Question 1

Valuation of a small, privately held corporation is difficult.

Accepted Answer

Valuing a small, privately held corporation is challenging due to the lack of publicly available financial information, less market visibility, and the unique characteristics of each business that may not be easily comparable to others.

Question 2

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

Accepted Answer

The modified-book value method primarily adjusts assets and liabilities to their current market values, but it still focuses on historical costs and does not account for future earnings or potential growth, reflecting past financial performance rather than future prospects.

Question 3

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

Accepted Answer

The ideal method for valuing a business depends on the nature of the business and the purpose of the valuation. Asset-based valuation is just one method among others like the income approach and the market approach, and it may not be ideal for businesses where intangible assets or future earnings potential are significant.

Question 4

Corporate angels may be a headache for a small company.

Accepted Answer

Corporate angels, or individual investors who provide capital for business startups, often in exchange for convertible debt or ownership equity, can sometimes be a headache for small companies due to potential disagreements on business direction, pressure for quick returns, or excessive involvement in day-to-day operations.

Question 5

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

Accepted Answer

Informal investors, often comprising friends, family, and angel investors, significantly contribute to the early-stage financing of startups and young businesses, with estimates suggesting they provide around $100 billion annually in the United States. This form of investment plays a crucial role in the entrepreneurial ecosystem by filling the gap between self-funding and formal venture capital.

Question 6

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

Accepted Answer

The first financing for a new business often comes from the entrepreneur's personal savings, friends, and family before seeking angel investors.

Question 7

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

Accepted Answer

Placing a value on your startup is a crucial step in raising angel investment, as it helps determine the amount of equity you are willing to give up in exchange for funding.

Question 8

Banks expect loans to be secured by positive cash flow.

Accepted Answer

The answer of Banks expect loans to be secured by...

Question 9

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

Accepted Answer

Market-comparable valuation is based on comparing the startup to similar companies in the industry that have been sold or valued recently, focusing on metrics like sales, earnings, or other relevant financial ratios, not directly on 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.

Accepted Answer

High-potential firms in their early growth stages often reinvest most of their earnings into the business to fuel growth, leading to low or even negative free cash flow initially.

Question 11

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

Accepted Answer

A seed-stage company is in the very early stages of forming its business, often focused on product development and securing initial funding, while a startup is already operational, working on scaling its business model and possibly seeking additional rounds of funding.

Question 12

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

Accepted Answer

Venture capital investors typically expect a higher rate of return for mezzanine stage investments because these are considered riskier and closer to the company's IPO, compared to bridge financing, which is often a shorter-term solution to specific financial needs.

Question 13

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

Accepted Answer

Angel groups continued to invest in seed-stage companies even after the internet bubble burst, adapting their investment strategies to the new market conditions.

Question 14

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

Accepted Answer

The answer of A company's growth rate vis-à-vis its industry...

Question 15

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

Accepted Answer

The answer of Professional angels are a category of investors...

Question 16

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

Accepted Answer

While friends and family can be a source of startup funding, it's not necessarily true that they should be the first option. Entrepreneurs should consider all funding options, including personal savings, loans, grants, and venture capital, based on their specific situation and the potential impact on personal relationships.

Question 17

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

Accepted Answer

The liquidation value of a company refers to the estimated total value of a company's physical assets if it were to go out of business and its assets sold. This valuation does not necessarily involve the courts or bankruptcy proceedings, as it can be calculated for various purposes, including financial analysis, investment evaluation, or strategic planning.

Question 18

Angel investors are one category of formal investors.

Accepted Answer

Angel investors are considered informal investors because they invest their own money into startups or small businesses, unlike formal investors such as venture capital firms that invest institutional money.

Question 19

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

Accepted Answer

Modified-book value is more applicable to stable, asset-intensive companies rather than small, fast-growing firms, as it adjusts assets to their current market values.

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.

Accepted Answer

The present value of a company is determined by discounting its expected future free cash flows to the present, not past free cash flows, plus the residual (terminal) value of the firm.

Quiz 11: Raising Money for Starting and Growing Businesses