Kestrel AI — Series C at $5B
An 8-hour Venture Investment Memo case study with a complete model answer
Modeled After
Spark Capital
The single-question investment prompt Spark Capital is reported to set — would you invest at this price — answered as a research memorandum that underwrites a Series C to a three-to-five times return with uncapped upside.
Structure and exercise format are modeled after Spark Capital — the single-question prompt and the memo it expects. The company, the ARR figures and the competitive set in this case are entirely our own.
The Situation
Kestrel AI, Inc. runs a managed inference and post-training platform for open-weight models.
Kestrel AI
- Sector
- Enterprise software / AI infrastructure — managed inference and post-training for open-weight models
- Size
- Geography
- United States, selling to AI-native startups, enterprises and model labs; hardware capacity contracted from third-party operators
- Ownership
- Situation
The Prompt
You are an investor at a venture and growth fund.
Supporting Materials
What you are handed at the start of the case, in the format a real process would use.
The assignment (material-1.pdf)
Term sheet and round mechanics (material-2.pdf)
Company deck extract (material-3.pdf)
Expert call notes (material-4.pdf)
Market and comparable-company extract (data-1.xlsx)
What You Have to Produce
The deliverables, in the order the committee will read them. The exercise runs 480 minutes.
PART 1
The round: settle ownership before anything else
PART 2
Dilution to exit, modeled rather than assumed
PART 3
The preference, and what it is actually worth
PART 4
What you need to believe
PART 5
Screen the listed comparison set
PART 6
Three operating cases you can defend
PART 7
Sensitivities, and the price that would clear the bar
PART 8
The beliefs, and the diligence that would test them
How to Approach It
The order a strong candidate works in, and why. This is the shape of the answer — the finished memo is in the solution set below.
- 0:00 – 2:00
read everything, and open nothing
- 2:00 – 2:45
settle the ownership arithmetic
- 2:45 – 3:30
run the bar backwards
- 3:30 – 4:30
screen, then build the cases
- 4:30 – 8:00
write, and solve for the price
Key Concepts
The ideas this case is built on. Know these cold and the case becomes a question of execution rather than knowledge.
Ownership is struck on the post-money, always
The stake is the primary divided by the post-money, not by the pre-money. Dividing by the pre-money overstates the stake by exactly the ratio of post-money to pre-money, and it flatters every line downstream — the exit proceeds, the multiple of money, the required growth rate. It is the most common arithmetic error in this archetype and it always errs in the investor's favor, which is why it survives so many drafts.
The option pool is part of the price
A pool refresh created pre-money is funded entirely by the existing holders. The headline pre-money is not what they receive; the price per share the round actually strikes is lower, and the difference is the pool. A headline pre-money that does not name the pool is not a price, and a founder who has not worked this out is about to be surprised at signing.
Dilution has two halves and one of them is invisible
Future priced rounds dilute you by the new investor's stake and again by the pool top-up each of those rounds requires. Modeling the first and assuming the second away is how a stake that looks like it survives to exit does not. Compound both, round by round, and carry the exit ownership through every returns calculation.
A non-participating preference has no closed form
Each series takes the greater of its preference and its as-converted share of whatever is left once the series that stay on preference have been paid. That interaction is circular: a later round sitting on its preference shrinks the residual an earlier round converts into, which pushes the earlier round's conversion point up. Solve it at each exit value rather than assuming a rule, and check the answer against the naive preference-over-ownership version to see how far off the shortcut is.
A preference is a floor at par, not protection
Below the total preference stack, a pari passu structure shares pro rata by invested amount — so a bad outcome returns less than the money, not the money. Above the stack and below the conversion point, every outcome pays exactly par, which is a wide band in which nothing you do changes the answer. The payoff only becomes interesting above the conversion point, which is why a mandate's tolerance for uncapped upside does real work rather than sitting there as decoration.
What you need to believe, not what it is worth
A venture underwrite that produces a valuation has answered a question nobody asked. Running the hurdle backwards produces a growth rate instead — a falsifiable claim about the operating business that the research can attack or defend. It also makes disagreement productive: two investors who disagree about a valuation are stuck, while two investors who disagree about whether a company can compound at a stated rate for five years have something specific to talk about.
A revenue multiple hides a margin assumption
Any exit struck on revenue is an exit struck on earnings with the terminal margin buried inside it. Divide the peer median revenue multiple by the peer median earnings multiple and you have recovered the margin the revenue multiple assumes. Anyone valuing on revenue alone has taken a position on terminal margin without saying so, and the honest move is to state the basis once and hold it everywhere — including on the side of the comparison you did not choose.
Landed growth and expanded growth are not the same growth
A high blended net revenue retention number reads as a company its customers grow into. Decompose net new revenue into expansion off the opening base and revenue newly landed, and the picture can invert. Expansion compounds off a base that is already there; landed revenue has to be re-bought every year, and if it lands in the cohort with the weakest gross retention, the compounding the price assumes is not the compounding the company has demonstrated.
Name the belief no diligence can settle
Some of what an investment requires is testable in a week, some is half-testable, and some is simply a view about how a market resolves. Sorting them is more useful than pretending the third category can be researched away. Naming what a model leaves out is worth more than pricing one more thing.
