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Indicate whether the statement is true or false.
1. Most venture investing came from wealthy individuals and families prior to World War II.
a. True
b. False
2. The summary of the investment terms and conditions accompanying an investment proposed by the venture capitalist is
known as the statement of strengths and weaknesses.
a. True
b. False
3. Carried interest is the portion of profits paid to the professional venture capitalist as incentive compensation.
a. True
b. False
4. In 1958, the Small Business Administration created Small Business Investment Companies.
a. True
b. False
5. SLOR stands for “standard letter of recognition.”
a. True
b. False
6. Term sheets consist of the terms and conditions accompanying an investment, as stipulated by the founders of the
venture.
a. True
b. False
7. Internet financing led the record level of venture investing in the 1999–2000 time period.
a. True
b. False
8. The term “capital call” refers to the flow of business plans and term sheets involved in the venture capital investing
process.
a. True
b. False
9. The initial stage in the professional venture investing cycle begins with determining the objectives and policies for the
next fund.
a. True
b. False
10. Once the venture capital firm has received exit proceeds from a venture in the form of cash or securities, some method
of returning the proceeds (less the carried interest) must be determined.
a. True
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b. False
11. Family offices are the largest supplier of venture capital.
a. True
b. False
12. Term sheets may contain demands regarding the voting rights of shares issued to venture investors.
a. True
b. False
13. A term sheet is a summary of the investment terms and conditions accompanying an investment by venture capitalists.
a. True
b. False
14. When the venture fund calls upon the investors to deliver their investment funds, it reflects the deal flow.
a. True
b. False
15. Endowments and foundations are more important suppliers of venture capital relative to individuals and families.
a. True
b. False
16. The professional venture investing cycle begins with the obtaining of commitments for a series of capital calls.
a. True
b. False
17. Public pension funds supply about 20 percent of venture capital funds.
a. True
b. False
18. Professional venture capital, as we know it today, did not exist before World War II.
a. True
b. False
19. The first major government foray into venture investing came with the formation of the Small Business
Administration (SBA) in 1947.
a. True
b. False
20. Two typical issues addressed in a term sheet are valuation and the size and staging of financing.
a. True
b. False
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21. The phrase “two and twenty shops” refers to investment management firms having a contract that gives them two
percent carried interest and a 20 percent of assets annual management fee.
a. True
b. False
22. Initially, Small Business Investment Companies’ access to borrowed funds appeared attractive. This was because
venture investing and debt service commitments are an ideal mixture of financing for startups.
a. True
b. False
23. The beginning of professional venture capitalists began with the formation of American Research and Development in
1966.
a. True
b. False
24. In venture investing context, due diligence describes the process of investigating a potentially worthy concept or plan.
a. True
b. False
25. The deal flow reflects the flow of business plans and term sheets involved in the venture capital investing process.
a. True
b. False
26. Annual VC investments reached an all-time high in the year 1990.
a. True
b. False
27. Individuals and families are more important suppliers of venture capital relative to finance and insurance firms.
a. True
b. False
28. Endowments and foundations are the smallest percentage source of venture capital.
a. True
b. False
29. The American Research and Development (ARD) organization was formed in 1946.
a. True
b. False
30. Due diligence (in venture investing context) is the process of ascertaining the viability of a business plan.
a. True
b. False
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31. When a syndicate of VCs invests in a venture, the investor in charge of organizing the due diligence process is known
as the lead investor.
a. True
b. False
32. Pension funds are the largest percentage source of venture capital.
a. True
b. False
33. SLOR stands for “standard letter of rejection.”
a. True
b. False
34. Created by the Small Business Administration, Small Business Investment Companies possess important tax
advantages and are eligible to borrow amounts up to four times their equity base from the government.
a. True
b. False
35. In addition to having personal financial stakes in their portfolio of investments, professional venture capitalists have
raised funds from other investors to invest in the portfolio.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
36. When evaluating the prospects of a new venture, venture capital firms consider the characteristics of the entrepreneur
and its team. Which of the following is not part of the review of the entrepreneur/team?
a. its background and experience
b. its managerial capabilities
c. management’s stake in the firm
d. the VC firms’ ability to cash out
37. Professional venture investing usually involves setting up a venture capital firm as a(n):
a. proprietorship
b. corporation
c. partnership
d. S corporation
38. Venture capital firms tend to specialize in publicly identified niches because of the potential for value-added investing
by venture capitalists. Which of the following is not one of these niches?
a. industry type
b. venture stage
c. management style
d. size of investment
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39. In a venture capital fund placement memorandum, all of the following are included in the summary of terms except:
a. indemnification
b. objective
c. liquidation
d. valuation
40. When screening prospective new ventures, venture capital firms consider their own funds’ requirements. Which of the
following is not one of the venture firm’s requirements relating to its own funds?
