Deck 11: Raising Money for Starting and Growing Businesses

Question 1

Valuation of a small, privately held corporation is difficult.

Answer 1

True

Question 2

The modified-book value method of valuation's main weakness is that it reflects the past rather than the future.

Answer 2

True

Question 3

According to the chapter, the ideal method for valuing a business is asset-based valuation.

Answer 3

False

Question 4

Corporate angels may be a headache for a small company.

Question 5

According to the chapter, informal investors provide $100 billion per year to startup and young businesses in the US alone.

Question 6

The first financing for your new business will come from angel investors.

Question 7

Placing a value on your startup is the first thing you should do when raising a round of angel investment.

Question 8

Banks expect loans to be secured by positive cash flow.

Question 9

Market-comparable valuation is based on the net income and the startup's capitalization rate.

Question 10

A rapidly growing, high-potential firm will generate a lot of free cash flow in its first few years.

Question 11

The difference between a seed-stage company and a startup is that the latter, unlike the former, is already in business.

Question 12

Venture capital investors expect a higher rate of return for mezzanine stage investments than for bridge financing.

Question 13

After the internet bubble burst, angel groups stopped investing in seed-stage companies.

Question 14

A company's growth rate vis-à-vis its industry is not considered when using the Asset-Based valuation method.

Question 15

Professional angels are a category of investors primarily comprised of retired entrepreneurs.

Question 16

Friends and family should be your first sources of startup money.

Question 17

The liquidation value of a company is a strict valuation placed on an insolvent company by the courts during a bankruptcy proceeding.

Question 18

Angel investors are one category of formal investors.

Question 19

Modified-book value is applicable to small, fast-growing, firms.

Question 20

The present value of company is the present value of the past free cash flows, plus the residual (terminal) value of the firm.

Question 21

Replacement Value is a variation of:

A) Market-Comparable Valuation Method
B) Earning Capitalization Method
C) Present Value of Future Cash Flows Method
D) Market Capitalization Method
E) Asset-based Valuation Method

Question 22

After the IPO, the company has to file a registration statement with the SEC.

Question 23

IPOs are rare, even among venture capital backed companies.

Question 24

The least desirable way for venture capitalist to harvest an investment is:

A) IPO
B) Acquisition
C) Buyback
D) Stock swap
E) They are equally attractive

Question 25

Acquisitions are legally barred, by the SEC, from being paid in cash.

Question 26

The company planning a public offering must first select an investment bank.

Question 27

Most angel investors prefer common stock that can later be converted into preferred stock.

Question 28

Approximately what percent of informal investment is directed to businesses founded by the investor's relative?

A) 25%
B) 35%
C) 40%
D) 50%
E) 65%

Question 29

According to the GEM study, half of all informal investors are expecting their money to be returned within how many years?

A) 1 year
B) 2 years
C) 3 years
D) 4 years
E) 5 years

Question 30

Venture capitalists traditionally view the potential return of four times their investment within five years as the standard, minimum threshold for investment.

Question 31

All of the following are mentioned in the chapter as possible sources of funding that the entrepreneur should explore prior to soliciting investments from family and friends, except:

A) Vendor financing
B) Reduced rent from a landlord
C) Selling infrastructural assets
D) Customer financing
E) Services at reduced rates

Question 32

Business angels are generally satisfied with a lower return than venture capitalists.

Question 33

Going public is an expensive endeavor.

Question 34

Selling the company is the most common way of harvesting an investment.

Question 35

Venture capitalists prefer to invest in entrepreneurs who have competent business plans.

Question 36

Which of the following types of angels is usually a passive investor?

A) Professional
B) Entrepreneurial
C) Corporate
D) Micromanagement
E) Enthusiast

Question 37

Entrepreneurs should be careful not to weight employee compensation too heavily with stock options to avoid risks to morale should the share price decline significantly.

