Sourcing, Underwriting, Structuring and Building a Career in Growth Equity
Julian R. Sterling
One Excel workbook. Chapter 12 calls the reserve the most underappreciated lever in
portfolio construction, then answers the question in four sentences and never writes down a
number. This writes them down. It is free. Nothing is gated behind a sign-up, and no email
address is asked for.
Chapter 12 states seven quantities in words — fifteen to twenty positions, a
double-digit stake, an equal amount reserved alongside every initial dollar, two follow-on
rounds — and not one figure in digits. The file runs those quantities, and four things
come out that the chapter does not say.
A pro rata cheque costs less than the original one, not more. The chapter
says exercising pro rata “costs real capital — often more than the original check,
because the company is now more valuable”. On its own parameters round C costs
half the initial cheque and round D three quarters. The
explanation is the wrong half of the identity: a pro rata is your ownership times the round
size, and size is dilution times valuation. Companies that get more valuable sell
less. The sheet tabulates the break-even — at a twenty per cent round the company must
be worth five times its entry valuation before the chapter’s sentence
becomes true.
A one-to-one reserve is too tight and too loose at once. Defending one winner
through both rounds costs 1.25× its cheque, against one times held back
— so it does not stretch to the “lean in” promised in the same sentence.
Across fifteen positions, where five never raise again, pure defence uses
48 per cent of the pool and leaves 155 idle. Both are true, and they point
opposite ways.
Defending always costs you multiple. Same company, same exit: 7.65×
undefended against 5.00× defended, while the internal rate of return
barely moves — 40.4 against 40.8 per cent. That is mechanical, not incidental. Follow-on
dollars are bought above the entry price by construction, so there is no exit value at which
defending improves the multiple. Reserves buy profit dollars and scale; they do not buy
multiple.
And there is a band where defending loses money outright. Below an exit of
about 520 the follow-on dollars come back worth less than they cost —
and at that exit the company is worth nearly four times its entry valuation and the original
cheque is still returning 2.66×. The ordinary good-but-not-great
outcome, in which defending converts a solid winner into a worse one.
The last sheet tests the sentence at the centre of the chapter, that reserves shape returns
“as much as picking winners does”. Like for like, a fund with no reserve owns
36 per cent more of the identical company set — and the one-to-one
fund’s idle reserve closes that gap at 1.02× what it has left.
Break-even, almost exactly. Which makes it not a parallel claim but the same claim: a reserve
is worth the selection quality of the follow-on decision and nothing else. Twenty-four checks.
Change the round C dilution from twenty per cent to thirty and watch the break-even step-up
fall from five times to three and a third — the only condition under which the
chapter’s sentence about pro rata is true is a company selling a lot of itself at a high
price, which is a distressed round, not a good one. Then drop the exit to four hundred and read
the last two columns of the band sheet: the follow-on dollars return seventy-seven cents while
the original cheque returns two times, and nothing about the company has gone wrong.
What the arithmetic does not settle
It cannot tell you which names will raise again, which is the input the whole reserve question
turns on and the one nobody knows at fund formation. It cannot price access — a fund may
defend its ownership to keep a seat rather than to make money on the marginal dollar, and that
can be right for reasons no multiple captures. And it deliberately gives neither fund any
selection skill, because the moment you assume an edge on follow-ons you have assumed the answer.
The point of the like-for-like is to show what a reserve is worth before the edge, so
that the edge has to be argued rather than presumed.
Conventions used throughout
Amber fill
an input — you may edit these
Grey fill
a formula — do not overtype these
Checks sheet
twenty-four controls, each stating its own verdict — three of them structural
Every figure is illustrative, as everything in the book is. The fund, the company, the rounds
and the exit are invented. The arithmetic is not — and one of the checks exists precisely
because it disagrees with the chapter.
Opening the file
The workbook opens in Microsoft Excel, LibreOffice Calc, Google Sheets and Numbers. It uses no
macros and no add-ins, so nothing needs to be enabled or trusted. If your spreadsheet asks to
update links on opening, decline — there are none.
Also by Julian R. Sterling
The other books with companion files. The full list of titles is on the
author page.
Closing the DealTwo defensible bridges 20.70 million apart, a peg worth 7.00 million, and the six choices that remove 6.60 of a 12.00 earn-out.
CMBS and CRE CLOsWhere the loss actually lands, from appraisal reduction to realised severity, and what the B-piece is really being paid for.
How to Read a Commercial LeaseThe three refinements chapter 19 names and never performs, and the renewal rate below which the mark-to-market is worth nothing.
How to Read a Credit AgreementWhere the default actually comes from, the cure that costs 5.5 times the other, and the capacity nobody adds up.
