Question 1

The key idea behind staged funding is that each funding stage gives the venture capitalist an opportunity to reassess the management team and the company's financial performance.

Accepted Answer

Staged funding allows venture capitalists to reassess the management team and financial performance at each funding stage, making it easier to adjust the investment as necessary.

Question 2

To complete an IPO, a company will need the services of angel investors, who are experts in bringing new securities to market.

Accepted Answer

To complete an IPO, a company usually needs the services of investment banks or underwriters, who are experts in bringing new securities to market. Angel investors may have invested in the company earlier, but they are usually not directly involved in the IPO process.

Question 3

Most businesses are started when an entrepreneur is given a vision for a new business or product by institutional investors.

Accepted Answer

Most businesses are actually started by entrepreneurs who come up with their own ideas and seek funding from investors, rather than the other way around. Institutional investors may provide funding and support for existing businesses, but they are not typically the originators of new business ideas.

Question 4

A significant number of venture capital companies focus on mature businesses.

Accepted Answer

Venture capital companies typically focus on funding early-stage and high-growth businesses, rather than mature businesses.

Question 5

Traditional sources of funding work for new or emerging businesses, despite the presence of only intangible assets.

Accepted Answer

Traditional sources of funding often require collateral, which intangible assets cannot provide.

Question 6

To complete an IPO, a company will need the services of investment bankers, who are experts in bringing new securities to market.

Accepted Answer

Investment bankers are crucial in the initial public offering (IPO) process as they help the company with underwriting and marketing the securities to potential investors. Without the services of investment bankers, it would be extremely difficult for a company to successfully complete an IPO.

Question 7

Privately held companies find it easier to attract top management talent and to better motivate current managers.

Accepted Answer

This statement is incorrect. Publicly held companies often have more resources and a higher profile, making it easier for them to attract top talent. Additionally, publicly held companies may offer stock options or equity compensation to motivate managers, which can be more attractive than the compensation packages available at privately held companies.

Question 8

A principal way for venture capitalists to exit is to sell part of the company's equity back to the entrepreneur.

Accepted Answer

The principal way for venture capitalists to exit is to sell their equity stake in the company either through an IPO or by selling the company to another firm. Selling part of the equity back to the entrepreneur is not a common exit strategy.

Question 9

Venture capitalists are individuals or companies that help privately held businesses go public.

Accepted Answer

Venture capitalists help privately held businesses raise funding in exchange for equity but they do not necessarily help them go public. Going public typically involves a company undergoing an initial public offering (IPO) and listing their stock on a public stock exchange, which is a separate process often handled by investment banks.

Question 10

The bootstrapping period usually lasts about five years.

Accepted Answer

The bootstrapping period can vary significantly depending on the business and industry, and it is not typically defined as lasting about five years.

Question 11

In stand-by underwriting, the investment banking company makes no guarantee to sell the securities at a particular price.

Accepted Answer

In stand-by underwriting, the investment bank guarantees to sell the remaining unsold securities at a predetermined price, ensuring the issuer raises the intended capital.

Question 12

In stand-by underwriting, the investment banker guarantees the issuer a fixed amount of money from the share sale.

Accepted Answer

In stand-by underwriting, the investment banker agrees to purchase any unsold shares from the issuer at a set price, thus guaranteeing the issuer a fixed amount of money from the share sale.

Question 13

A significant number of venture capital companies focus on high-technology investments.

Accepted Answer

Many venture capital companies specialize in investing in high-growth, high-potential companies in the technology sector. These companies often have innovative ideas, disruptive technologies, and strong growth potential, making them attractive for venture capital investment.

Question 14

The process by which many entrepreneurs raise 'seed' money and obtain other resources necessary to start their businesses is often called bootstrapping.

Accepted Answer

Bootstrapping refers to the process of starting a business with minimal outside investment, often relying on personal savings, revenue from early sales, and resourcefulness to obtain necessary resources. It is a common method for entrepreneurs to fund their ventures without taking on significant debt or giving up too much equity too early.

Question 15

Angel investors are investors who come to the rescue of companies threatened by takeovers.

Accepted Answer

Angel investors are individuals who invest their own money in early-stage companies in exchange for equity or ownership in the company. They usually invest during the early stages of a company's development, often before any outside investors or venture capitalists get involved, and help the company grow and become successful. Their main purpose is not to prevent takeovers, but to help the company succeed and share in its success.

Question 16

Underwriting is the risk-bearing part of investment banking.

Accepted Answer

Underwriting involves assessing and taking on risk for various types of financial deals, such as initial public offerings or bond issuances. This is a key function of investment banking.

Question 17

At the closing of a best-efforts offering, the issuing company delivers the security certificates to the underwriter and the underwriter delivers the payment for the securities, net of the underwriting fee, to the issuer.

Accepted Answer

The answer of At the closing of a best-efforts offering,...

Question 18

The amount of equity capital that can be raised in the public equity markets is typically smaller than the amount that can be raised through private sources.

Accepted Answer

The amount of equity capital that can be raised in the public equity markets is typically larger than the amount that can be raised through private sources. Public equity markets provide access to a larger pool of investors, resulting in the potential for higher capital raising.

Question 19

The initial 'seed' money usually comes from the entrepreneur or other founders.

Accepted Answer

The initial funding for a startup typically comes from the entrepreneur or co-founders, either from their own savings or from personal networks. This is known as seed funding, and it is used to cover the initial costs of starting a business, such as market research, product development, and initial marketing expenses.

Question 20

A venture capitalist may also exit an investment by selling ordinary shares in an initial public offering.

Accepted Answer

A venture capitalist can exit their investment by selling ordinary shares in an IPO (Initial Public Offering). In an IPO, a company goes public and shares of its stock are sold for the first time, typically on a stock exchange. This can provide an opportunity for investors, including venture capitalists, to sell their shares and exit the investment.

Quiz 15: How Companies Raise Capital