Essentials of Entrepreneurship and Small Business Management, 9e (Scarborough)
Chapter 15 Sources of Financing: Equity and Debt
1) Entrepreneurs needing between $100,000 and $3 million in the current financial environment
will likely find acquiring financing to be ________.
A) challenging
B) confusing
C) attainable
D) easy
2) Unlike entrepreneurs of the past, today’s entrepreneurs ________.
A) are finding more government interest and funding for business start-ups than in the past
decade
B) find fewer closed doors as small business start-ups have become less risky
C) have to piece their capital together from several sources
D) are spending a smaller percentage of their time raising capital for their businesses
3) When searching for capital to launch their companies, entrepreneurs should remember several
“secrets” to successful financing. Which of the following is not one of those secrets?
A) Choosing the right sources of capital can be just as important as choosing the right form of
ownership or the right location.
B) The money is out there, but the key is knowing where to look.
C) Creativity counts when searching for financing.
D) Raising money should not take very long therefore, if it does not come quickly, it probably
will not come at all.
4) The Global Entrepreneurship Monitor reports that the average amount of capital that
entrepreneurs use to start small businesses is between ________ and ________.
A) $25,000; $28,000
B) $50,000; $62,000
C) $15,000; $22,000
D) $100,000; $114,000
5) Which of the following represents capital?
A) Inventory
B) Equipment and machinery
C) Cash
D) All of the above
6) The primary disadvantage of equity capital is that the entrepreneur ________.
A) must repay it at some point with interest
B) must give up some (perhaps most) of the ownership in the business to outsiders
C) experiences the disadvantage of the risk/return tradeoff in the form of higher interest rates
D) B and C above
7) The primary advantage of equity capital is ________.
A) its lower interest rate
B) that it is readily available to a large number of entrepreneurs from a variety of lenders
C) that it does not have to be repaid like a loan does
D) that it does not appear on a company’s balance sheet
8) Entrepreneurs are most likely to give up more equity in their businesses in the ________
phase of their companies than in any other.
A) startup
B) product development
C) product testing
D) product shipping
9) Rather than piecing together their startup capital from multiple sources as they have in the
past, entrepreneurs now are relying on a single source of funding.
10) In startup companies, raising capital can easily consume as much as one-half of the
entrepreneur’s time and take many months to complete.
11) Rather than relying primarily on a single source of funds as they have in the past,
entrepreneurs today must piece together their capital from multiple sources, a method known as
layered financing.
12) Most entrepreneurs seeking money to launch their businesses need more than $1,000,000 in
startup capital.
13) Capital is any form of wealth employed to produce more wealth.
14) A small company needs fixed capital to purchase its permanent assets.
15) A company that is experiencing rapid expansion has similar capital requirements as those of
a fledgling business.
16) While equity capital represents the personal investment of the owner(s) of a business and
does not have to be repaid, debt capital is a liability that must be repaid with interest in the
future.
17) Equity capital is also called risk capital because these investors assume the primary risk of
losing their funds if the business fails.
18) Entrepreneurs are most likely to give up more equity in their businesses in the startup phase
than in any other.
19) Unlike equity financing, debt financing does not require an entrepreneur to dilute her/his
ownership interest in the company.
20) Explain the difference between equity and debt capital. What advantages and disadvantages
characterize each?
21) The first place an entrepreneur should look for startup capital is ________.
A) a bank
B) a venture capitalist
C) the Small Business Administration
D) his own savings
22) A method of raising capital that taps the power of social networking and allows
entrepreneurs to post their elevator pitches and proposed investment terms on specialized Web
sites and raise money from ordinary people who invest as little as $100 is called ________.
A) crowd funding
B) angel financing
C) venture capital
D) bootstrapping
23) The largest single source of external equity capital for small businesses is ________.
A) angels
B) venture capitalists
C) Small Business Administration loans
D) the stock market (i.e., “going public”)
24) When looking for an angel, the key is ________.
A) networking
B) waiting until you need the money
C) looking across industries
D) using computer matches
25) Angels are an excellent source of ________ money, often willing to wait ________ years or
longer to cash out their investment.
A) immediate; 5
B) patient; 7
C) long-term; 10
D) passive; 20
26) The general trend of angel financing is that it has ________ as a source of capital for
entrepreneurs over the past few years.
A) increased
B) stabilized
C) decreased
D) disappeared
27) Which of the following is not a characteristic of a typical angel investor?
A) Investing money locally.
B) Purchasing majority ownership in the company.
C) Investing in the startup phase of the company.
D) Willing to wait seven years or more to cash out an investment.
28) Before entering into any partnership arrangement, entrepreneurs must consider ________.
A) the partnership will only have an impact on sharing profits
B) what interest rate the partner is expecting
C) the impact of giving up some personal control and sharing profits with others
D) the ramifications of having another person on the payroll
29) (A)n ________ is a private, for-profit organization that purchases equity positions in young
businesses that will potentially produce returns of 300 to 500 percent over five to seven years.
A) commercial bank
B) venture capital company
C) angel
D) SB-1 filing
30) The average venture capital firm screens about ________ investment proposals each year
and ultimately invests in ________ of them.
A) 10,000; 12
B) 1,000; 1
C) 5,000; 13
D) 5,000; 80
31) Although there is no limit on the amount of stock it can buy, a typical venture capital firm
will purchase less than ________ percent of the ownership in a small firm.
