Akil Nannooh, CFA

How valuation is actually formed Valuation is not set by ambition or comps alone. It’s shaped by the strength of demand, clarity of growth levers, downside protection, and competition for the round. Founders think valuation is the starting point. Investors see it as the outcome.

6

Unpopular opinion/learning: in consumer AI, as an investor, being first-mover on the wrong bet is still better than being consensus on the right one. Your cheque buys you into the ecosystem before the pattern is obvious - early enough to spot, and back, what comes next.

22

2 Comments

We don’t require warm intros at Right Side Capital Management. That said, for the investors who do, this is excellent advice. If you’re going to ask for an intro, do the homework first. It shows immediately.

4

2 Comments

I get to see endless email exchanges regarding dematerialisation (demat) of shares of private companies that we VCs invest in. Securities and Exchange Board of India (SEBI), in its infinite wisdom, decided that the shares of all companies that VCs invest in should be dematerialised. This ignores basic realities: 1. Ours is, primarily, a "Primary" market (unlike the public stock market which is, primarily, "secondary"). Transactions (additional rounds/M&A/secondary sales/IPO) are few and far between - a frequency measured in many months, if not years. 2. A significant minority of the VC industry's investments do not make it past the 5-7 year mark. 3. VC funded company Cap Tables are complicated - many Series (to "quantify" rights attached to them based on when the investment is made); Preference Shares vs. Equity shares. In contrast to the "clean" Cap Tables at IPO/subsequently for listed companies. 4. The system (NSDL/CDSL) is groaning under this weight. Much back-and-forth between the three participants (VCs, companies, depositories) due of the complications indicated above. 5. Bandwidth of thinly-staffed finance teams at companies/VCs is affected by this overhead. Yes, demat in the public markets has been a huge success. Yet, horses for courses/different strokes for different folks/one size does not fit all (take your pick). When will we ever learn? Indian Venture and Alternate Capital Association (IVCA) {My business career has largely overlapped with the creation/evolution of SEBI. I am grateful for the discipline SEBI has induced in the secondary markets over the last few decades. This is a specific complaint about the VC segment I operate in.}

123

27 Comments

After yesterday's breakfast meeting, within 24 hours, an AI assisted Pre revenue enterprise valuation analysis was generated for my eApartment Life startup. Then, - 409A Valuation Report - Board approval of option grants - Equity Incentive Plan - Stock Option Grant Agreement - The eApartment Life Community Ownership & Equity Incentive System (30–40 page master framework)” This document explains; - the C-Corporation - the Community Equity Trust - RSUs - Stock Options - Merchant Equity - Super-User Equity - Token reward layer - Community Contributor RSU Agreement (for renters helping grow the network) - Merchant Partner Equity Agreement (equity tied to merchant participation) - Super-User Growth RSU Agreement (for people driving large-scale adoption) - The Community Equity Trust Agreement (15–20 pages). - Super-User Growth Leader Equity Agreement - Merchant Partner Equity Agreement - Super-User Growth Leader Equity Agreement - Property Community Ambassador Equity Agreement - Community Contributor Equity Agreement - Advisor Equity Grant Agreement Plus, the following reports; - The Apartment Power Network Expansion Playbook - The $1B Blueprint; How eApartment Life Could Become a Category-Defining Platform - The eApartment Life Unfair Advantages Report. - The eApartment Life Network Effects & Strategic Moat Report. All forwarded to my attorney for review. Entrepreneurship is changing fast! #startups #entrepreneurmindset #AI

