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True / False
1. When venture capitalists scrutinize a new opportunity, they typically evaluate the market, management, and technology
in that order.
a.
True
b.
False
2. The venture capital firm invests in a growing business through the use of debt and equity instruments to achieve long-
term appreciation on the investment within a specified period of time, typically five to seven years.
a.
True
b.
False
3. The term sheet is a letter of intent that spells out the terms the VC is prepared to accept.
a.
True
b.
False
4. VCs often want both equity and debt - equity because it gives them an ownership interest in the business, debt because
they will be repaid more quickly.
a.
True
b.
False
5. An antidilution provision ensures that the selling of stock at a later date will increase the economic value of the venture
capitalist's investment.
a.
True
b.
False
6. Following the IPO registration statement, an advertisement called a "tombstone" announces the offering in the financial
press.
a.
True
b.
False
7. The principal advantage of a public offering is that it provides the offering company with a tremendous source of
interest-bearing capital for growth and expansion, paying off debt, or product development.
a.
True
b.
False
8. Intrinsic value is the perceived value arrived at by interpreting balance sheet and income statements through the use of
ratios, discounting cash flow projections, and calculating liquidated asset value.
a.
True
b.
False
9. Nearly all valuation techniques rely on the analysis of the future market for the company's products.
a.
True
b.
False
10. Comparable companies are those that are similar to the new venture in value characteristics such as risk, rate of
growth, capital structure, and the size and timing of cash flows.
a.
True
b.
False
Multiple Choice
11. ____ take an equity position through ownership of stock in the company.
a.
Investment bankers
b.
IPOs
c.
Venture capital firms
d.
Angel networks
e.
Super angels
12. VCs are fundamentally risk averse, so it is the entrepreneur's job to reduce risk in the three key areas: management
risk, technology risk, and ____ risk.
a.
business model
b.
investment
c.
legal
d.
R&D
e.
None of these choices
13. Most VCs invest in the ____ stage because it is more likely to bring them to the liquidity event they need in three to
five years to make the investment worthwhile.
a.
business model
b.
startup
c.
transition
d.
rapid growth
e.
None of these choices
14. If after exhaustive due diligence the VCs are still sold on the business, they draw up the ____, which signals the start
of a negotiation.
a.
business plan
b.
term sheet
c.
tombstone
d.
prospectus
e.
None of these choices
15. A VC may request a ____, a penalty requiring founders to give up some of their stock to the VC if the company does
not achieve its projected performance goals.
a.
fair market provision
b.
stop-loss statement
c.
forfeiture provision
d.
liquidation agreement
e.
letter of intent
16. ____ from lawyers, accountants, consultants, and investment bankers are essentially a promise not to charge the full
fee if an IPO fails.
a.
Fair market provisions
b.
Stop-loss statements
c.
Forfeiture provisions
d.
Liquidation agreements
e.
Registration statements
17. An underwriter draws up a/an ____, which outlines the terms and conditions of the agreement between the underwriter
and the entrepreneur/selling stockholder.
a.
fair market provision
b.
stop-loss statement
c.
forfeiture provision
d.
prospectus
e.
letter of intent
18. The ____ method is probably the technique most commonly used to account for the going-concern value of a business,
but it has problems as well.
a.
discounted cash flow
b.
venture capital
c.
comparables
d.
multiple of earnings
e.
real options
19. Bootstrapping refers to:
a.
Getting by on as few resources as possible
b.
Leasing or sharing
c.
Using other people’s money
d.
A through c
e.
A and b only
20. Which of the following are not "backend" costs for an entrepreneur seeking capital by selling securities (shares of
stock in the corporation)?
a.
Prospectus printing costs
b.
Investment banking fees
c.
Legal fees
d.
Marketing costs
e.
Brokerage fees
21. Entrepreneurs typically get startup capital from:
a.
Personal savings
b.
Family & friends
c.
Credit cards
d.
Angel investors
e.
A through C only
22. ____ is a floorless exchange that trades on the National Market System.
a.
AMEX
b.
NASDAQ
c.
NYSE
d.
SEC
e.
