Deck 20: Entrepreneurial Finance and Venture Capital

Question 1

If a venture capital investment contract provides for the protection of the venture capital group's ownership stake if the firm sells new equity under duress,then the contract has a(n)

A) demand registration rights provision
B) stock option plan
C) ownership rights agreement
D) ratchet provision

Answer 1

ratchet provision

Question 2

Pickswinners Venture Fund
Pickswinners Venture Fund invested $10 million five years ago in Robotronics Co. The fund received 6 million shares of convertible preferred stock, each of which can be converted into three shares of common stock. Robotronic is now set to complete an IPO, and its shares are being priced at $40 each. Pickswinners will convert its preferred stock to common at the IPO, and will sell its shares along with Robotronic. The investment banking firm handling the IPO will charge an 8% underwriting fee.
If Pickswinners' common stock position represents 40% of Robotronics equity,how many shares are being offered in the IPO?

A) 15,000,000
B) 18,000,000
C) 25,200,000
D) 45,000,000

Answer 2

45,000,000

Question 3

Venture capital funding is usually not straight equity initially,but rather

A) senior debt
B) staged loan agreements
C) convertible debt or preferred stock
D) stock options

Answer 3

convertible debt or preferred stock

Question 4

Venture capital funded firms often use stock options in their compensation plans

A) to hide compensation costs from investors.
B) to attract and retain talented employees with lower cash outlays.
C) to transfer risk to the venture capital investors.
D) to enhance the future venture capital fund returns.

Question 5

It's Gonna Be Big (IGBB)
It's Gonna Be Big (IGBB) is seeking venture capital investment of $8 million. The founder and the venture capital fund agree the firm is worth $15 million today, and the venture capital investor asserts it requires a 35% (compounded annually) expected return. IGBB and the venture capital investor foresee an IPO in four years, at which time IGBB is expected to be valued at $90 million.
Suppose the venture capital investor's share of the equity in IGBB is 25%,and that in four years at the IPO the firm is valued at $120 million.What annual (compounded)return did the venture capital investor earn?

A) 46%
B) 39%
C) 30%
D) 26%

Question 6

The investment contract provision that gives the venture capital fund the right to compel the firm to file with the SEC for a public offering is a

A) repurchase rights provision
B) participation rights provision
C) demand registration rights provision
D) ownership rights agreement

Question 7

Why is the cancellation option a key aspect of staged financing?

A) It allows the entrepreneur the opportunity to exit the contract.
B) It allows the venture capital fund to extract excessive returns.
C) It allows the venture capital fund to invest at lower expected returns because risks are reduced.
D) It provides either party a "no fault" exit from the investment contract.

Question 8

Convertible securities are attractive to venture capital investors because

A) they allow for the venture capitalist to exercise control without majority ownership of the firm's equity.
B) they provide seniority for the venture capitalist relative to the entrepreneur.
C) they allow the venture capitalist in the upside of firm success.
D) all of the above.

Question 9

Formal business entities with full-time professionals who seek out and fund promising ventures are

A) angel capitalists
B) institutional venture capital funds
C) vulture funds
D) business incubators

Question 10

A growing firm seeks $30 million to develop and market its promising new technology.An institutional venture capital fund steps in with an $8 million initial investment.This is an example of

A) low base financing
B) staged financing
C) scaled financing
D) intermittent financing

Question 11

A provision in the venture capital fund's investment contract that limits the firm's ability to sell assets without prior investor approval is an example of

A) a ratchet provision
B) a negative covenant
C) a positive covenant
D) a participation rights provision

Question 12

It's Gonna Be Big (IGBB)
It's Gonna Be Big (IGBB) is seeking venture capital investment of $8 million. The founder and the venture capital fund agree the firm is worth $15 million today, and the venture capital investor asserts it requires a 35% (compounded annually) expected return. IGBB and the venture capital investor foresee an IPO in four years, at which time IGBB is expected to be valued at $90 million.
What share of IGBB's equity is necessary for the venture capital investor to achieve its required return?

A) 45%
B) 40%
C) 35%
D) 30%

Question 13

With few exceptions over time,____ have generally provided more total funding to entrepreneurial companies each year.