Recommend a price, not a company
'Good company, wrong price' is a complete answer and often the honest one. Hold the exit constant, solve for the pre-money at which your own cases clear the bar, and say how far that sits from the ask. If the gap is small, that is the most dangerous situation of all, because it is exactly where a fund talks itself into a deal by adopting the one case it does not believe.
What Makes It Hard
The specific traps in this case — the places candidates lose the assessment without noticing.
Check Your Answer
Type the figures you produced and find out how many are right before you open the worked answer. You get a verdict and, where you are off, a pointer to the part of the build to re-check — never the number itself. Everything you type stays on this device.
How to type a figure. Digits, with an optional unit: 1,234.5, $1,234.5, 2.6x, 21.4%. For a negative use (20.0) or -20.0. Enter as many decimals as you carried — precision is never penalised.
What the Case Asked For
The arithmetic is only half of it. Tick off what you actually produced — this half is yours to score, because nothing can grade a written recommendation from a checkbox.
The Model Answer
The worked answer in full: memo, built the way a banker would actually build it. It is a reference, not a submission — a strong answer under the clock is far shorter.
What the Solution Covers
- —Competitive landscape mapping
- —ARR growth underwriting
- —What-you-need-to-believe returns math
- —Expert-call synthesis
- —Diligence plan design
- —Investment recommendation
Memo
The written recommendation and how it was reached
Upgrade to Diamond
Sign up and upgrade to Diamond to unlock the memo and the audio walkthrough.
Get StartedDownloads are available to Diamond members
Memo (PDF) — yours to open, edit and rebuild
Walkthrough
A conversational walkthrough of how to approach the case under time pressure — where to start, what to cut, and how the recommendation gets defended.
Audio Walkthrough
How to approach Kestrel AI — Series C at $5B
60-second preview — upgrade to Diamond for the full walkthrough
Frequently Asked Questions
Why is there no deck?
Because the format is memo-first. The deliverable is seven to ten portrait pages of argument, and the exhibits sit inside it rather than replacing it. A venture partner reading this on a Sunday wants the recommendation on page one and the reasoning behind it; a slide deck spends its first four pages saying what a masthead says in four lines.
How much modeling does this actually need?
Less than you think, and it is a constraint on the prose rather than the graded artifact. The ownership arithmetic, the waterfall, three ARR paths and a couple of sensitivity grids will hold up the entire memo. A venture underwrite that needs a fifteen-tab operating model has stopped being an underwrite and started being a way of not deciding.
Should I build a discounted cash flow?
No. There is no discount rate in this exercise, no free cash flow to discount and no terminal value that would not simply restate the exit multiple. Importing a cost-of-capital debate into a venture round adds a page of apparatus and no information. If you want to test the valuation assumption, grid the exit multiple and the terminal margin instead — those are the two a partner will actually argue about.
Why run the hurdle backwards instead of forecasting forwards?
Because a forecast is an opinion and a requirement is a fact. Running the bar backwards produces a specific growth rate the company has to deliver, which anyone can then check against the market, the competition and the company's own history. It also protects you from the most common failure in this format, which is building a five-year model that arrives, by coincidence, at exactly the number the fund needs.
Is a 1.0x non-participating preference downside protection?
Only in a narrow band, and less than it looks. Below the total preference stack a pari passu structure pays out pro rata by invested amount, so the money does not come back. Above the stack and below the conversion point every outcome pays exactly par. The instrument is best understood as a floor at par with a wide flat region, not as insurance.
What if the answer is 'no'?
Then write it, and name the price at which it becomes yes. A recommendation to pass that also says what you would pay is a stronger and more useful answer than a yes manufactured by nudging an assumption. The reviewer's next question is always what you assumed and why, and 'because otherwise the deal did not work' is not an answer that survives it.
How should expert calls appear in the memo?
Attributed by role and company, never by name, and quoted at enough length that the reader can judge the source rather than your paraphrase of it. Quote the strongest version of the argument you disagree with — a mixed evidence board is more credible than a stacked one, and leaving in the call that cuts against your recommendation is the cheapest credibility you will ever buy.
Do I need to build a bottom-up market size?
Not necessarily, but you do need to say why not. It is legitimate to work from a third-party forecast and spend your time on the quality of the market and where this company has a right to win, and it is a defensible choice to state explicitly. What is not defensible is skipping the question without saying so, then leaning on the market's size in your conclusion.
Is this format still used?
Yes, and it is the most transferable of the venture formats because it is what the job is. A round is priced, the partnership has a return bar, and somebody has to say in writing what would have to be true. The memo is the artifact the investment committee actually reads, and it has to name a price.
About This Venture Investment Memo Case Study
Venture Investment Memo case study for venture & growth interviews. 480-minute format covering competitive landscape mapping, arr growth underwriting, what-you-need-to-believe returns math. Includes the full prompt, a written memo and an audio walkthrough.
This case study sits in Venture & Growth, under Investment Research Memos. Every case ships with the full prompt, the supporting materials, a complete model answer and an audio walkthrough of the judgment behind the recommendation.
480-Minute Format
The time limit a real assessment would give you
Memo
Included in the model answer
Audio Walkthrough
How to approach the case under time pressure
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