a. investor control
b. rate of return
c. size of investment
d. probable stock listing exchange for the mature venture
41. After determining the next fund’s objectives and policies, the professional venture investing cycle’s next step is to:
a. solicit investments in new fund
b. organize the new fund
c. obtain commitments for a series of capital calls
d. arrange harvest or liquidation
42. As venture firms attract money from investors, it is placed in a fund. Important issues that must be put in place with
the establishment of the fund include all of the following except:
a. determining the general partners
b. establishing a fee structure
c. establishing a profit sharing arrangement
d. assigning the management team to each borrower
43. Which of the following is the largest percentage supplier of venture capital?
a. public pension funds
b. family offices
c. endowments and foundations
d. financial and insurance
44. When evaluating the prospects of a new venture, venture capital firms consider which of the following?
a. characteristics of the proposal, characteristics of the entrepreneur/team, and nature of the proposed industry
b. characteristics of the proposal and the entrepreneur/team
c. characteristics of the entrepreneur/team and nature of the proposed industry
d. characteristics of the proposal and nature of the proposed industry
45. In a venture capital fund placement memorandum, all of the following are part of the executive summary except:
a. general partners’ capital contributions
b. limitation of liability
c. allocation of gains and losses
d. imposition of confidentiality
46. When screening possible investments, a venture capital firm might issue a SLOR, which stands for:
a. “standard letter of rejection”
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b. “standing letter of reconciliation”
c. “standard letter of reassessment”
d. “senior letter of reference”
47. A venture fund calls upon its investors to deliver their investment funds. This is known as:
a. carried interest
b. a deal flow
c. a capital call
d. a SLOR
48. After a new professional venture capital fund is organized, the fund managers:
a. conduct due diligence and actively invest
b. solicit investments and obtain commitments
c. arrange harvest or liquidation
d. identify prospective venture investments and then solicit investments
49. All of the following are typically part of a venture fund’s typical compensation and incentive structure except
a. some percent annual fee on invested capital
b. a percent share of any profits to the managing general partner
c. carried interest
d. a salary for the general partners
50. All of the following are typical issues addressed in a term sheet except:
a. valuation
b. employment contracts
c. registration rights
d. management fees
51. In a venture capital fund placement memorandum, which of the following is not part of the offering summary?
a. objective of formation
b. declaration of general partner
c. management fee
d. minimum capital restrictions
52. In a venture capital fund placement memorandum, which of the following is not part of the fund overview?
a. fund size
b. investment focus
c. fund management
d. general partners’ capital contributions
53. The term “carried interest” refers to:
a. interest not currently paid but which must be paid in the future by a
b. professional venture capitalist
c. interest transported directly to a bank
d. interest owed on a loan in default
e. the portion of profits paid to a professional venture capitalist as incentive compensation
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54. If an investment management firm is known to be a two and twenty shop, this implies that the firm receives an annual:
a. 2% fee on invested capital and 20% carried interest
b. 20% fee on invested capital and 2% carried interest
c. 2% fee on gross operating profits and 20% carried interest
d. 20% fee on gross operating profits and 2% carried interest
55. In a venture capital fund placement memorandum, which of the following is not a front-matter declaration?
a. description of limited manner of the offering
b. targeted fund size
c. imposition of confidentiality
d. notice of lack of SEC registration
56. When screening prospective new ventures, venture capital firms must consider the nature of the proposed industry.
Which of the following is not part of the screening of the proposed industry?
a. market attractiveness
b. managerial references
c. potential size
d. technology
57. In a syndicate of venture investors, the investor who is responsible for governing the process of due diligence is:
a. the primary investor
b. the lead investor
c. a small group of secondary investors
d. none of these choices; it is a democratic process that is shared by all investors in the group
58. The beginning of professional venture capitalists is considered to have begun with the establishment or formation of:
a. the Small Business Administration
b. Small Business Investment Companies
c. the American Research and Development organization
d. the Professional Venture Capitalists organization
59. A summary of the investment terms and conditions accompanying an investment is referred to as:
a. a term sheet
b. a business plan
c. a fund created by professional venture capitalists
d. due diligence in venture investing
60. Which of the following is the smallest percentage supplier of venture capital?
a. financial and insurance
b. public pension funds
c. endowments and foundations
d. funds of funds
61. Term sheets are usually drafted by:
a. the mangers of the venture seeking VC funding
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b. the VC fund seeking to fund the venture
c. management and founders
d. a third party, in order to ensure the fair treatment of both parties
62. The beginning of professional venture capitalists is considered to have occurred:
a. prior to World War II
b. in 1946
c. in 1956
d. after the Vietnam War
63. Which of the following is not one of the likely outcomes of the venture firm’s screening process?
a. seek the lead investor position
b. seek a nonlead investor position
c. close the capital fund
d. issue a standard letter of rejection
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Answer Key
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