A Practitioner’s Guide to Sourcing, Diligence, Deals and Portfolio Work
Julian R. Sterling
Two Excel workbooks. One runs the reserve arithmetic the book says you should be able to run in your head — and then never runs. The other computes the unit economics of chapter 6, a chapter about whether a business works that contains two numbers. Every figure in both is a live formula. They are free. Nothing is gated behind a sign-up, and no email address is asked for.
Chapter 12 is the longest in the book. It says that “underneath every reserve
decision sits arithmetic that you should be able to run in your head” — and
contains no arithmetic at all. Not one figure, in sixty-six paragraphs. This file runs it.
Start with the number that reframes the chapter. Holding a ten per cent stake through Series A
to D costs 14.76 million in one company. A 40 million reserve pool therefore
defends 2.71 companies out of forty. The book describes firms with “a
policy of taking their full pro-rata in nearly every up round”; at this fund shape that
policy costs 14.8 times the pool. It is not a policy. It is an impossibility.
Which settles what the follow-on framework is really for. Ranking companies against each other
is not a counsel of rigour — it is a binding constraint. Recommend a follow-on and you are
arithmetically recommending that two other companies get nothing. And note where the money goes:
sixty-one per cent of the cost falls in the Series D alone, which is why reserve
pools run dry late, and why pro-rata taken cheaply at the A can be the reason there is nothing
left for the round that mattered.
The book’s own claims hold up exactly. Ten per cent at seed becomes 3.70 per
cent at exit if you never follow on — its “double-digit to low single
digits”, measured. Eight per cent of a landmark outcome is worth 1.60× the fund and
two per cent is worth 0.40× — its “difference between returning capital and
returning several times capital”, measured.
But one convention does not survive being computed. The book says funds reserve
“a roughly even split, about half”. On this fund shape half returns 2.47× and
a quarter returns 3.14× — a gap of 67 million on a 100
million fund. Turn the selection-skill dial down and the optimum falls further, toward
a twentieth. It never rises to a half. The direction is the opposite of intuition:
the worse you are at picking follow-ons, the less you should reserve, because a
fund that reserves half and chooses badly has arranged to make its mistakes with the larger pile
of money.
Reserve_Arithmetic.xlsx · XLSX · 20 KB
Appendix F · Chapter 6
The unit economics of growth
Chapter 6 asks whether “a single unit of it, typically a single customer,
generates more value than it costs to acquire and serve”. It runs to some two
thousand four hundred words and contains two numbers: the chapter number, and a stray ten.
This file supplies the arithmetic, using only the chapter’s own example and its own claims.
The chapter describes two companies, both doubling revenue, one whose cohorts expand and one
whose cohorts decay, and stops one step short of computing them. Computed: the declining company
must buy 1.53 times as much new revenue every year to print the identical
growth rate. Nothing in the top line shows it.
Then the question the chapter cannot answer as posed. It says a customer’s value depends on
how long they stay, and never names a horizon — but for a cohort that expands the sum has
no limit. The same customer is worth 2.78 over three years and 81.95 over twenty.
The decaying company’s converges on 2.67 and goes no further. Choose three years and one is
worth 1.59 times the other; choose twenty and it is 30.76. Both are defensible, and they are
nineteen times apart.
Which makes the threshold exact. Growth adds value below an acquisition cost of
10.98 for one company and 2.51 for the other: a margin for
error 4.37 times narrower, on a business that must also buy 1.53 times more. Its exposure is
6.68 times larger at an identical headline growth rate.
And the chapter’s warning that broken economics hide behind fast growth “for a
surprisingly long time” gets an answer that is not a duration. At a common acquisition cost
both companies run a cumulative deficit every single year — −3,020 against
−5,720 — because anything doubling spends faster than margin arrives. The
accounts never separate them. The defect is invisible for exactly as long as the growth lasts.
So the test the chapter proposes and never performs is the one that works. Cut acquisition to
zero and the healthy company still grows, reaching 1.75 times its revenue in
four years without winning a single customer. The other falls to 0.24 times: it loses
76 per cent of its revenue, having done nothing wrong except stop buying.
The_Unit_Economics_of_Growth.xlsx · XLSX · 13 KB
What to try first
Open sheet 5 and set selection skill to 0.50 — a fund whose follow-ons land on the right
companies half the time. The optimal reserve ratio drops from a quarter to a fifth, and the
conventional half now returns 1.81×. Then push the fund-returner’s exit value up and
watch the optimum climb: the steeper the power law, the more reserves are worth,
because there is more of one outcome to own. That single relationship is the whole of reserve
strategy, and it is two inputs away.
What the arithmetic does not settle
It cannot tell you which companies are the winners, which is the entire difficulty and the reason
the skill dial exists. It cannot price signalling — the chapter is right that declining a
pro-rata can damage a company you still own, and no model here captures that. And it assumes
reserves can be deployed when you want them, which recycling and fund-life limits complicate. What
it does settle is the size of the constraint you are working inside, which is the thing most
easily left vague and most expensive to leave vague.
Conventions used throughout
Amber fill
an input — you may edit these
Grey fill
a formula — do not overtype these
Checks sheet
sixteen controls, each stating its own verdict
Every figure is illustrative, as everything in the book is. The outcome set — one company at
two billion, two at 300 million, four at 75, eight at 20, twenty-five at nothing — is a power
law of a particular steepness, and the optimal reserve ratio is sensitive to it. It is an input.
What is not sensitive, across everything tested, is the direction of the answer.
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.
Articles on this book
One of the calculations in this workbook, worked out in full.
All articles.
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 Growth Equity InvestorWhat a pro rata cheque really costs, and the band where defending your ownership loses money.
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.
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.
Also by Julian R. Sterling
The other books with companion files. The full list of titles is on the
author page.
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 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.
The CBAM Compliance HandbookWhat 2027 really costs, how big the buffer should be, and the term the surrender formula counts twice.
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.
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 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 Distressed Debt InvestorWhere the fulcrum security actually breaks, and what an 80-cent recovery is worth once composition and time are priced.
The Real Estate Debt InvestorThe margin against the return on capital, the floor priced, and what prepayment protection buys.
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.
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.
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.
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.
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.
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