Chapter 10 Questions
True/False
1) It is very difficult for entrepreneurs to raise debt financing from conventional banks because
they require as many as three years of actual—not projected—financial statements and assets
2) Self-funding by entrepreneurs, along with funding from informal investors, is the lifeblood of
3) The downside financial risk for an investor in the worst-case scenario is the same, whether they
5) Angels invest in seed‐stage and very early‐stage companies that are not yet mature enough for
6) The term, “business angels,” strictly refers to just former entrepreneurs who invest some of
8) Professional angels are a category of investors primarily comprised of retired entrepreneurs.
9) Placing a value on your startup is the first thing you should do when raising a round of angel
(pg. 308)
11) Most angel investors prefer common stock that can later be converted into preferred stock.
12) According to the GEM Report, generally speaking, the amount needed to start a business is
13) The businesses that need the most startup capital are those created with the intent to grow and
14) Usually, businesses started by men require less capital than those started by women because
16) The median expected payback time of an investment is one year, and the median amount
17) The expected internal rate of return or IRR (compound annual return on investment) is
calculated from the expected payback time and the times return for formal investors and
18) The SEC does not permit the offering and selling of securities through internet crowdfunding
312)
20) The formal venture capital industry was born in Massachusetts at the end of WWII when a
22) The general partners’ share of investment returns is called carried interest. (True)
(pg. 313)
23) The highest return on a venture capital investment is produced when the company has a
24) In general, trade sales produce nearly as big a capital gain as IPOs. When a company executes
25) The present value of a company is the present value of the past free cash flows, plus the
26) Market-comparable valuation is based on the net income and the startup’s capitalization rate.
27) A rapidly growing, high-potential firm will generate a lot of free cash flow in its first few
28) The modified-book value method of valuation’s main weakness is that it reflects the past
31) The difference between a seed-stage company and a startup is that the latter, unlike the
32) Venture capital investors expect a higher rate of return for mezzanine stage investments than
33) A company’s growth rate vis-à-vis its industry is not considered when using the Asset-Based
324)
325)
1) Almost every new business raises its initial money from the founders themselves and what we
call informal investors, including: (pg. 303)
2) Who comprises the “4Fs”? (pg. 303)
3) According to the GEM study, entrepreneurs contribute about ______ of the capital needed to
launch their ventures. (pg. 304)
4) According to the GEM study, half of all informal investors are expecting their money to be
returned within how many years? (pg. 304)
A. 1 year
Zacharakis, A., Corbett, A. & Bygrave (2020) Entrepreneurship, 5th Edition. Hoboken, NJ: Wiley.
B. 2 years
C. 3 years
D. 4 years
E. 5 years
5) Approximately how many business angels are there in the US as of 2016? (pg. 306)
6) What subset of informal investor is relatively sophisticated and invests primarily in glamorous
companies? (pg. 306)
7) Which of the following types of angels is usually a passive investor? (pg. 307)
8) Which of the following types of angels have started their own businesses and are looking to
invest in new businesses? (pg. 307)
9) Which of the following types of angels are managers of larger corporations who invest from
their savings and current income? (pg. 307)
10) Which of the following types of angels are doctors, dentists, lawyers, accountants,
consultants, and even professors who have substantial savings and incomes and invest some
of their money in start‐ups? (pg. 307)
E. Enthusiast
11) Which of the following types of angels are retired or semiretired entrepreneurs and
executives who are wealthy enough to invest in start‐ups as a hobby? (pg. 307)
12) Which of the following types of angels are entrepreneurs who have been successful with their
own companies and have strong views on how the companies they invest in should be run?
(pg. 307)
13) The amount of capital that entrepreneurs need to start their ventures depends mainly on______.
(pg. 309)
14) For informal investment, the amount invested by _______ is the highest, and the median return
expected is ____ times the original investment. (pg. 309)
E. Work Colleagues; 1.5
15) Approximately what percent of informal investment is directed to businesses founded by the
investor’s close family? (pg. 309)
16) Which of the following categories of informal investors expects the highest return on his or
her investment, since it is made in a more detached manner? (pg. 309)
17) The split of the percent of entrepreneurs who expect to profit from their ventures and the
percent of those that do not is almost ________ of the split among informal investors. (pg. 310)
18) The rarest source of capital for nascent entrepreneurs is______. (pg. 311)
19) While classic venture capitalists finance very few companies, some of the ones that they do
E. none of the above
E. the investments from IPO
21) Venture capital funds are limited partnerships that typically begin with how long of a term?
