Deck 10: Raising Money for Starting and Growing Businesses

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

IPOs are rare, even among venture capital backed companies.

Question 5

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

Question 6

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

Question 7

Corporate angels may be a headache for a small company.

Question 8

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

Question 9

Valuation of a small, privately held corporation is difficult.
3 The present value of company is the present value of the past free cash flows, plus the residual (terminal)value of the firm.

Question 10

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

Question 11

Banks expect loans to be secured by positive cash flow.

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

According to the chapter, the most precise way of valuing a business is asset-based valuation.

Question 21

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 22

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

Question 23

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 24

Going public is an expensive endeavor.

Question 25

Angel investors are one category of formal investors

Question 26

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

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

Question 27

Venture capitalists prefer to invest in entrepreneurs who have long-term business plans.

Question 28

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

Question 29

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

Question 30

All of the following is 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 31

How much do business angels invest annually in the US?

A)$5 - 6 billion
B)$10 - 15 billion
C)$15 - 20 billion
D)$20 - 30 billion
E)$50 - 60 billion

Question 32

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

Question 33

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 34

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 35

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 36

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

Question 37

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

Question 38

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

Question 39

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 40

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 41

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 42

Name the ways of valuing a business and explain why none of them can be called ideal.

Question 43

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 44

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 45

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 46

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 47

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 48

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 49

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 50

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 51

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

A)~1.5%
B)~3%
C)~5%
D)~7%
E)~10%

Question 52

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 53

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 54

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

A)2
B)5
C)8
D)10
E)12

Question 55

What percent of all VC backed companies ever go public?

A)<1%
B)5%
C)10%
D)25%
E)55%

Question 56

Give a list and a brief description of the possible ways to finance a new venture.

Question 57

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)Track record in meeting performance milestones.
C)Success in recruiting talented employees
D)None of the above

Question 58

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

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

Question 59

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 60

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 61

What are the advantages of having a venture capital backed company?

Question 62

Explain why the underwriter of an IPO often tries to lower the price of the stocks in the offering.

Question 63

What are the important aspects of the JOBS act to today's entrepreneurs?

Question 64

Name at least eight criteria an ideal candidate for venture capital has to meet.

Question 65

Who are informal investors and what are the benefits of attracting investments from them?

Question 66

Discuss the most critical aspects of a 5 year pro-forma statement as it relates to risk and valuation
a.Certain factors will weigh more heavily in the attainment of desired financial results.
b.Some of those factors will be facts, but others will be assumptions
c.The assumptions must not merely be noted, but must be questions that the venture is aggressively trying to confirm/deny.
d.The ability to test, iterate, market, and research to answer critical assumptions will directly impact a company's valuation
e.More assumptions can make an investment riskier, but entrepreneurs who aren't able to confirm/deny assumption in time to adapt accordingly are a risky team to invest in.
f.

Question 67

What may be some drawback in getting acquired?

Question 68

Explain some benefits and risks of bootstrapping a start-up for as long as possible?

Question 69

What are the pros and cons of going public?

Question 70

Discuss some intangible factors in finding the right venture capitalist to partner with.

Question 71

Explain how VCs can harvest their investments.What ways do they prefer and what do they avoid?

Question 72

Why should you approach business angels? What are the ways of doing that?

Question 73

Why would a company want to be acquired?