How to Read a Real Estate Loan AgreementThe cure ratio in closed form, the four-point window in which the cheap cure works, and the cure sized to the wrong threshold.
Office Real EstateA six per cent yield that returns 3.2 per cent once the re-letting cycle is paid for, and the headline-to-net-effective rent arithmetic.
Private Equity Real EstateBoth worked waterfalls to the dollar, the two capital stacks, and the arithmetic of the promote made changeable.
Private Markets PerformanceThirty-one of the thirty-three figures chapter 19 publishes reproduce exactly — and the two that do not are named rather than quietly adopted.
Raising a Real Estate FundThe chapter 17 funnel run on a calendar — when the first close actually lands, and why more travel does not help.
Real Estate FinanceFour people look at one building and reach four numbers; the lender is whole only above 105,109,489, twelve per cent below today’s value rather than forty.
Real Estate Financial ModelingProperty, development and fund models built line by line, and the modelling test worked end to end.
Real Estate Fund ManagementThe waterfall of 6.11, the build-to-core of 8.7 and the proceeds gap, reproduced as live formulas rather than asserted.
REIT Analysis and ValuationFFO of 532.0, AFFO of 381.0, net asset value and dividend safety — every figure a formula you can change.
Retail Real EstateThe occupancy cost of every unit in a centre, the sixteen per cent of the rent roll no tenant can sustain, and the right-size-convert-or-hold decision priced.
Sale and LeasebackA €179.5 million transaction end to end, with rent cover measured on the entity that actually signs the lease.
Self-Storage Real EstateThe cohort engine behind a 590-unit store, and the rate increase on existing customers priced against the move-outs it causes.
The Fund Finance ProfessionalChapter 8 builds the reported-to-eligible NAV bridge; chapter 9 computes every ratio without it. Two points at every state — and what a subscription line does to the IRR.
The Private Credit InvestorThe two coverage ratios are not measured on the same thing: the erosion is 47.7 per cent, not the 28.7 the headline implies.
The Private Equity Fund Controller PlaybookThe book defines IRR, DPI, RVPI and TVPI, tells you to update them at the exit, and prints not one value. Computed: a 1.833× deal inside a fund at 0.892 TVPI.
The Venture Capital AssociateWhat defending a position costs, and how many companies a reserve pool actually defends.
Financial Risk ManagementA fund inside every limit that cannot meet a redemption — and the number that decides it is the one with no currency attached.
Business ValuationThree advisers land 26.8 per cent apart on one company, and the whole gap turns out to be 1.96 points of perpetual growth.
Quantitative FinanceThree models agree to a quarter of one per cent about a number that one unobservable input moves a hundred and three times as much.
Asset ManagementFour people quote four returns for one mandate, all correct and 2.7017 points apart — forty-eight times the manager’s net skill.
Alternative InvestmentsA manager reports 13.29 per cent and the endowment earns 6.26 — both correct, and only a third of the advertised advantage arrives.
Credit AnalysisFour defensible EBITDAs on one borrower give leverage from 3.19x to 6.47x — and the add-back argument is fifty times the covenant headroom.
Venture CapitalOne company out of twenty-eight returns 56.7 per cent of the fund, and half the capital goes in after the decision — at half the return.
Machine Learning for FinanceFive people quote the accuracy of one credit model, all five are right, and the number that decides how much money it makes is none of them.
Commercial Real Estate InvestingThe equity earned 8.6647 per cent and the investor received exactly 8.0000 — the preferred return, and nothing above it.
Mergers and AcquisitionsThe board paper says the deal creates 13,436,667 of value. The arithmetic says it destroys 17,530,855. Nobody is lying.
DerivativesThe treasury report says the hedge cost 1,233,698. That is the interest differential, not a cost.
Treasury ManagementFive cash balances for one company, all correct and 145,600,000 apart — and the revolver that is two-thirds of the liquidity leaves at a revenue fall of 8.4127 per cent.
Financial Planning and AnalysisRevenue 3.0190 per cent above budget and operating profit 16.3209 per cent below it, in the same quarter, with every figure correctly stated.
Energy TradingA position report that is 91.7031 per cent hedged and correctly computed, on a book that is short 2,542,000 MWh — and a margin call of 198,400,000 the next morning.
Construction Cost ControlA contract sum of 26,301,102 became a final account of 29,153,363 on the building that was drawn — and 85.8 per cent of what was lost was knowable on the day it was signed.
Pricing StrategyA list price of 148.00, a pocket price of 112.51, and the nine deductions in between — with what one point of price is actually worth.
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