating costs, customer metrics, product prices, and other drivers of the business. All this information helps the company managers predict the most probable outcome for the company.

The managers usually begin with 3 basic scenarios, as below:

• Base-case scenario: Based on management assumptions, this is the most probable scenario. For instance, while calculating the net present value, the rates that are used most often include the average cash flow growth rate, tax rate, and the discount rate. 
• Best-case scenario: This is the most ideal scenario and is the one most sought after by management and put into action to achieve their objectives. For instance, while calculating the net present value, one would use the lowest possible tax rate, the highest possible growth rate, or the least possible discount rate.
• Worst-case scenario: This is taken as the most severe outcome that can take place in any given situation. For instance, while you calculate the net present value, one would take the highest possible discount rate and subtract it from the possible highest expected tax rate or the cash flow growth rate.

Conducting these three scenarios would give the company an idea on how to predict the outcomes of future events, and how to manage the different risks the firm could encounter.

Benefits of Performing Scenario Modeling for Startups

There are a lot of reasons as to why investors and managers perform financial modeling analysis. To begin with, predicting the future of a company is very risky. Hence, it is important to explore as many different cases as possible.

These reasons for conducting financial scenario modeling include:

• Projecting investment returns or losses: By using scenario modeling software, you will be able to analyze and generate different values of potential gains or losses of an investment.
• Future planning: It offers the owners a peek into what the expected risks and returns are when planning any future investment. This is great for a business, as the main goal of any company is to increase revenue over time. By using calculations, you will be able to make better decisions about your investments. 
• Avoiding risk and failure: With financial scenario modeling, companies can avoid poor investment decisions by assessing financial prospects. Both the best and worst probabilities are taken into account so that investors can make better decisions using this information. 
• Being proactive: Companies can avoid potential losses that result from uncontrollable factors by being preventive during the worst-case scenarios. These worst-case scenarios are determined by analyzing the situations and events that might lead to unfavorable outcomes. In fact, as the saying goes, it is always better to be proactive than reactive when a problem comes up.

Plan the Future with Scenario Modeling Software or Tools

As mentioned above, using scenario modeling software is the best way to get your company’s financial analysis done. And to help you calculate this easily and get the needed results, Eqvista has created a tool where you can easily process the different financial scenarios based on your cap table and company data. 

Here is a breakdown of our financial round modeling tools:

• Waterfall Analysis: Prepare pro forma cap tables to comprehend the impact of an exit of the company for each shareholder. 
• Round Modeling: A model of fully diluted ownership, outstanding options for potential financing rounds and post-money valuation in just a few clicks. 

Eqvista has been created in such a way where you can not just create your cap table for your business, but also get the perfect financial scenario modeling done with it. The application can handle every kind of scenario and complex investment type for each financing round. This means that you will be able to create various different scenarios one after another and plan your next steps accordingly. 

You will also be able to understand the impact that the exit and financing decisions would have on your capitalization structure and payout ratio. To give you a better idea when you will need the financial scenario modeling to help you, a few scenarios have been shared below:

Note: Both the finance team and the investors can make use of the model to make a decision. And both situations have been outlined below.

For the finance teams:

• In a situation where you get the term sheet from the potential acquiring company, you can use the model to see the payouts for your team and the investors within seconds using the Eqvista financial scenario modeling. 
• The moment you get a term sheet from an investor, you can understand all about its impact on your cap table and payout structure quickly with the help of the model.
• Ensure that the main stakeholders like the founders are maintaining a meaningful ownership stake by studying the model derived from the financial tool. 

For the investors:

• In case you want to invest in another company again, you can easily see the impact of different investment terms before you give them your term sheet.
• In case you already have a preferred financial model template, take help by using our scenario modeling to get a better understanding of the answer before creating your own model or use it as a valuation point to check your work at the end.
• When a portfolio company is raising funds, you can comprehend the impact of it on your firm and other firms that are on your company’s cap table.

How Eqvista’s Waterfall Analysis and Round Modeling Helps?

With all that has been mentioned about financial scenario modeling, let us share what Eqvista’s round modeling and waterfall analysis offers. 

1. Waterfall Analysis Tool

Waterfall analysis is a tool that would help shareholders and investors in preparing financial models of the total amount that each shareholder would get when the company exits. The tool would use your cap table to undergo complicated calculations that would permit the users to view all the possible exit scenarios. This is done through advanced algorithms to calculate the end results using our financial models.

Our waterfall analysis also considers every aspect of the preference shareholders in the cap table. And along with this, we have also incorporated a unique waterfall chart for investors during the preference share rounds. To understand better, here are the main features of our waterfall analysis:

• Converted liability option for noteholders
• Cash Dividend option for preference shareholders
• Multiple inputs for exit value, exit date, and possible transactions fees
• Instantly reactivity for efficient analysis
• Cap table comparison of payout values
• Waterfall chart for preference rounds
• Preference liquidation breakdown of preferred investors
• Advanced calculations for preference rounds

All these features are nicely incorporated together with a simple-to-use interface for any exit scenario. The interface is user-friendly and includes various functions that would help the users in their cap table management.  

2. Round-Modeling Tool

Another financial model that you can benefit from on Eqvista is the round-modeling tool. It is a scenario modeling tool that helps the company management and the investors view the dilution of the cap table when there are new investments added to the company. Additionally, our round-modeling tool also takes into consideration a new option pool after the new investment is made. 

The overall results that come from the scenario modeling software would help you make the most critical decisions on the amount and timing of the new investments coming into the company. It is the main key that would help those startups looking for growing their company. And it helps in managing the cap table, the effects of the founder’s share dilution and other existing shareholders as well. 

Here are the main advantages that you can enjoy with the Eqvista round modeling tool:

• Pre-money & post-money convertible basis
• A basic and advanced version for new investments
• Multiple inputs for date of investment, investment amount, and pre-money & post-money valuation
• Instant reactivity for inputting data
• Pie chart & key figures for new investments
• Pre-money & post-money convertible basis
• Convertible note interest options for convertible notes
• Convertible rate options for preferred shares

The main thing that makes our round scenario modeling software the best financial tool for your startup is the fact that it can test different scenarios with a wide range of different functionalities. It also has a very user friendly interface, allowing our companies to easily understand the results given.This is what makes us different from the other platforms out there.

Try out Eqvista today!

Finance teams and investment firms usually spend hours of valuable time to form cap tables and potential exit scenarios in spreadsheets. Building these models from scratch is time-consuming and difficult. And if you’re running a small startup, you might not even have someone with the expertise to model financing or exit scenarios. We’ve solved this with our financial modeling tools.

We at Eqvista built this financial scenario modeling software to help you understand the impact of your company’s future financing rounds or possible exits. Find out more here & begin to use the application today!