Deck 12: Professional Venture Capital

Question 1

The initial stage in the professional venture investing cycle begins with determining the objectives and policies for the next fund.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

Annual VC investments reached an all-time high in the year 1990.

Answer 3

False

Question 4

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

Question 5

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

Question 6

The professional venture investing cycle begins with the obtaining of commitments for a series of capital calls.

Question 7

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

Question 8

Pension funds are the largest percentage source of venture capital.

Question 9

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 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

Endowments and foundations are the smallest percentage source of venture capital.

Question 17

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

Question 18

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 startups.

Question 19

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

Question 20

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

Question 21

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

Question 22

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 23

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

Question 24

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

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

Question 25

SLOR stands for "standard letter of rejection."

Question 26

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

Question 27

SLOR stands for "standard letter of recognition."

Question 28

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

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

Question 29

Family offices are the largest supplier of venture capital.

Question 30

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

Question 31

D ue diligence (in venture investing context)is the p rocess of ascertaining the viability of a business plan.

Question 32

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

Question 33

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 34

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

A)solicit investments in new fund
B)organize the new fund
C)obtain commitments for a series of capital calls
D)arrange harvest or liquidation

Question 35

Public pension funds supply about 20 percent of venture capital funds.

Question 36

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

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

Question 37

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

Question 38

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 39

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

Question 40

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 41

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

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

Question 42

In a venture capital fund placement memorandum, all of the following are part of the executive summary except :

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

Question 43

The term "carried interest" refers to:

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

Question 44

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

Question 45

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

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

Question 46

Which of the following is the largest percentage supplier of venture capital?

A)public pension funds
B)family offices
C)endowments and foundations
D)financial and insurance

Question 47

Which of the following is not one of the likely outcomes of the venture firm's screening process?

A)seek the lead investor position
B)seek a nonlead investor position
C)close the capital fund
D)issue a standard letter of rejection

Question 48

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)a salary for the general partners

Question 49

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)determining the general partners
B)establishing a fee structure
C)establishing a profit sharing arrangement
D)assigning the management team to each borrower

Question 50

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

Question 51

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)general partners' capital contributions

Question 52

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

Question 53

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

A)characteristics of the proposal, characteristics of the entrepreneur/team, and nature of the proposed industry
B)characteristics of the proposal and the entrepreneur/team
C)characteristics of the entrepreneur/team and nature of the proposed industry
D)characteristics of the proposal and nature of the proposed industry

Question 54

Which of the following is the smallest percentage supplier of venture capital?

A)financial and insurance
B)public pension funds
C)endowments and foundations
D)funds of funds

Question 55

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

A)2% fee on invested capital and 20% carried interest
B)20% fee on invested capital and 2% carried interest
C)2% fee on gross operating profits and 20% carried interest
D)20% fee on gross operating profits and 2% carried interest

Question 56

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

Question 57

When screening possible investments, a venture capital firm might issue a 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 58

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

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

Question 60

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)none of these choices; it is a democratic process that is shared by all investors in the group

Question 61

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

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

Question 62

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

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

Question 63

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)a third party, in order to ensure the fair treatment of both parties