A) angel capitalists
B) institutional venture capital funds
C) vulture funds
D) government sponsored enterprises

Question 14

Pensions are well-suited to the institutional venture capital fund area of investing because

A) pension fund managers are able to take more risk like venture capital fund managers.
B) pension fund managers are able to hold investments with longer time horizons like venture fund managers
C) pension fund managers do not face investor scrutiny like other fund managers.
D) pension fund managers need high risk/high return investments to boost fund returns as the baby boom generation reaches retirement.

Question 15

It's Gonna Be Big (IGBB)
It's Gonna Be Big (IGBB) is seeking venture capital investment of $8 million. The founder and the venture capital fund agree the firm is worth $15 million today, and the venture capital investor asserts it requires a 35% (compounded annually) expected return. IGBB and the venture capital investor foresee an IPO in four years, at which time IGBB is expected to be valued at $90 million.
If the venture capital investor pushes for a 40% per year expected return,what share of IGBB's equity will it receive in exchange for its $8 million investment?

A) 34%
B) 39%
C) 30%
D) 26%

Question 16

Venture capitalists use staged financing

A) to limit other investors' returns.
B) to increase the venture capitalist's ownership stake.
C) to reduce the venture capitalist's risk exposure.
D) to increase the probability the portfolio company succeeds.

Question 17

A rapidly growing source of new money for institutional venture capital funds is

A) bank loans
B) pension funds
C) individuals
D) government grants

Question 18

Which of the following institutional venture capital fund categories controls the dominate share of industry resources?

A) small business investment companies
B) financial venture capital funds
C) corporate venture capital funds
D) venture capital limited partnerships

Question 19

Entrepreneurial growth companies

A) usually consume more cash than they generate.
B) usually have tangible assets as a large part of their values.
C) usually have low risk for investors.
D) usually compensate employees with large salaries.

Question 20

Which of the following will make it more likely the entrepreneur receives funding on more attractive terms?

A) the firm is a true start-up, at first stage financing
B) the entrepreneur is new to the venture capital market
C) the firm has a promising product/technology close to launch
D) there are many alternative investments available to the venture capital investor

Question 21

John Smith seeks $15 million from a VC fund.John and the VC agree that the company should be ready to go public in 8 years.At that time the company should have a market capitalization of $368.75 million.If the VC requires a 45% return on their investment,what is the VC's stake at the time of the IPO?

A) $368.75 million
B) $293.11 million
C) $202.65 million
D) $15 million

Question 22

A wealthy individual who makes private equity investments on an ad hoc basis,is called a(n)

A) angel capitalist
B) small business investment company
C) financial venture capital fund
D) venture capital limited partnership

Question 23

Miller Venture Capital Fund wants to average a 34.375% return on its investments.Of the 15 total investments 5 have failed (i.e a return of -100%),and 7 generated a zero return.Two other projects yielded a return of 80% and 85%,respectively.What has to be the return on the last outstanding investment in order for Miller to reach its investment goal?

A) 425%
B) 1,250%
C) 885%
D) 680%

Question 24

Miller Venture Capital
Miller Venture Capital made a $5 million investment in Bavarian Sausage Technology (BST) 8 years ago and in return received 1 million shares of convertible preferred stock that can be converted into 2 shares of common stock. After all stock has been converted BST will have 15 million shares outstanding. In addition, the company is planning on issuing an additional 3 million shares in an IPO.
Refer to Miller Venture Capital.What fraction of BST's common stock will Miller own after the IPO?

A) 15.24%
B) 11.11%
C) 45.32%
D) 23.56%

Question 25

Which of the following is not considered a type of an institutional venture capital fund?

A) small business investment companies
B) financial venture capital funds
C) corporate venture capital funds
D) all of the above are types of institutional venture capital funds

Question 26

John Smith seeks $7.5 million from a VC fund.John and the VC agree that the company should be ready to go public in 4 years.At that time the company should have a market capitalization of $254.35 million.If the VC requires a 54% return on their investment,what is the VC's stake at the time of the IPO?

