Deck 12: Informal Risk Capital, Venture Capital, and Going Public

Question 1

Early-stage financing is usually the least costly type of financing to obtain.

Answer 1

False

Question 2

On a reward-based crowdfunding site,individuals pledge money to a company that might be developing a new technology or product,a new cultural art project,or a new musical album.

Answer 2

True

Question 3

Angel investors,family,and friends are often the source of funds in development financing.

Answer 3

False

Question 4

Crowdfunding brings together various individuals who commit money to projects and companies they want to support.

Question 5

In private venture-capital firms,limited partners provide the funding and the general partner manages the fund.

Question 6

Expansion or development financing is easier to obtain than early-stage financing.

Question 7

The private equity market provides capital for privately held ventures.

Question 8

There are only two types of crowdfunding: reward-based and equity crowdfunding.

Question 9

To succeed in crowdfunding,you need to develop a solid marketing campaign,carefully execute the campaign and provide excellent service.

Question 10

SBIC firms are small companies with some government money that invest in other companies.

Question 11

In 2017,venture capital dollars were concentrated in the following three industries: internet,health care,and business products and services.

Question 12

There is more risk involved in financing a business's early operations,therefore,higher rates of return are expected.

Question 13

Only individuals may invest in venture-capital limited partnerships.

Question 14

The best source of funds for first-stage financing is the venture-capital market.

Question 15

The informal investment market contains the smallest pool of risk capital in the United States.

Question 16

The largest amount of venture-capital money raised was for later-stage and expansion-stage investments.

Question 17

The private equity market is composed of individuals,venture capital firms and private equity funds.

Question 18

Going private is a form of acquisition and leverage buyout financing.

Question 19

Most angel investors are individuals who accumulated their wealth through inheritance.

Question 20

Seed capital is an example of expansion or development financing.

Question 21

A venture capitalist would rather invest in a first-rate product and a second-rate management team than the reverse.

Question 22

The inventory turnover ratio measures the efficiency of the venture in managing its inventory.

Question 23

The acid test ratio is a more rigorous test of the short-term liquidity of the venture as it eliminates inventory,which is the least liquid current asset.

Question 24

Financial ratios are control mechanisms to test the financial strengths of a new venture.

Question 25

The present value of future cash flow method of valuation considers the firm's cash flow in relation to the time value of money.

Question 26

For the venture capitalist,the executive summary is an important part of the business plan.

Question 27

Many times Internet companies are valued according to the number of users they have and the data that is generated such as page views and unique visitors.

Question 28

Venture capitalists tend to avoid investment proposals that are referred from lawyers and accountants.

Question 29

The return on investment ratio measures the ability of the firm to repay long-term debt using current assets.

Question 30

The valuation approach that gives the lowest value of the business is the earnings approach.

Question 31

Venture capitalists view going public a highly disadvantageous step since the level of risks involved substantially increase.

Question 32

The detailed review of a potential venture capital deal is called diligent research.

Question 33

The three main advantages of going public are obtaining new capital,realizing an enhanced valuation,and enhancing the company's ability to obtain future funds.

Question 34

The current ratio is used to measure the long-term solvency of the venture and its ability to meet short-term debts.

Question 35

In order to increase their chances for success,an entrepreneur should approach all possible venture capital firms with proposals.

Question 36

To attract venture capital funding,an investment must have significant capital appreciation potential.

Question 37

The debt ratio is calculated by dividing total liabilities by total inventory.

Question 38

An extension of the earnings approach is the book value method.

Question 39

Balance sheet items are carried at cost,a good indicator of fair market value in valuing a company.

Question 40

The future earnings capacity of the company is the most important factor in valuation.

Question 41

Early stage financing is typically:

A) easier to obtain than expansion financing.
B) called seed or start-up capital.
C) where venture capitalists are highly involved.
D) used as working capital to support initial growth.

Question 42

Two major disadvantages of going public are the increased reporting requirements and potential loss of control.

Question 43

The securities of certain smaller companies going public must also be qualified under international blue-sky laws.

Question 44

________ crowdfunding sites allow individuals to invest in private companies for a percentage share of the company.

A) Lending
B) Reward-based
C) Equity
D) Market

Question 45

A publicly traded company needs to disclose to the public all material information regarding the company,its operations,and its management.

Question 46

When private individual investors put money into a fund,which usually has a manager,then this becomes:

A) crowdfunding.
B) an angel fund.
C) a private venture-capital firm.
D) due diligence.

Question 47

The underwriting syndicate is a group of firms involved in selling stock to the public.

Question 48

Which type of risk-capital market is available as a stage one funding source only for high-potential ventures

A) Informal risk capital market
B) Private venture capital companies
C) Small business investment companies
D) Public equity market

Question 49

Which of the following would not typically be part of a private venture capital fund

A) Money from state governments
B) Money from insurance companies
C) Money from pension funds
D) Money from college endowment funds

Question 50

With the enactment of the Sarbanes-Oxley Act in 2002,the expense and administrative responsibilities of being a public company,as well as the liability risks of officers and directors,are significantly greater.

