Deck 12: Professional Venture Capital

Question 1

Most venture investing came from wealthy individuals and families prior to World War II.

Answer 1

True

Question 2

The phrase "two and twenty shops" refers to investment management firms having a contract that gives them two percent carried interest and 20 percent of assets annual management fee.

Answer 2

False

Question 3

Pension funds are the dominant source of funds for venture investing.

Answer 3

True

Question 4

Internet financing led the record level of venture investing in the 1999-2000 time period.

Question 5

Initially, Small business Investment Companies access to borrowed funds appeared attractive. This was because venture investing and debt service commitments are an ideal mixture of financing for start-ups.

Question 6

The American Research and Development ARD) company was formed in 1946.

Question 7

The deal flow reflects the flow of business plans and term sheets involved in the venture capital investing process.

Question 8

The establishment of the Small Business Administration was the first major government foray into venture investing.

Question 9

The beginning of professional venture capitalists began with the formation of American Research and Development in 1966.

Question 10

In 1958 the Small Business Administration created Small Business Investment Companies.

Question 11

The summary of the investment terms and conditions accompanying an investment proposed by the venture capitalist is known as the statement of strengths and weaknesses.

Question 12

The first major government foray into venture investing came with the formation of the Small Business Administration SBA) in 1947.

Question 13

In the venture investing context, due diligence describes the process of investigating a potentially worthy concept or plan.

Question 14

In addition to having personal financial stakes in their portfolio of investments, professional venture capitalists have raised funds from other investors to invest in the portfolio.

Question 15

Individuals and families are more important suppliers of venture capital relative to finance and insurance firms.

Question 16

The term "capital call" refers to the flow of business plans and term sheets involved in the venture capital investing process.

Question 17

"Carried interest" is the portion of profits paid to the professional venture capitalist as incentive compensation.

Question 18

When the venture fund calls upon the investors to deliver their investment funds, it reflects the deal flow.

Question 19

Created by the Small Business Administration, Small Business Investment Companies possess important tax advantages and were eligible to borrow amounts up to four times their equity base from the government.

Question 20

Professional venture capital, as we know it today, did not exist before World War II.

Question 21

Endowments and foundations are more important suppliers of venture capital relative to individuals and families.

Question 22

Due diligence in a venture investing context) is the process of ascertaining the viability of a business plan.

Question 23

As venture firms attract money from investors, it is placed in a fund. Important issues that must be put in place with the establishment of the fund include all of the following except:

A) determine the general partners
B) establishing a fee structure
C) a profit sharing arrangement
D) establish its governance
E) the management team assigned to each borrower

Question 24

The beginning of professional venture capitalists is considered to have begun with the establishment or formation of:

A) Small Business Administration
B) Small Business Investment Companies
C) American Research and Development organization
D) Professional Venture Capitalists organization

Question 25

The beginning of professional venture capitalists is considered to have occurred:

A) prior to World War II
B) 1946
C) 1956
D) 1966
E) after the Vietnam War

Question 26

According to Figure 12.4 Bloomberg 2014), family offices was the largest supplier of venture capital in 2014.

Question 27

Which of the following was the largest source of venture capital funds in 2009 as reported in Figure 12.4)?

A) pension funds and corporations
B) individuals and families
C) endowments and foundations
D) finance and insurance

Question 28

A "term sheet" is a summary of the investment terms and conditions accompanying an investment by venture capitalists.

Question 29

SLOR stands for "standard letter of recognition."

Question 30

"Due diligence," in venture investing context, is the process of ascertaining the viability of a business plan.

Question 31

When a syndicate of VCs invests in a venture, the investor in charge of organizing the due diligence process is known as the "lead investor."

Question 32

Term sheets may contain demands regarding the voting rights of shares issued to venture investors.

Question 33

According to Figure 12.4 Bloomberg, 2014), public pension funds supplied about 20 percent of venture capital funds.

Question 34

Annual VC investments, as indicated in Figure 12.1, reached an all-time high in the year 2000.

Question 35

SLOR stands for "standard letter of rejection."

Question 36

Venture Capital firms tend to specialize in publicly identified niches because of the potential for value-added investing by venture capitalists. Which is not one of these niches?

A) industry type
B) venture stage
C) size of investment
D) management style
E) geographic area

Question 37

Term sheets consist of the terms and conditions accompanying an investment, as stipulated by the founders of the venture.

Question 38

Two typical issues addressed in a term sheet are valuation and the size and staging of financing.

Question 39

Once the venture capital firm has received exit proceeds from a venture in the form of cash or securities, some method of returning the proceeds less the carried interest) must be determined.