A) $7.5 million
B) $42.18 million
C) $254.35 million
D) $36.74 million

Question 27

Pickswinners Venture Fund
Pickswinners Venture Fund invested $10 million five years ago in Robotronics Co. The fund received 6 million shares of convertible preferred stock, each of which can be converted into three shares of common stock. Robotronic is now set to complete an IPO, and its shares are being priced at $40 each. Pickswinners will convert its preferred stock to common at the IPO, and will sell its shares along with Robotronic. The investment banking firm handling the IPO will charge an 8% underwriting fee.
Palooka Products negotiates a venture capital investment contract,receiving $5 million today,with the expectation that the firm will seek an IPO in five years with an expected value of $50 million.If the venture capital investor requires a 40% expected return,what share of Palooka Products' equity does it accept in exchange for its $5 million investment?

A) 54%
B) 38%
C) 26%
D) 14%

Question 28

Which country shows a great potential for future private equity investment?

A) Canada
B) China
C) India
D) Japan

Question 29

Pickswinners Venture Fund
Pickswinners Venture Fund invested $10 million five years ago in Robotronics Co. The fund received 6 million shares of convertible preferred stock, each of which can be converted into three shares of common stock. Robotronic is now set to complete an IPO, and its shares are being priced at $40 each. Pickswinners will convert its preferred stock to common at the IPO, and will sell its shares along with Robotronic. The investment banking firm handling the IPO will charge an 8% underwriting fee.
What proceeds does Pickswinners expect to receive?

A) $662,400,000
B) $220,800,000
C) $720,000,000
D) $552,000,000

Question 30

Miller Venture Capital
Miller Venture Capital made a $5 million investment in Bavarian Sausage Technology (BST) 8 years ago and in return received 1 million shares of convertible preferred stock that can be converted into 2 shares of common stock. After all stock has been converted BST will have 15 million shares outstanding. In addition, the company is planning on issuing an additional 3 million shares in an IPO.
Refer to Miller Venture Capital.If the value of BST stock is $25 at the end of the first trading day,what is the value of Miller's investment?

A) $50 million
B) $25 million
C) $30 million
D) $5 million

Question 31

China has one of the fastest growing and potentially largest economies in the world,yet there is very little or no private equity investment.Why?

A) There are not enough attractive investment opportunities yet.
B) Basic contracting and property rights issues cannot be legally supported or enforced at this time.
C) Stock market growth provides more than enough funding.
D) None of the above.

Question 32

Among the possible exit strategies employed by venture capitalists,which of the following describes the redemption option?

A) exit through an initial public offering
B) exit through a sale of the company directly to another company
C) exit through selling the company back to the founders
D) none of the above

Question 33

Miller Venture Capital
Miller Venture Capital made a $5 million investment in Bavarian Sausage Technology (BST) 8 years ago and in return received 1 million shares of convertible preferred stock that can be converted into 2 shares of common stock. After all stock has been converted BST will have 15 million shares outstanding. In addition, the company is planning on issuing an additional 3 million shares in an IPO.
Refer to Miller Venture Capital.If BST's stock trades at $25 at the end of the first trading day,what is the annual return on Miller's investment?

A) 900.00%
B) 24.65%
C) 33.35%
D) 350.00%

Question 34

John Smith seeks $15 million from a VC fund.John and the VC agree that the company should be ready to go public in 8 years.At that time the company should have a net income of $6.75 million.If comparable firms are expected to be trading at a P/E ratio of 25,what will be the company's market capitalization at the time of the IPO?

A) $375 million
B) $168.75 million
C) $126.35 million
D) $254.75 million

Question 35

Miller Venture Capital Fund wants to average a 50% return on its investments.Of the 15 total investments 5 have failed (i.e a return of -100%),and 7 generated a zero return.What has to be the average return on the three outstanding investment in order for Miller to reach its investment goal?

A) 268%
B) 417%
C) 124%
D) 930%

Question 36

John Smith seeks $7.5 million from a VC fund.John and the VC agree that the company should be ready to go public in 4 years.At that time the company should have a net income of $3.75 million.If comparable firms are expected to be trading at a P/E ratio of 18,what will be the company's market capitalization at the time of the IPO?

A) $7.5 million
B) $67.5 million
C) $135 million
D) $95.7 million

Question 37

The financing provided for equity investments in rapidly growing private companies is called

A) venture capital
B) junk bonds
C) initial public offerings
D) none of the above

Question 38

John Smith seeks $15 million from a VC fund.John and the VC agree that the company should be ready to go public in 8 years.At that time the company should have a market capitalization of $368.75 million.If the VC requires a 45% return on their investment,what is the fraction of the firm that the VC will receive for its $15 million investment?