Question 38

The equation for the value of a company with the earnings capitalization method is:

A) Company Value = Gross Revenue ÷ Book Value
B) Company Value = Net Income ÷ Capitalization Rate
C) Company Value = Net Income × Market price of stocks
D) Company Value = Sum of Cash Flow for the past five years
E) Company Value = Price of one share × number of shares

Question 39

Which of the following must be added to Operating Income when calculating Free Cash Flow?

A) Depreciation
B) Principal Payments
C) Interest Payments
D) Capital Expenditures
E) Tax Payments

Question 40

Buybacks of investors' equity is a common exit strategy for venture capital firms.

Question 41

Which factor plays the largest role in a venture receiving a second round of venture capital?

A) Number of media mentions the start-up receives
B) Progress on meeting performance milestones.
C) Success in recruiting talented employees
D) None of the above

Question 42

Which of the following is not one of the six top factors venture capitalists evaluate in analyzing a candidate for investment?

A) Management team
B) Business plan
C) Product/service
D) Investors' recommendations
E) Target market

Question 43

Which factor is often more favorable in an acquisition, as compared to an IPO?

A) Liquidity for founders
B) Lower expenses and investment banker commissions
C) Ability to sustain the existing culture
D) None of the above
E) All of the above

Question 44

For the entrepreneur advancing through the IPO process, what is the step that immediately follows the SEC's approval of the preliminary prospectus?

A) The "road-show"
B) Filing the registration form with the SEC
C) Agreeing upon the price of stocks
D) Meeting with all key players
E) Start seeking an underwriter for the IPO

Question 45

Venture capitalists will invest only if the company has the potential to return at least:

A) Seven times their investment in five years
B) Four times their investment in three years
C) Five times their investment in two years
D) Ten times their investment in seven years
E) Five times their investment in five years

Question 46

What will a VC usually receive in exchange for the money invested?

A) Common stock
B) Stock options
C) Promissory notes
D) Letter of deposit
E) Convertible preferred stock

Question 47

In recent years, approximately how many venture-backed companies went public?

A) 20
B) 60
C) 70
D) 100
E) 200

Question 48

Which of the following about a potential venture capitalist should be cause for concern?

A) The venture capitalist sits on ten boards
B) Venture capitalist visits the company weekly
C) Venture capitalist retains significant funds for future investments
D) The venture capitalist was successful as an Entrepreneur in a related industry

Question 49

What is the underwriter's standard commission for taking a company public?

A) ~1%
B) ~3%
C) ~5%
D) ~7%
E) ~10%

Question 50

In general, a venture capitalist should not sit on more than what number of portfolio company boards?

A) 2
B) 6
C) 8
D) 10
E) 12

Question 51

What is the term for the founder's compensation to be paid a few years after the company is acquired, if the company meets certain targets?

A) Added value
B) Plus value
C) Money on the table
D) Premium for excess
E) Earn-out

Question 52

What are the most attractive companies that go public usually backed with?

A) Angel capital.
B) Venture capital.
C) Positive cash flow.
D) Investments from family members.
E) Sweat equity

Question 53

In addition to money, what value should a venture capitalist bring to a start-up?

A) Talent acquisition
B) Industry contacts
C) Professional Contacts
D) All of the above

Question 54

The period when the prior shareholders are not permitted to sell any of their stock is called:

A) Lockup period
B) Blocking period
C) Limited period
D) Banning period
E) None of the above

Question 55

What is the term for the event by which the investor realizes his or her investments?

A) Crop
B) Gain
C) Exit
D) Yield
E) Cream

Question 56

Which of the following is NOT true about Angel groups?

A) They often consist of successful entrepreneurs and business people
B) They do not want unsolicited bids
C) They grew in numbers during the late 1990s
D) They focus on seed and early-stage funding.

Question 57

From a venture capitalist's perspective, an introduction to an entrepreneur through which of the following people is most worrisome?

A) Other entrepreneurs
B) Lawyers
C) Finders
D) Angels
E) Bankers

Question 58

Which of the following is a non-financial reason for an angel to invest?

A) A desire to mentor entrepreneurs
B) To have fun
C) To indirectly benefit society
D) All of the above
E) None of the above