Question 40

All of the following are typically part of a venture fund's typical compensation and incentive structure except:

A) some percent annual fee on invested capital
B) a percent share of any profits to the managing general partner
C) carried interest
D) salary for the general partners

Question 41

When evaluating the prospects of a new venture, venture capital firms consider the characteristics of the entrepreneur and its team. Which of the following is not part of the review of the entrepreneur/team?

A) its background and experience
B) its managerial capabilities
C) management's stake in the firm
D) the VC firms' ability to cash out
E) the capability to sustain an effort

Question 42

In a Venture Capital Fund Placement Memorandum, which of the following is not part of the fund overview?

A) fund size
B) investment focus
C) fund management
D) portfolio size
E) general partners' capital contributions

Question 43

Term sheets are usually drafted by:

A) the mangers of the venture seeking VC funding
B) the VC fund seeking to fund the venture
C) management and founders
D) it is usually done by an third party, in order toensure the fair treatment of both parties

Question 44

All of the following are typical issues addressed in a term sheet except?

A) valuation
B) board structure
C) registration rights
D) management fees
E) employment contracts

Question 45

In a Venture Capital Fund Placement Memorandum, which of the following is not a front matter declaration?

A) description of limited manner of the offering
B) targeted fund size
C) imposition of confidentiality
D) notice of lack of SEC registration
E) declaration of the highly risky nature of investment

Question 46

When screening possible investments, a venture capital firm might issue an SLOR which stands for:

A) standard letter of rejection
B) standing letter of reconciliation
C) standard letter of reassessment
D) senior letter of reference

Question 47

Professional venture investing usually involves setting up a venture capital firm as a:

A) proprietorship
B) corporation
C) partnership
D) S corporation

Question 48

After a new professional venture capital fund is organized, the fund managers:

A) conduct due diligence and actively invest
B) solicit investments and obtain commitments
C) arrange harvest or liquidation
D) identify prospective venture investments and then solicit investments

Question 49

A summary of the investment terms and conditions accompanying an investment is referred to as a:

A) term sheet
B) business plan
C) fund created by professional venture capitalists
D) due diligence in venture investing
E) capital call

Question 50

When screening prospective new ventures, venture capital firms consider their own funds' requirements. Which of the following is not one of the venture firm's requirements relating to its own funds?

A) investor control
B) rate of return
C) size of investment
D) probable stock listing exchange for the mature venture
E) financial provisions for investors

Question 51

In a Venture Capital Fund Placement Memorandum, all of the following are part of the executive summary except?

A) special limited partners
B) general partners' capital contributions
C) limitation of liability
D) allocation of gains and losses
E) imposition of confidentiality

Question 52

If an investment management firm is known to be a "two and twenty shop", this implies that the firm:

A) receives an annual 2% fee on invested capital, and a 20% carried interest
B) receives an annual 20% fee on invested capital, and a 2% carried interest
C) receives an annual 2% fee on gross operating profits, and a 20% carried interest
D) receives an annual 20% fee on gross operating profits, and a 2% carried interest

Question 53

After determining the next fund's objectives and policies, the "professional venture investing cycle's" next step is:

A) solicit investments in new fund
B) organize the new fund
C) obtain commitments for a series of capital calls
D) conduct due diligence and actively invest
E) arrange harvest or liquidation

Question 54

When evaluating the prospects of a new venture, venture capital firms consider which of the following?

A) characteristics of the proposal
B) characteristics of the entrepreneur/team
C) nature of the proposed industry
D) both b and c
E) all of the above

Question 55

The term "carried interest" refers to:

A) interest not currently paid but which must be paid in the future by a professional venture capitalist
B) interest transported directly to a bank
C) interest owed on a loan in default
D) the portion of profits paid to the professional venture capitalist as incentive compensation

Question 56

In a Venture Capital Fund Placement Memorandum, which of the following is not part of the offering summary?

A) objective of formation
B) declaration of general partner
C) management fee
D) minimum capital restrictions
E) targeted fund size

Question 57

In a syndicate of venture investors, the investor who is responsible for governing the process of due diligence is:

A) the primary investor
B) the lead investor
C) a small group of secondary investors
D) the investor in charge of issuing SLORs for the syndicate
E) it is a democratic process that is shared by all investors in the group

Question 58

When screening prospective new ventures, venture capital firms must consider the nature of the proposed industry. Which of the following is not part of the screening of the proposed industry?

A) market attractiveness
B) managerial references
C) potential size
D) technology
E) threat resistance

Question 59

In a Venture Capital Fund Placement Memorandum, all of the following are included in the summary of terms except?

A) indemnification
B) objective
C) liquidation
D) valuation
E) expenses

Question 60

A venture fund calls upon its investors to deliver their investment funds. This is known as:

A) due diligence
B) deal flow
C) a capital call
D) carried interest
E) a SLOR