A) 20.51%
B) 15%
C) 79.49%
D) 63.47%

Question 39

Pickswinners Venture Fund
Pickswinners Venture Fund invested $10 million five years ago in Robotronics Co. The fund received 6 million shares of convertible preferred stock, each of which can be converted into three shares of common stock. Robotronic is now set to complete an IPO, and its shares are being priced at $40 each. Pickswinners will convert its preferred stock to common at the IPO, and will sell its shares along with Robotronic. The investment banking firm handling the IPO will charge an 8% underwriting fee.
What is the annual (compounded)return on Pickswinners' investment?

A) 13%
B) 31%
C) 131%
D) 231%

Question 40

Which of the following is a type of covenant in a private equity investment contract?

A) ownership right agreements
B) ratchet provisions
C) stock option plans
D) all of the above

Question 41

Al Bert seeks $15 million from a VC fund.Al and the VC agree that the company should be ready to go public in 6 years.At that time the company should have a market capitalization of $161.1 million.If the VC requires a 45% return on their investment,what is the fraction of the firm that the VC fund will receive for its $15 million investment?

A) 69.32%
B) 13.46%
C) 56.89%
D) 86.54%

Question 42

WIMMP Venture Capital
"Where Is My Money" Professional Venture Capital (WIMMP) made a $10 million investment in Bavarian Sausage Technology (BST) 5 years ago and in return received 2.5 million shares of convertible preferred stock that can be converted into 1.5 shares of common stock. After all stock has been converted BST will have 22.5 million shares outstanding. In addition, the company is planning on issuing an additional 5 million shares in an IPO.
If BST's stock trades at $21.50 at the end of the first trading day,what is the annual return on WIMMP's investment?

A) 51.81%
B) 45.69%
C) 35.26%
D) 68.21%

Question 43

"ALOTACASH" Venture Capital Fund currently has its money tied up in 12 investments.Of those investments 3 are expected to fail (i.e a return of -100%),and 6 are expected to generate a zero return.The three remaining projects are supposed to yield a return of 70%,83% and 167%,respectively.What is the average return on "ALOTACASH"s investments?

A) 12.68%
B) -4.57%
C) 8.93%
D) 1.67%

Question 44

John Smith seeks $7.5 million from a VC fund.John and the VC agree that the company should be ready to go public in 4 years.At that time the company should have a market capitalization of $146.75 million.If the VC requires a 54% return on their investment,what is the fraction of the firm that the VC will receive for its $7.5 million investment?

A) 28.74%
B) 71.26%
C) 54.00%
D) 38.57%

Question 45

Which type of venture capital firms dominate the industry?

A) small business investment companies
B) financial venture capital funds
C) corporate venture capital funds
D) venture capital limited partnerships

Question 46

Which of the following had a significant impact on the change that the venture capital industry went through in the early 1970's?

A) the lowered top personal tax rate on capital gains from 35% to 28%
B) the adoption of the "Prudent Man Rule"in 1979
C) the restructuring of the economy in 1975
D) a and b

Question 47

Which of the following is the most likely method of financing for a high technology entrepreneurial firm?

A) equity
B) mortgage bonds
C) debentures
D) junk bonds

Question 48

Which type of venture capital fund has the ability to borrow from the U.S.Treasury?

A) financial venture capital funds
B) corporate venture capital funds
C) small business investment companies
D) venture capital limited partnerships

Question 49

The roots of the American venture capital industry can be traced to

A) the American Research and Development Company.
B) the American Reinvestment and Development Company.
C) the Alternative Direct and Reinvestment Company.
D) none of the above.

Question 50

WIMMP Venture Capital
"Where Is My Money" Professional Venture Capital (WIMMP) made a $10 million investment in Bavarian Sausage Technology (BST) 5 years ago and in return received 2.5 million shares of convertible preferred stock that can be converted into 1.5 shares of common stock. After all stock has been converted BST will have 22.5 million shares outstanding. In addition, the company is planning on issuing an additional 5 million shares in an IPO.
If the value of BST stock is $21.50 at the end of the first trading day,what is the value of WIMMP's investment?

