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

Question 1

Angel investors usually expect to play an active role in the businesses they invest in.

Answer 1

True

Question 2

Most venture capital deals have been made in California and Massachusetts.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

Private venture capital firms use both state and federal grant money to invest in other businesses.

Question 5

The public equity market is available only for high-potential ventures.

Question 6

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

Question 7

Business angels find many of their deals through friends,investment bankers,business brokers and other business associates.

Question 8

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

Question 9

Venture capital firms generally prefer a minimum funding level of $100,000.

Question 10

Angel investors typically finance firms that are close to their homes.

Question 11

Venture capital firms are pools of equity managed by large corporations.

Question 12

Angel investors have a longer investment horizon than venture capitalists do.

Question 13

The informal investment market contains the smallest pool of risk capital in the U.S.

Question 14

Business angels are members of a professionally managed group of wealthy individuals who efficiently distribute risk capital.

Question 15

The Small Business Investment Company Act of 1958 married the use of private capital with government funds to finance small businesses.

Question 16

Angel investors typically invest between $500,000-$1,000,000.

Question 17

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

Question 18

In 2011 venture capital deals were concentrated in the three areas of software,biotechnology and industrial/energy.

Question 19

Endowment and pension funds can be part of venture capital equity pools.

Question 20

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

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

Replacement value is used only by insurance companies and in very unique circumstances.

Question 32

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 33

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

Question 34

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

Question 35

The earnings approach is the most widely used method of valuing a company.

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

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 42

Which type of risk-capital market is available as a 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 43

Making long-term decisions can be difficult in publicly traded companies where sales and profit evaluations indicate the capability of management via stock values.

Question 44

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 45

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 46

Business angels typically invest what amount in the businesses they finance?

A)$50,000-$100,000
B)$100,000-$500,000
C)$500,000-$1,000,000
D)$1,000,000-$5,000,000

Question 47

A business angel's investment time horizon is usually:

A)1-2 years.
B)3-4 years.
C)5-6 years.
D)7-10 years.

Question 48

The informal risk-capital market is made up of:

A)angels.
B)stockbrokers.
C)venture capitalists.
D)commercial banks.

Question 49

For a company to go public,larger underwriting firms have more stringent criteria,such as sales as high as $50 million to $100 million,and a 40 to 70 percent annual growth rate.

Question 50

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

Question 51

________ were authorized in 1958 to marry private capital and government funds for investment in small companies.

A)Research and development limited partnerships
B)State-sponsored venture-capital funds
C)Small business investment companies (SBICs)
D)Computerized entrepreneur-investor matching systems

Question 52

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 53

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 54

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 55

Business angels usually find their deals through:

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

Question 56

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 57

The underwriter is of critical importance in establishing the initial price for the stock of the company.

Question 58

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 59

After the completion of the preliminary preparation,the first public offering normally requires three to six months to prepare,print,and file the registration statement with the SEC.

Question 60

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

Question 61

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 62

Venture capitalists are typically located in all of the following areas except:

A)Los Angeles
B)New York
C)Virginia
D)Chicago

Question 63

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 64

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 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 top area of venture capital investment in 2011 was in:

A)software.
B)telecommunications.
C)media and entertainment.
D)banking.

Question 67

The largest percentage of venture capital funding is invested in:

A)seed capital.
B)start-up capital.
C)expansion funds.
D)acquisition funds.

Question 68

The longest stage of the venture capital process,at 1-3 months,is:

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

Question 69

The ____ is calculated by dividing liabilities by total assets.

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

Question 70

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 71

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 72

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 73

Venture capital firms expect returns in the range of:

A)15-20%.
B)25-35%.
C)40-60%.
D)100%.

Question 74

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 75

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 76

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 77

Which of the following was not one of the top industries where venture capital was invested in 2011?

A)Software
B)Biotechnology
C)Industrial/energy
D)Telecommunications

Question 78

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 79

In 2014 which region received the highest level of venture capital investment?

A)New England
B)Silicon Valley
C)NYC Metro
D)LA/Orange County

Question 80

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

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