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c. the length of time invested in developing the product or service
d. the amount of capital already raised by the founders
51. Which of the following would be most useful when valuing your company?
a. advice from family and friends
b. success of a similar company in another part of the country
c. advice from an accountant who has clients in a similar market and industry
d. industry experts from another part of the country
52. Pre-money valuation is the post-money valuation minus the ______.
a. the value of the company at the end of 1 year
b. the value of the company at the end of 5 years
c. investment
d. cost of the obtaining the investment
53. An entrepreneur is asking for $1 million for 30% of his company. What is the
entrepreneur’s post-money valuation?
a. $3.33 million
b. $300,000
c. $2 million
d. it cannot be determined
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Neck, Entrepreneurship
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54. A company’s pre-money valuation is $500,000 and the post-money valuation is
$600,000. How much did the angel invest?
a. $5,000
b. $50,000
c. $100,000
d. it cannot be determined
55. An investor offers $150,000 for 30% of the company. What is the post-money
valuation of the company?
a. $350,000
b. $500,000
c. $50,000
d. it cannot be determined
56. An investor has offered $150,000 for 20% of the company. The company has a pre–
money valuation of $350,000. Should the entrepreneur consider the offer?
a. No, the investor is asking too great a percentage.
b. Yes, the investor is asking for less than the value of the investment.
c. No, the investor is not offering enough for the value of the company.
d. it cannot be determined
57. Professional angels are ______________________.
a. independently wealthy retired or semiretired entrepreneurs or executives who often
invest their personal capital in startups as a hobby.
b. people who have already successfully started and
operated their own businesses
c. doctors, lawyers, dentists, accountants, consultants, and the like, who invest their
savings and income
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d. usually former business executives looking to use their savings or current income to
invest
58. In 2014, venture capitalists invested in ____ of seed-stage companies.
a. 15%
b. 2%
c. 5%
d. 8%
59. Venture capitalists look for ventures that will earn them ________ times their
original investment.
a. two to five
b. five to ten
c. seven to twelve
d. ten to fifteen
60. When evaluating startups for potential investment, most VCs look for __________
above all else.
a. early seed funding
b. midsize companies
c. great teams
d. local companies
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61. The average partner in a VC firm will do ________ deals per year.
a. 100
b. roughly 50
c. five to ten
d. one to three
62. An entrepreneur is looking for funds to form a prototype and pitch the product.
Which of the following should NOT be considered at this stage?
a. crowdfunding
b. family and friends
c. personal loans
d. venture capitalists
63. An entrepreneur has conducted crowdfunding to raise enough money for patents
and building the founding team. He is now looking for funds to form a prototype and
pitch the product to new investors. Which of the following is the most likely source of
funds?
a. angel investor
b. venture capitalist
c. family and friends
d. venture capitalist groups
Instructor Resource
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64. IPOs, mergers and acquisitions, and buybacks are all types of ________ strategies..
a. investment
b. exit
c. growth
d. retrenchment
65. Karen has formulated a line of green cleaning products, which she has tested with
local commercial entities with great results. She is now ready to seek money to place
the product in stores. What stage of financing is Karen interested in?
a. seed stage financing
b. startup financing
c. early-stage financing
d. continuity financing
66. How far back can we track the history of venture capital?
a. to the dot com investments of the early 90s
b. to venture capital startups in the 1980s
c. to the 1958 Small Business Investment Act
d. to the 20th century investors such as the Rockefellers and the Bessemers
67. Venture capitalists work with investment portfolios. What does this mean?
a. the capitalists invest in more than one company at a time
b. details are kept for ready access about all company information
c. they have a defined type of businesses they would like to invest in
d. they have a list of investors on behalf of whom they invest
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68. If a VC offers you $2 million for a third of your company, what was your pre-money
valuation?
a. $2 million
b. $3 million
c. $4 million
d. $6 million
69. How much do investment bankers earn for handling an IPO?
a. a flat fee of $1 million
b. 7% of all the money earned from the IPO
c. 7% of the value of the company
d. a flat fee of $7 million
70. This practice allows larger companies to purchase smaller companies to increase
profitability or eliminate competition.
a. acquisitions
b. mergers
c. IPOs
d. buybacks
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71. This exit strategy allows the entrepreneur an opportunity to buy back venture capital
stock at cost and an additional premium.
a. IPO
b. exit clause
c. buyback
d. retract clause
72. As a general theme for this chapter, what sequence should an investor take when
seeking financial support for his or her startup?
a. family and friends, angel investor, venture capitalists, IPO
b. angel investors, family and friends, venture capitalists
c. family and friends, angel investors, IPO
d. angel investors, venture capitalists, IPO
True/False
1. In early-stage financing, small amounts are given so that entrepreneurs can prove a
business concept
2. Seed-stage financing consists of small amounts of capital to help entrepreneurs
prove a concept.
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3. Entrepreneurs should not conduct due diligence on potential venture capital
investors.
4. An angel investor is frequently a family member or close friend.
5. The experience of the cofounders and previous successes will influence an investor’s
willingness to invest in your company
6. If an entrepreneur issues convertible debt, he or she will lose control of the company.
7. Angel investors are eligible to invest as long as they are accredited investors.
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8. Generally speaking, there are more minority angel funding groups than women angel
groups.
9. Because they are investors, angel investors and venture capitalists do not usually
have an exit plan.
10. When working with a venture capitalist, it is possible to be demoted within your own
company.
11.The authors recommend finding investors early in the game so that you can focus on
building the company.
12. Typically entrepreneurs value their companies based on its current financial
performance.
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13. By issuing convertible debt, the entrepreneur will become the minority stockholder
and lenders will assume control over how the company is run.
14. Research suggests that women are better investors than men, as they take more
time researching potential entrepreneurial ventures, and take on less risk.
15. Generally, if a venture is at an early stage, then venture capital is the most likely
source of funding.
16. Angel investors usually look for opportunities in young startups that can be expected
to return 10 times their investment in five years.
17. Very few founding CEOs are pushed out after giving up equity to VCs.
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Essay
1. You and your cofounders have spent a year building and testing a home wireless
system that is easy to install and will integrate media streaming from phones, television,
and the Internet. You have tested the product on family and friends and built a
prototype. You now need money to build a pilot test, creating 100 systems and placing
them in a display at five selected stores. Identify the best source(s) of capital that you
and your cofounders should seek (you will need $100,000).
2. Imagine that you are about to go on Shark Tank to obtain financial backing. Describe
what factors you should consider when valuing your company.
3. Assume that you are an entrepreneur faced with giving up 20% of your company in
exchange for venture capital. What factors would you consider in accepting this offer?
Instructor Resource
Neck, Entrepreneurship
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4. Imagine that you have a new, tested invention that will require a million dollars in
order to produce enough of the product to return a profit. What considerations should
you review before approaching a venture capitalist?
5. Describe what might occur during the legal aspect of due diligence, prior to the actual
investment.
6. Describe what might occur during the market analysis component of due diligence,
prior to the actual investment.
7. What people might be interviewed in the course of due diligence?
Instructor Resource
Neck, Entrepreneurship
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8. Describe what you should look for during your assessment of a venture capitalist.
9. Consider that you have just been offered a million dollars to grow your business.
However, the venture capitalist group will be stepping in as the management team, and
you will retain 16% of the company. What should you consider in making your decision?
10. During the due diligence process, many questions are asked that cannot be
answered immediately. What ground rules might you establish to make sure that the
parties remain ethical during the process?
Instructor Resource
Neck, Entrepreneurship
SAGE Publishing, 2018