A) $48.375M
B) $80.625M
C) $63.425M
D) $37.557M

Question 51

During most years,which source has generally provided more total investment in entrepreneurial companies?

A) institutional venture capital funds
B) angel funds
C) a and b have provided approximately equal total investment
D) none of the above

Question 52

Modern venture capital is defined as

A) a professionally managed pool of money raised for the sole purpose of making actively managed direct equity investments in rapidly growing private companies.
B) a professionally managed pool of money raised for the purpose of making equity investments in slowly growing private companies.
C) a professionally managed pool of money raised for the sole purpose of making actively managed direct equity investments charitable ventures.
D) none of the above.

Question 53

WIMMP Venture Capital
"Where Is My Money" Professional Venture Capital (WIMMP) made a $10 million investment in Bavarian Sausage Technology (BST) 5 years ago and in return received 2.5 million shares of convertible preferred stock that can be converted into 1.5 shares of common stock. After all stock has been converted BST will have 22.5 million shares outstanding. In addition, the company is planning on issuing an additional 5 million shares in an IPO.
What fraction of BST's common stock will WIMMP own after the IPO?

A) 16.67%
B) 11.11%
C) 9.09%
D) 13.64%

Question 54

What is considered the leading cause(s)of the death of young entrepreneurial firms?

A) not enough customers
B) too many customers
C) too much cash
D) both (a) and (b)

Question 55

Most of the capital for early venture funds came from

A) corporate backers.
B) wealthy individuals.
C) family trusts.
D) all of the above.

Question 56

Which of the following is not a difference between entrepreneurial finance and "ordinary" finance?

A) entrepreneurial companies generally have faster growth than ordinary companies
B) most of the assets of entrepreneurial companies are often intangible assets
C) entrepreneurial companies must attract, motivate, compensate, and retain highly skilled technical and entrepreneurial talent with minimal cash flow
D) none of the above

Question 57

Al Bert seeks $15 million from a VC fund.Al and the VC agree that the company should be ready to go public in 6 years.At that time the company should have a market capitalization of $161.1 million.If the VC requires a 45% return on their investment,what is the VC's stake at the time of the IPO?

A) $139.41 million
B) $21.75 million
C) $112.67 million
D) $156.23 million

Question 58

Al Bert seeks $15 million from a VC fund.Al and the VC agree that the company should be ready to go public in 6 years.At that time the company should have a net income of $8.95 million.If comparable firms are expected to be trading at a P/E ratio of 18,what will be the company's market capitalization at the time of the IPO?

A) $213.67 million
B) $142.25 million
C) $161.10 million
D) $123.78 million

Question 59

"ALOTACASH" Venture Capital Fund wants to average a 45% return on its investments.Of the 12 total investments 3 have failed (i.e a return of -100%),and 6 generated a zero return.Two other projects yielded a return of 70% and 83%,respectively.What has to be the return on the last outstanding investment in order for "ALOTACASH" to reach its investment goal?

A) 852%
B) 358%
C) 687%
D) 152%

Question 60

"ALOTACASH" Venture Capital Fund wants to average a 45% return on its investments.Of the 12 total investments 3 have failed (i.e a return of -100%),and 6 generated a zero return.What has to be the average return on the last three outstanding investment in order for "ALOTACASH" to reach its investment goal?

A) 280%
B) 840%
C) 460%
D) 625%

Question 61

One principle of venture capital funding is:

A) the bulk of venture capitalists invest in a firm in the early stage of the company's development.
B) professional venture capitalists typically require lower returns on companies in the earlier stages of their development.
C) most venture capital funds that invest in a company during its early years do not remain committed to the firm as it develops.
D) the earlier the development stage of the company, the higher must be the expected return on the venture capitalist's investment.

Question 62

Which of the following is the most popular exit strategy that VCs use?

A) IPO
B) through sale of the portfolio company directly to another company
C) by selling the portfolio company back to the entrepreneur
D) none of the above

Question 63

You are a venture capitalist who is approached by a firm that is willing to sell you 30% of the firms common stock.You believe the firm will be worth $800 million dollars when it IPOs in 5 years.If you require a 50% return on investments with this firm's risk characteristics,what amount will you have to invest today in order to purchase 30% of the firm's common shares?