1

👇 Most interesting snippets form IPEM Private Credit Summit 10.9. Market trends: 🧑‍🎓 Private debt has developed a lot. 15 years ago, investors had no private credit bucket, it was PE teams wanting to have earlier cash flow and some stability in portfolios. 10 years ago, dedicated private credit allocations started to emerge, then followed for the insurance sector, the development of rated notes. Today, investors are diversifying outside core direct lending. People do not want more of that. Now people are looking at specialist and diversifying strategies. Interest in European middle market is growing rapidly. Capital solutions/Commercial RE debt/Asset backed/infra debt is interesting. This will continue. 💡 A veteran of US private credit market started with second lien/mezz 26 years ago. How the market has evolved! Back then small part of deals were private debt financed. Now in the US, most private capital transactions are private debt financed, not bank financed. Huge shift. 🌍 US is having more interest in Europe. Chinese investors have said we are not doing anything in US. Many need European structure and European manager and assets. Some Korean investors paused US lending and are focussing on Europe for the first time. 🤝 Capital solutions is an important addition to growth financing options and has become interesting to PD allocators. For a growth company, entrepreneurial company especially important financing option. What is “Capital solutions”? Hybrid capital, anything between senior and equity, can be 2nd lien/mezzanine/junior. Non-dilutive growth financing. Financing in situations where senior lender/bank cannot offer a loan. It is SME financing, complex private credit, something that do not fit in plain vanilla simple direct lending. Mostly senior secured. Sometimes hybrid can be needed to unlock a situation. “Solving an issue for a company and facilitates a particular situation, but not special sits, distressed, no. Capital solutions are always good credits and good companies. A solution to a high-quality growth business.” For instance, family businesses wanting to access PE. But founder only wants to sell a minority and wants to keep control. This situation does not work for PE. Capital solutions may find a solution that works for both. A solution provider, lender requires a growth agenda and the capital going towards growth. It is about LTV and not providing equity as debt. And there are not very many providers. So can become the most interesting place in the capital structure. Sophistication of borrowers, sponsors and LPs make it possible to grow in this space. Previously, LPs had a hard time understanding is this debt, is this equity? But no more. Also, the "DPI starved world" means investors want a mix of cash yield and upside exposure rather than pure junior equity, senior debt. And, diversifying allocations from now matured direct lending portfolios as well as a good complement to longer duration PE. 👏 #Privatedebt

11

The first thing a sensible VC looks at is the dependence of a startup on other startups. Including the presence of startup venture capitalists. Recently I was at an investment committee meeting of a large Fund of Funds. We had in front a startup fund (meaning the fund itself was new to the business as were the managers). They had the family office of Bill Gates in their LP list. But when we spoke to them, it was just a set of job seekers who had found salaries in the umbrella of a fund. They were akin to what DSA agents are to banks for credit card distribution. At best they were a proxy for LPs who wanted to hide behind them. At worst, they were a bunch of amateurs who would take the startups down with them. Not only did the Fund reject them, they also marked all the startups that they had invested in as entities not to be considered for funding. All this startup dependencies sounds doable. Sometimes it feels collaborative. It looks like an ecosystem. In reality, it is a house of cards. When a startup depends on another startup for demand, you are not building revenue. You are renting someone else’s runway. The day their funding dries up, your growth story evaporates. One board meeting on their side can wipe out your pipeline. The Fund may have commitments from fancy sources but they may never get drawn down. When you depend on a startup on demand, supply or funding side, you inherit their fragility. If they pivot, you scramble. If they miss payroll, your delivery slips. If they shut down, your customers don’t care that your vendor died. They just see that you failed. Two fragile balance sheets do not create stability. They multiply risk. Just as two mongrels can’t mate to deliver pedigreed litter. During bull markets, startup-to-startup revenue looks explosive. Founders celebrate each other’s growth on LinkedIn. Everyone is someone else’s “strategic partner.” Then funding tightens and the dominoes fall. Suddenly your biggest customer is “restructuring.” Your key supplier is “exploring strategic alternatives.” Your VC is scrambling to distress sell your shares. Translation: your model had no shock absorber. Markets see this immediately. Revenue concentration in early-stage customers signals volatility. Heavy operational dependence on early-stage vendors signals fragility. You may call it ecosystem energy. They call it risk discount. A real business moves risk downward in the value chain. It buys stability. It buys from or sells to someone more stable than itself. It builds buffers before it builds bravado. If your top three customers and your top supplier are all burning venture capital, you are not diversified. You are synchronized. If your VC is failing - your problems get compounded. And synchronized fragility is not a strategy.

9

The company highlighted that it has remained ROI focused on its technology spend, with savings from efficiency gains partially self funding incremental investment. In addition, BAC noted that growth within its tech spend has been largely driven by its discretionary tech investment budget (~$4bn of ~$13bn total) which has scaled ~45% vs. only ~15% growth in its core operational tech over the past decade. On incremental discretionary investments, the company noted it targets a ~3 year pay back on average.

2

1 Comment

I'm sharing an important point from Ollie Hörbye after chatting with a few founders in the Drainage and Pump maintenance space. Two companies can look identical on EBITDA but can be very different underneath once you account for maintenance capex and asset intensity. Worth a read for any owner thinking about long-term value, succession, or a future transaction.

19