(pg. 312)
22) The capital gain on the harvest is shared with ____% for the limited partners and ____% for
the general partners, once the limited partners have received their entire original principal. (pg.
E. 50%-50%
23) What category of venture capital participant employs gatekeepers to advise it on what projects
to invest in and to monitor the investment afterwards? (pg. 313)
24) If a venture capital fund is successful, as measured by the financial return to the limited
partners, the general partners usually raise another fund ______ years later. (pg. 314)
25) In general, a venture capitalist should not sit on more than what number of portfolio company
boards? (pg. 316)
26) What will a VC usually receive in exchange for the money invested? (pg. 316)
27) The equation for the value of a company with the earnings capitalization method is: (pg. 318)
A. Company Value = Gross Revenue ÷ Book Value
E. Company Value = Price of one share × number of shares
28) Which of the following must be added to Operating Income when calculating Free Cash Flow?
E. Tax Payments
29) Replacement Value is a variation of: (pg. 319)
30) The least desirable way for venture capitalist to harvest an investment is: (pg. 322)
31) What is the term for the event by which the investor realizes his or her investments? (pg.
322)
32) In recent years, approximately how many venture-backed companies went public? (pg. 323)
33) The period when the prior shareholders are not permitted to sell any of their stock is called:
(pg. 323)
E. None of the above
34) For the entrepreneur advancing through the IPO process, what is the step that immediately
Open Ended
1. What are other sources of funding besides Venture Capital? (pg. 303)
2. Who are informal investors and what are the benefits of attracting investments from
them? (pg. 304)
funding.
4. What is convertible debt? What stages of funding are convertible debt usually raised
money.
6. What is the expectation of return on investment for informal investors? How does it
differ based on the relationship to the entrepreneur? (pg. 309)
• The median expected payback time, as you can see in Figure 10.1, is two years, and the
median amount returned is one times the original investment. In other words, there is a
and businesslike manner than are investments by relatives and friends.
7. Describe venture capital investing from the perspective of the firm’s general partners.
(pgs. 312-313)
partnership, the general partners receive an annual fee of 2% to 3% of the principal that
has been paid into the fund.
8. What are the advantages of having a venture capital backed company? (pgs. 315-316)
9. Name the ways of valuing a business and explain why none of them can be called ideal.
(pg. 317)
10. What are the three ways for an investor to exit an investment? Which is the most
lucrative? (pgs. 322-323)
11. Explain three positive reasons to go public and three negative reasons not to IPO: (pgs.
323-324)
• Positives:
• Negatives:
a great deal of information about itself that until then has been private and known only
to insiders. That information includes compensation of officers and directors, employee
stock option plans, significant contracts such as lease and consulting agreements,
details about operations including business strategies, sales, cost of sales, gross profits,
net income, debt, and future plans. The IPO prospectus and other documents that have
to be filed with the SEC are in the public domain; they are a gold mine for competitors
and others that want to pry into the company’s affairs.
ever-increasing performance quarter by quarter. This expectation forces management
to focus on maximizing short-term performance rather than on achieving long-term
public relations with the research analysts, financial journalists, institutional investors,
other stockholders, and market makers— so named because they make a market for the
company’s stock. This is a distraction from their main job, which is running the
company for optimal performance.
stock or stock options, but when it is sinking, it can be demoralizing— especially when
an employee’s options go “underwater” (the stock price falls below the options price).
Underwater options can make it difficult to motivate and retain key employees.
12. Explain why the underwriter of an IPO often tries to lower the price of the stocks in the
offering. (pg. 325)
• Therefore, if underwriters see that the market is not ready to buy all the stock at a set
price before the IPO, they may try to lower the price.
13. Why would a company want to be acquired? (pgs. 326-327)
• Managers can focus on building the company
14. What may be some drawback in getting acquired? (pgs. 326-327)
• Management may prefer to move on to a new venture instead of working through an
• Employees may have different views on how the venture should be harvested and an
acquisition may cause turn-over.