A) $240.000 million
B) $105.350 million
C) $31.605 million
D) none of the above

Question 64

Venture capital funds typically use stage financing in order to

A) ensure that the entrepreneur is disciplined in goal achievement.
B) to minimize risk.
C) to retain an option for funding future developmental stages of the firm.
D) all of the above.

Question 65

Once starting a new business an entrepreneur should concentrate on:

A) becoming wealthy
B) generating positive cash flow
C) immediately seeking out venture capitalists
D) generating as much sales as possible

Question 66

Venture capitalists have many opportunities to expropriate the limited partners' wealth.This can be controlled by:

A) having a positive reputation.
B) having contractual covenants.
C) requiring that the general partner have limited liability.
D) All of the above
E) Both (a) and (b)

Question 67

In order to protect the rights and the investment of the venture capital firm,the entrepreneur is usually subject to

A) a covenant spelling out what the entrepreneur must do.
B) a covenant spelling out what the entrepreneur cannot do.
C) a gentleman's agreement.
D) both (a) and (b)

Question 68

You are a venture capitalist that is going to invest $10 million dollars today in a firm that is projected to be worth $100 million four years from today when it is expected to have an initial public offering.If you require a 40% annual return on investments with this kind of risk,then what portion of the equity of the firm should you own after the investment?

A) 10.00%
B) 38.42%
C) 40.00%
D) none of the above

Question 69

You are a venture capitalist who can invest only $10 million dollars in a firm today.The firm is expected to be worth $100 million five years from now when it has its IPO.If you require to be a 50% owner of the firm's common stock at the time of the IPO,then what is your annualized rate of return on this investment?

A) 158.49%
B) 100.00%
C) 37.97%
D) none of the above

Question 70

You are a venture capitalist that is going to invest $7 million dollars today in a firm that is projected to be worth $200 million six years from today when it is expected to have an initial public offering.If you require a 35% annual return on investments with this kind of risk,then what portion of the equity of the firm should you own after the investment?

A) 3.50%
B) 21.12%
C) 35.00%
D) none of the above

Question 71

In recent history,the largest portion of venture capital investments have occurred

A) in California.
B) in New England.
C) in the airline industry.
D) in start up stage financing.

Question 72

Which type of public market is good for the future of entrepreneurial firms as they mature into potential IPOs?

A) a healthy capital market for small stocks
B) a healthy capital market for large stocks
C) a weak small capital market
D) neither as these firms are not publicly traded yet

Question 73

Which group is the largest source of external seed and start-up capital for American businesses?

A) venture capital limited partnerships
B) institutional venture capital funds
C) angel capitalists
D) small business investment companies

Question 74

Which country has been the largest recipient of VC financing as a percentage of GDP?

A) China
B) Australia
C) South Africa
D) Israel

Question 75

Venture Fund A focuses on start up technology companies while Venture Fund B focuses on middle-stage technology companies.Which firm would require the highest returns on its investments?

A) Venture Fund A
B) Venture Fund B
C) venture funds require the same return
D) it is impossible to say which firm would require the highest return

Question 76

As a limited partner in a venture capital limited partnership,today you committed to investing $70 million dollars.What amount must you contribute immediately?

A) $70 million
B) $80 million
C) $90 million
D) probably less than $70 million

Question 77

A study by the National Venture Capital Association found that the sales of venture firms during the 1970 - 2005 period was

A) half that of non-venture backed companies.
B) equal to that of non-venture backed companies.
C) twice that of non-venture backed companies.
D) three times that of non-venture backed companies.

Question 78

Which European country is noted for having the largest amount of venture capital invested in its firms?

A) Germany
B) France
C) Italy
D) Britain

Question 79

Which of the following statements is (are)true?

A) Companies that were financed with venture capital tend to generate more sales, exports and investment in R&D than non-venture capital-backed companies.
B) About 95% of European venture-backed companies said they would either not exist or would not have developed as quickly without venture capital investment.
C) Companies that were financed with venture capital tend to generate the same level of sales, exports and investment in R&D as non-venture capital-backed companies.
D) Both (a) and (b) are true.

Question 80

Most venture capital firms invest capital in order to purchase

A) equity of the entrepreneurial firm.
B) debt of the entrepreneurial firm.
C) an investment that is convertible into common stock of the entrepreneurial firm.
D) none of the above.