Chapter 15—Funding a Startup Venture
TRUE/FALSE
1. Most startup ventures meet the criteria that venture capitalists use to define high-growth and
high-return companies.
2. The Small Business Innovation Development Act of 1982 was designed to stimulate technological
innovation by small businesses in the global market place.
3. Small Business Innovative Research (SBIR) grants provide small businesses with up to $150,000
during the concept stage and feasibility phase of Phase I.
4. Bootstrapping involves begging, borrowing, or leasing everything needed to start a venture.
5. Equity investors are guaranteed return of their investment and protection against loss.
6. Angels are a good source of seed or startup capital.
7. Private placement is a more costly, more time-consuming process than a public offering.
8. Commercial finance companies make loans based on the quality of the assets of the business.
9. The Small Business Administration (SBA) micro loan program guarantees it will repay up to 50
percent of the loan to a commercial lender should the business default.
10. Banks are not normally a readily available source of either working capital or seed capital to fund a
startup venture.
MULTIPLE CHOICE
1. In the first stage of investment, seed funding will usually come from ____.
a.
angels
b.
equity investors
c.
friends and family
d.
SBA loans
e.
suppliers
2. By the second stage on investment, known as ____, the business is requiring capital to grow on the
basis of a proven business model.
a.
transition
b.
emergence
c.
tornado
d.
growth
e.
None of these choices
3. Taking on outside investment capital means that the entrepreneur must plan for some type of ____ so
that investors can cash out of the business and receive a return on their investment.
a.
transition
b.
liquidity event
c.
bridge financing
d.
mezzanine financing
e.
None of these choices
4. In the third stage of investment, the company will begin to experience rapid growth that calls for large
sums of capital and perhaps a different type of money, termed ____, to provide the funds required for
an initial public offering.
a.
venture capital
b.
liquidity financing
c.
angel financing
d.
mezzanine financing
e.
None of these choices
5. In technology ventures, early seed funding and grants support a long period of product development.
Often this early-stage money comes from ____.
a.
venture capital
b.
SBA loans
c.
angel financing
d.
mezzanine financing
e.
government grants
6. When major insurance companies and pension funds make equity investments and cash deposits into
community banks that then lend to social ventures to help them grow, they are engaging in ____.
a.
social investment funds
b.
impact investing
c.
seed-stage grants
d.
mezzanine financing
e.
foundation grants
7. The ____ of startup ventures depends heavily on the entrepreneur’s personal resources.
a.
capital structure
b.
equity ratio
c.
rate of growth
d.
personal financing
e.
None of these choices
8. According to a Wells Fargo/Gallup study, most new ventures are started with ____.
a.
less than $10,000
b.
$15,000 to $20,000
c.
$50,000
d.
$70,000
e.
$100,000
9. Which of the following is not a strategy for bootstrapping?
a.
Opening a kiosk
b.
Subcontracting work
c.
Leasing equipment
d.
Managing receivables weekly
e.
Structuring convertible debt
10. Many investors suggest structuring a/an ____ deal for friends and family because this tactic avoids
having to place a valuation on the company that is likely to be wrong.
a.
risk capital
b.
convertible debt
c.
equity financing
d.
SBIC
e.
hard asset
11. ____ normally invest between $10,000 and $500,000 and usually focus on first-stage financing⎯that
is, startup funding or funding of firms younger than five years.
a.
Venture capitalists
b.
Angel investors
c.
Social investors
d.
High tech investors
e.
SBICs
12. ____ are actually privately managed venture capital firms licensed by the Small Business
Administration.
a.
PPMs
b.
SBIRs
c.
STTRs
d.
SBICs
e.
Venture capital institutes
13. Entrepreneurs can access ____ through universities that act as conduits for matching entrepreneurs
with investors.
a.
angel networks
b.
strategic alliances
c.
VC networks
d.
small business capital institutes
e.
venture capital institutes
14. ____ has/have become a popular form of cash management in smaller businesses that sell to big
companies.
a.
Factoring
b.
Bootstrapping
c.
Strategic alliances
d.
SBA loans
e.