A) 21
B) 50
C) 70
D) 80
32) Venture capitalists look for ________ as the most important ingredient in the success of any
business.
A) innovation
B) a growth industry
C) a competitive edge
D) competent management
33) When evaluating a company as a potential investment target, venture capitalists look for all
but which of the following?
A) A competent management team
B) Potential for high returns
C) Convenient and profitable exit strategy
D) Stable industry
34) Approximately ________ percent of all venture capital invested comes from corporations.
A) 2
B) 8
C) 17
D) 24
35) Bootstrapping is a process in which entrepreneurs tap their personal savings and use creative,
low-cost start-up methods to launch their businesses.
36) Bootstrap financing describes using internal, and often creative, methods of financing a
company’s need for capital.
37) Bootstrapping is a method of raising capital that taps the power of social networking and
allows entrepreneurs to post their elevator pitches and proposed investment terms on specialized
Web sites and raise money from ordinary people who invest as little as $100.
38) After an entrepreneur invests his own money for startup, (s)he will typically seek additional
financing from friends and family next.
39) Crowd funding is a method of raising capital that taps the power of social networking and
allows entrepreneurs to post their elevator pitches and proposed investment terms on specialized
Web sites and raise money from ordinary people who invest as little as $100.
40) Crowd funding is a process in which entrepreneurs tap their personal savings and use
creative, low-cost start-up methods to launch their businesses.
41) Unlike venture capital firms and most other institutional investors, angels typically invest in
businesses in their earliest phases, providing the seed capital needed to get the business going.
42) If an entrepreneur needs a relatively small amount of money to launch a company, angels are
a primary source of funds.
43) Angels are not a good source of financing for entrepreneurs seeking relatively small amounts
of money, as they typically do not make investments of less than $1 million.
44) Private investors, or angels, seek 60 to 75 percent annual return on investment, which is
much higher than those of professional venture capitalists, and tend to take a 51+ percent share
of the business.
45) Angels fill a significant gap in the seed capital market.
46) One of the disadvantages of angels is that they are typically not willing to wait more than
three years to cash out their investments.
47) Networking through personal contacts and the Internet is one of the best ways to find angels,
who usually prefer to invest in local businesses operating in industries they know something
about.
48) An option for acquiring equity capital is for the entrepreneur to take on partner(s) however, it
is important that (s)he consider the impact of giving up some personal control over operations
and sharing profits with others.
49) Private investors look to earn the return on their investments in a business through the
increased value of the business, not through dividends and interest.
50) A typical venture capital firm seeks investments in the $20,000 to $50,000 range and annual
returns of 35-50 percent over three to five years.
51) Venture capital companies reject 90 percent of the proposals they receive because they don’t
meet the firms’ investment criteria.
52) Venture capital firms rarely take an active role in managing the business in which they
invest.
53) Venture capital companies invest only in companies in the startup phase.
54) The most important ingredient that venture capitalists look for in judging the potential
success of a small business is a competent management team.
55) Two factors that make a deal attractive to venture capitalists include high returns and a
convenient, profitable exit strategy.
56) Corporate venture capital accounts for approximately 17 percent of all venture capital.
57) Sarah’s aunt and cousin have offered to provide some financial assistance for her new
business. Should an entrepreneur turn to friends and family members for money to launch a
company? Why or why not? If so, under what conditions?
58) Angels fill an important role in equity financing of a small business. Discuss their role, their
typical profile, and how to find an angel.
59) Venture capital companies are an important source of equity funding for small businesses.
Discuss their policies, ownership control, and investment preferences regarding funding small
businesses.
60) A(n) ________ is when a company raises capital by selling shares of its stock to the general
public for the first time.
A) venture capital offering
B) partnership
C) debt equity arrangement
D) initial public offering
61) Less than ________ percent of all U.S. companies are publicly-held corporations.
A) 1
B) 5
C) 10
D) 12
62) The biggest benefit of a public stock offering is ________.
A) the capital infusion the company receives
B) the ability to use its stock to acquire other companies
C) a listing on a stock exchange
D) the ability to use its stock to attract and retain key managers and employees
63) Investment bankers who underwrite public stock offerings typically look for all but which of
the following characteristics in a small company?
A) A strong record of earnings.
B) A solid position in a stable market.
C) Consistently high growth rates.
D) A sound management team with experience and a strong board of directors.
64) In an initial public offering, the underwriter, or investment banker, serves to ________.
A) advise and help prepare the company’s registration statement for the SEC
B) determine the price of the shares issued in the offering
C) sell the company’s stock through an underwriting syndicate of other investment bankers it
develops
D) All of the above
65) The single most important ingredient in making a successful public offering is ________.
A) choosing a capable underwriter
B) negotiating a favorable letter of intent
C) preparing a suitable registration statement
D) filing Regulation D with the SEC
66) The document outlining the details of the agreement between the entrepreneur and the stock
underwriter is called ________.
A) Regulation D
B) a “blue sky” agreement
C) the letter of intent
D) the registration statement
67) The “wait to go effective” is the time period when ________.
A) the SEC registration statement is being prepared
B) the underwriter decides what regulation to file under
C) the firm prices the stock for the offering
D) the company is waiting for SEC approval after filing the registration statement