Question 51

The deregulatory legislation that allows companies to be more active in their intent to raise money through crowdfunding was the:

A) Securities Exchange Act
B) Sarbanes-Oxley Act
C) Small Business Investment Act
D) Jump Start Our Business Act (JOBS Act).

Question 52

In most of the significant public offerings,the company technically sells the shares to the underwriters,who then resell the shares to the public investors.

Question 53

Which of the following is not part of the private equity market

A) An underwriter
B) An angel
C) An SBIC
D) Crowdfunding

Question 54

The best source of funds for first-stage financing is the:

A) private venture capital companies.
B) small business investment companies.
C) informal risk capital market.
D) public equity market.

Question 55

Blue-sky laws may speed up the process and lessen costs to the company going public.

Question 56

A prospectus is a letter from the SEC to a company indicating corrections that need to be made in their submitted material.

Question 57

Venture capital firms prefer to invest in:

A) high-potential ventures.
B) conventional small businesses.
C) privately-held middle market firms.
D) ventures during the early stages.

Question 58

Business angels usually find their deals through:

A) the Internet.
B) referral sources.
C) venture capitalists.
D) cold calling.

Question 59

The quiet period is a 90-day period in going public when company information that will help increase stock price should and can be released.

Question 60

The shorter the time before a company goes public,given that profits and sales growth occur,the less percentage of equity the entrepreneur will have to give up per dollar invested.

Question 61

In a private venture capital firm,the ________ manages the fund in exchange for a management fee and a percentage of profits.

A) limited partner
B) general partner
C) entrepreneur
D) referral source

Question 62

The longest stage of the venture capital process,at one to three months,is:

A) preliminary screening.
B) final approval.
C) agreement on principal terms.
D) due diligence.

Question 63

Which of the following statements about the demographic patterns of informal investors is not true

A) Many informal investors belong to angel networks.
B) Most informal investors are well educated, with many having graduate degrees.
C) Informal investors will finance firms anywhere, particularly in the United States.
D) The majority of informal investors do not expect to play an active role in ventures financed.

Question 64

The ________ is used to measure the short-term solvency of a venture.

A) return on investment
B) average collection period
C) debt ratio
D) current ratio

Question 65

Venture capitalists:

A) usually don't know one another.
B) tend to put more time and effort into business plans that were referred to them.
C) tend to invest in any area that has a good rate of return.
D) like entrepreneurs to bring in an accountant to verify financials.

Question 66

The due diligence phase of the venture-capital process includes:

A) outlining the principle terms.
B) a detailed review of the company's history.
C) preparation of an investment memorandum.
D) a preliminary study of the business plan.

Question 67

In most cases,the venture capitalist:

A) seeks control of the company.
B) would prefer to not be a part of the board of directors.
C) is not involved in developing strategic plans.
D) expects the management team to run the daily operations.

Question 68

Dividing net profit by total assets shows a firm's:

A) current ratio.
B) debt ratio.
C) net profit margin.
D) return on investment.

Question 69

Which of the following industries is not an area of interest for informal investors

A) Information Technology
B) Logistics
C) Software
D) Medical Technology

Question 70

Using the ________ method of evaluating the firm,cash flow is adjusted for the time value of money.

A) present value of future cash flow
B) replacement value
C) book value
D) earnings approach

Question 71

The ________ is calculated by dividing total liabilities by total assets.

A) debt ratio
B) current ratio
C) inventory turnover
D) net profit margin

Question 72

In the venture-capital process,________ is(are)absolutely essential for preliminary screening.

A) debt financing
B) a business plan
C) a sales-orientation
D) endowment funds

Question 73

Which factor in valuing your company is the most important

A) Future earnings capacity
B) Book value
C) Outlook of the economy
D) Market price of similar companies' stocks

Question 74

In 2017,the largest percentage of venture capital dollars raised was invested in which stage of company development

A) Early-stage
B) Seed-stage
C) Later-stage
D) Expansion-stage

Question 75

The ________ is calculated by dividing accounts receivable by average daily sales.

A) current ratio
B) average collection period
C) debt ratio
D) return on investment

Question 76

The least liquid current asset,________,is eliminated when calculating the acid test ratio.

A) cash
B) accounts receivable
C) inventory
D) land

Question 77

Included in the guidelines for dealing with venture capitalists,the entrepreneur should:

A) approach the venture capitalist directly.
B) bring a lawyer to all meetings.
C) disclose any significant problems in the initial meeting.
D) assure the venture capitalist that "There is no competition for this product."

Question 78

________ is the increase in value of the organization during a specific period of time.

A) Due diligence
B) Factors in valuation
C) Significant capital appreciation
D) Book value

Question 79

Which section of the business plan is used for initial screening and provides the starting point for the venture-capital process

A) The executive summary
B) The industry and market analysis
C) The mission statement
D) Strategic plan

Question 80

The industry sector receiving the largest share of venture capital in 2017 was in:

A) Internet.
B) health care.
C) computer software.
D) computer hardware.