None of these choices
15. With an SBA-guaranteed loan, an entrepreneur applies for a loan of up to ____ from his or her bank,
and the SBA guarantees that it will repay up to 90 percent of the loan to the commercial lender.
a.
$100,000
b.
$500,000
c.
$1 million
d.
$2 million
e.
$2.5 million
16. In the R&D ____, the startup acts as a general partner to develop the technology and then structures a
license agreement with the R&D partner whereby the entrepreneur can use the technology to develop
other products.
a.
joint venture
b.
limited partnership
c.
private placement
d.
strategic partnership
e.
None of these choices
17. State laws that protect investors from fraud are known by the term ____.
a.
Regulation A
b.
SCOR U-7
c.
Blue Sky laws
d.
Regulation D
e.
SCOR U-12
18. A sophisticated ____ investor is one who has a net worth of at least $2.5 million, earns $250,000 per
year, and has taken investment risk in the past.
a.
PPM
b.
angel
c.
equity
d.
VC
e.
None of these choices
19. The rules for private placement are stated in SEC Regulation ____.
a.
A
b.
B
c.
C
d.
D
e.
E
20. All of the following except ____ resources are required resources at various milestones in the
company’s growth.
a.
human
b.
social
c.
physical
d.
incubator
e.
financial
21. Many entrepreneurs neglect to consider one of the largest and most accessible sources of funding,
which is ____.
a.
the Small Business Administration
b.
state-funded venture capital
c.
their customers and suppliers
d.
venture capital institutes and networks
e.
pension funds
22. Companies that are not heavily regulated and that base their financial decisions on the quality of the
assets of the business are ____.
a.
commercial finance companies
b.
joint ventures
c.
angel networks
d.
VC networks
e.
commercial banks
23. The Small Business Innovation Development Act of 1982 requires that all federal agencies with
research and development budgets in excess of $100 million give a portion of their budgets to
technology-based small businesses in the form of ____.
a.
profit sharing
b.
deferred compensation
c.
pension benefits
d.
grants
e.
loans
24. A type of partnership useful for entrepreneurs starting high-tech ventures that carry significant risk due
to the expense of research and development is the ____.
a.
silent partnership
b.
R&D limited partnership
c.
secret partnership
d.
sole proprietorship
e.
LLC
25. ____ is/are a way of raising capital from private investors by selling securities in a private corporation
or partnership.
a.
A public offering
b.
Angel networks
c.
Guerrilla financing
d.
Private placement memorandum
e.
Venture capital
26. Private investors, called angels, are ____.
a.
usually small business investment companies
b.
the largest pool of risk capital in the United States
c.
found in the classified ads section of the newspaper
d.
found in the Yellow Pages of the telephone book
e.
friends of the lead entrepreneur
27. An investment in the entrepreneur’s venture is normally for an ownership share in the business and is
referred to as ____.
a.
debt financing
b.
equity
c.
trade credit
d.
notes payable
e.
bonds
28. Normally, the greatest single expense a business has is ____.
a.
advertising
b.
sales promotion
c.
payroll
d.
R&D
e.
production
29. Most entrepreneurs start their ventures with their own financial resources, which can include all the
following except ____.
a.
savings
b.
credit cards
c.
mortgages
d.
accounts receivable
e.
stock market accounts
30. Startup funds typically come from ____.
a.
a private investor
b.
a venture capitalist
c.
the founders and other “friendly money”
d.
angel investors
e.
banks
SHORT ANSWER
1. Discuss the benefits to an entrepreneurial business of leasing or sharing everything.
2. What is bootstrapping? What are the keys to success in bootstrapping?
3. What is equity? What are startup sources of equity?
4. List several typical characteristics of angels.
ANS:
5. What are the three phases of financing a venture?
ANS:
6. Briefly discuss “liability of newness” as it pertains to funding a new venture.
7. Define private placement.
8. Describe the role the Small Business Administration may play when an entrepreneur borrows from a
commercial bank.
ANS:
9. Briefly define and discuss business incubators.
10. What are the unique funding issues of high-tech ventures?