62) Layered financing is the process of piecing start-up capital together from a variety of sources
rather than relying on a single source of funds.
63) Seed capital for the entrepreneur is risk capital for investors.
64) The money needed to launch a new business is known as growth capital.
65) The owner of a small retail shoe store and the owner of a small furniture manufacturer would
likely have very different capital requirements.
66) Lenders of fixed capital expect the assets purchased to increase the borrowing firm’s
efficiency, profitability, and cash flows.
67) A small company needs fixed capital to expand and grow the business.
68) The need for growth capital is created by the uneven flow of cash into and out of the
business due to normal seasonal fluctuations.
69) The primary advantage of equity capital is that it does not have to be repaid with interest.
70) The most common source of equity funds used to start a small business is an SBA loan.
71) If an entrepreneur is not willing to risk funds in a business venture, other potential investors
and lenders are not likely to provide capital either.
72) An entrepreneur should not take advantage of offers from family and friends to lend or invest
money for the business venture.
73) Entrepreneurs forgoing their paychecks during the start-up phase is known as sweat equity.
74) “Angels” typically invest in businesses in the start-up phase, providing the seed capital
needed to get the business going.
75) “Angels” control a larger pool of venture capital than venture capitalists.
76) “Angels” usually prefer to invest in businesses they know something about.
77) Private investors, or “angels,” seek 60-75% annual return-on-investment and tend to take a
51%+ share of the business.
78) Most venture capitalists make investments in promising business ventures in return for a
share of the ownership.
79) Locating “angels” to finance a business is essentially a matter of networking—finding the
right contacts.
80) In exchange for the financing they receive from venture capitalists, entrepreneurs must give
up a portion of their businesses, sometimes surrendering a majority interest and control of its
operations.
81) Foreign corporations invest in U.S. small businesses through strategic partnerships in order
to gain access to new technology, new products, and U.S. markets.
82) To justify the cost of investigating the offers they receive, venture capitalists typically seek
investments in the $200,000 to $500,000 range.
83) Venture capital companies reject 90% of the proposals they receive because they don’t meet
the firms’ standards.
84) The majority of venture capital firms that provide capital to small businesses strive to not be
involved in running the business.
85) Most venture capitalist companies prefer to finance start-up companies to maximize their
return.
86) The most important ingredient that venture capitalists look for in judging the potential
success of a small business is a competent management team.
87) In an initial public offering, a company raises capital by selling shares of its stock to the
general public for the first time.
88) One of the characteristics that investment bankers who underwrite public stock offerings
typically look for is consistently high growth rates.
89) The biggest benefit of going public is the capital infusion the company receives.
90) In an IPO candidate, investment bankers look for scalability.
91) Once a small business goes for a public stock offering, information that the owner used to
keep private is now public information.
92) The number of IPOs have dropped significantly since 2001.
93) In a public stock offering, the underwriter’s primary role is in selling stock through an
underwriting syndicate it assembles.
94) The typical letter of intent prevents an underwriter from withdrawing a company’s stock
offering before it is executed.
95) A firm commitment underwriting agreement essentially guarantees that the small company
making the initial public offering will receive the funds it needs.
96) The reason Joe Falsetti couldn’t get investors interested in an IPO for his ROM Tech was his
unwillingness to disclose key financial information.
97) A lock-up agreement prevents the sale of “insider” shares for a specific time period—often
12 to 36 months—after an initial public offering.
98) The purpose of the road show coordinated by the underwriter of an initial public offering
(IPO) is to promote interest in the IPO among potential syndicate members.
99) The single most important ingredient in making a successful IPO is the road show.
100) The IPO process requires maximum disclosure.
101) The IPO process requires costly compliance with federal regulations.
102) Typically, the entire process of going public takes about 21 days.
103) The single most important ingredient in making a successful IPO is selecting a capable
underwriter.
104) Taking a company public is a simple process.
105) In an IPO, the letter of intent outlines the details of the deal.
106) To begin an offering, the entrepreneur and the underwriter must negotiate a letter of intent.
107) In an IPO the purpose of the road show is to sell shares.
108) Most letters of intent include a lock-up agreement.
109) In a best efforts agreement, the underwriter agrees to purchase all of the shares in the
offering.
110) A firm commitment agreement guarantees that the company will receive the required funds.
111) A lock-up agreement prevents sale of insider shares for 12 to 36 months.
112) A firm commitment agreement outlines the details of the IPO deal.
113) Once the letter of intent is signed, the next task is to prepare the registration statement.
114) In a firm commitment agreement, the underwriter agrees to purchase all of the shares in the
offering and then resells them to investors.
115) Most small companies meet the criteria for making a successful public stock offering.
116) Most of the start-up businesses that attract venture capital are technology companies.
117) Entrepreneurs bootstrap their companies.
118) Angels provide some of the startup capital for small companies.
119) The first place entrepreneurs should look for startup money is from their family and friends.
120) Growth capital, unlike working capital, is not related to the seasonal fluctuations of a small
business.
121) Angels often finance deals that venture capitalists would also consider.
122) A typical venture capital company seeks to purchase 20 percent to 40 percent of a business.
123) Most venture capitalists prefer to purchase ownership through common stock or convertible
preferred stock.
124) The primary disadvantage of equity capital is that the entrepreneur must give up some—
perhaps most—of the ownership in the business to outsiders.
125) Angels are an excellent source of “IPO money.”
126) Venture capital companies are private, for-profit organizations that purchase equity
positions in young businesses they believe have high-growth and high-profit potential, producing
annual returns of 300 to 500 percent over five to seven years.
127) Venture capital companies are typically not-for-profit organizations.
128) Although the three types of capital are interdependent, each has certain sources,
characteristics, and effects on the business.
129) Define and describe the importance of the following types of capital.
∙ fixed capital
∙ working capital
∙ growth capital
130) Outline and briefly describe the common sources of equity capital.
131) What is the cardinal rule that an entrepreneur should follow when borrowing venture money
from friends and relatives?
132) Discuss the role of “angels” in financing small companies, and what and how they tend to
finance start-ups.
133) Do angels finance start-ups or established firms?
134) Venture capital companies are an important source of equity funding for small businesses.
Discuss their policies, ownership, control, and investment preferences when it comes to funding
small businesses.
135) Explain the advantages and disadvantages of a small company “going public.”
136) Briefly review the steps involved in the IPO process.
137) What is a “road show” and what is its purpose?