K'NEX
23. All of the following disadvantages are associated with IPOs except ____.
a.
high cost
b.
being very time-consuming
c.
public scrutiny
d.
loss of control
e.
pressure to perform in the long term
24. When searching for a venture capital firm, what should you not do?
a.
Get recommendations from attorneys
b.
Shop around
c.
Get recommendations from accountants
d.
Look for venture capital firms that specialize in your industry
e.
Get a referral
25. Any investment deal includes all of the following components, except ____.
a.
the amount of money to be invested
b.
the timing and use of the investment moneys
c.
the liquidation strategy
d.
the return on investment to investors
e.
the level of risk involved
26. Venture capital firms in an early-stage investment characteristically demand a higher rate of return, as much as ____
percent or more annual cash-on-cash return, whereas a later-stage investment demands a lower rate of return, perhaps
____ percent annually.
a.
50 / 30
b.
60 / 30
c.
40 / 25
d.
30 / 10
e.
80 / 20
27. The historical peak for venture capital investment occurred in the year ____.
a.
1999
b.
2000
c.
2001
d.
2002
e.
2003
28. The ____ lays out the amount of investment the VC firm is willing to consider and the conditions under which it is
willing to consider making that investment.
a.
common stock
b.
negotiation deal
c.
term sheet
d.
antidilution provision
e.
None of these choices
29. VC funding is usually ____.
a.
early-stage funding
b.
mid-stage funding
c.
growth-stage funding
d.
later-stage funding
e.
None of these choices
30. Which type of venture typically requires considerable research and development cost prior to startup?
a.
Restaurants
b.
High-tech
c.
Construction
d.
Retail
e.
Manufacturing
31. The ____ determines the present value of the projected cash flows and is, in reality, the expected rate of return for the
investor.
a.
forecast period
b.
discount rate
c.
terminal value
d.
book value
e.
stable earnings history
32. A factor affecting the final valuation of the business is the degree of ____ that the owner has over the business.
a.
estimated value
b.
legitimate control
c.
risk
d.
discount
e.
None of these choices
33. The value derived by assuming the sale of all assets and calculating the amount that could be recovered from doing so
is the ____ value.
a.
liquidation
b.
going concern
c.
intrinsic
d.
book
e.
investment
34. The price at which a willing seller would sell and a willing buyer would buy in an arm's-length transaction is the ____
value.
a.
book
b.
fair market
c.
investment
d.
intrinsic
e.
liquidation
35. A ____, or prospectus, discusses all the potential risks of investing in the initial public offering.
a.
book value
b.
tombstone
c.
stop-loss statement
d.
red herring
e.
None of these choices
36. The first step in the IPO process is to ____.
a.
choose an underwriter
b.
decide on a stock exchange
c.
file a registration statement
d.
publish a tombstone
e.
None of these choices
37. Once a company has become a public company, returning to private status is ____.
a.
a way of raising more capital
b.
easy to accomplish
c.
not allowed by the SEC
d.
a nearly insurmountable task
e.
not allowed by the board of directors
38. A form of startup capital managed by professionals is ____.
a.
corporate bonds
b.
private venture capital
c.
retained earnings
d.
common stock
e.
loans
39. Which industries have the highest venture capital investment?
a.
Software and medical
b.
Software and IT services
c.
Biotechnology and software
d.
Biotechnology and semiconductors
e.
Industrial and energy
40. The term ____ refers to tangible choices such as - in the case of a new venture - investing in research and development
for new technology.
a.
options
b.
real options
c.
assets
d.
discount rate
e.
None of these choices
Subjective Short Answer
41. What are the advantages of an IPO?
42. What are the steps in the IPO process?
43. When venture capitalists scrutinize a new opportunity, they typically evaluate three things. Identify and discuss each.
44. What are the four components of an investment deal?
45. List the disadvantages of an IPO.
46. What is the difference between NASDAQ and the NYSE and AMEX?
47. List the six different definitions of value.
48. List the four components of discounted cash flow analysis (DCF).
49. List the main types of risk adjustment factors that influence the discount rate.
50. Briefly discuss due diligence as it pertains to the sequence of events in securing venture capital from a VC firm.
