BUSMHR 2500 Chapter 12 Informal Risk Capital, Venture Capital, and Going Public

Which of the following are the major factors that are used to determine the value of a company using the factor approach? (Check all that apply.)

Earnings Book value Dividend-paying capacity

The information in _____ on the business, management, and company assets is similar to that in Form S-1 of the registration statement.

Form 10-K

Startup capital

It is used for developing and selling some initial products of a venture to determine if commercial sales are feasible.

Identify the true statements about small-business investment companies (SBIC firms). (Check all that apply.)

The Small Business Investment Act of 1958 led to the formation of SBIC firms. SBIC firms were the beginning of the formal venture capital industry.

Identify a true statement about current ratios used by entrepreneurs for valuation.

The current liabilities must be covered from cash or its equivalent.

Which of the following should an entrepreneur do to be successful in crowdfunding? (Check all that apply.)

The entrepreneur should structure some rewards that are appropriate for what he or she is trying to get funded. The entrepreneur should include an emotional appeal in the crowdfunding video.

Which of the following statements are true about an equity pool? (Check all that apply.)

The pool is managed in exchange for a percentage of the gain generated on the investment and a fee. The pool is managed by a general partner.

First stage

The venture capitalist analyzes the economy of the industry and evaluates whether the company is in the industry specified for investment.

Identify a true statement about financial ratios of ventures.

They should be used with caution since they are only one control measure for interpreting the financial success of a venture.

A similarity between lending crowdfunding and equity crowdfunding is that they _____.

allows individuals to raise funds without going to the traditional providers of debt-commercial banks

The securities of certain smaller companies going public must be qualified under the _____ of each state in which the securities of the company will be offered.

blue-sky laws

The informal risk-capital market consists usually of a virtually invisible group of wealthy investors, often called _____, who are searching for equity-type investment opportunities in a wide variety of entrepreneurial ventures.

business angels

A letter from the Securities Exchange Commission to a company indicating corrections that are required to be made in the submitted prospectus is known as a(n) .

comment letter

the __ __ evaluates the worth of a company by taking into account its present and future earnings.

earnings approach

To stabilize the market and prevent the price from going below the initial public offering price, an underwriter will usually _____.

enter bids to buy the stock in the early stages after the initial offering

The private equity market, which is also known as the _____, can be a source of capital for privately held ventures.

enterprise capital market

True or false: The guidelines established by the Securities Exchange Commission regarding the information that can and cannot be released should be understood only by an entrepreneur in a company.

false

The _____ indicates a venture's ability to translate sales into profits.

net profit margin

A venture going public occurs when the entrepreneur and other equity owners of the venture _____.

offer and sell some part of the company to the public by registering with the Securities Exchange Commission

financial ratios

refer to control mechanisms to test the financial strength of a new venture

A(n) _____ includes materials submitted to the Securities Exchange Commission for approval to sell stock to the public.

registration statement

Small companies with some government funds that invest in other companies are known as _____.

small-business investment companies

VGNS Global, a start-up venture, requires $1,000,000 of venture-capital money. The venture is anticipating profits of $2,000,000 by the fifth year. A venture capitalist wants an investment multiple of 6 times. The price-earnings multiple of a similar company is 12. How much of the percent ownership would the company have to give up to obtain the needed funds from the venture capitalist?

25%

Fourth stage

A document detailing the venture capitalist's findings and the terms and conditions of the investment transaction is prepared.

Going private

A publicly held firm buying out existing stockholders

_____ refers to financing used to buy another company.

Acquisition financing

Fourth stage

Bridge financing to equip company for public offering

The objective of a venture-capital firm is to _____.

create long-term capital appreciation through debt and equity investments

_____ are individual investors who act alone without any group affiliation and are known to make the largest number of investments in the private equity market.

Angel investors

_____ evaluates a firm's capital structure.

Debt to equity ratio

_____ were usually established as limited partnerships during the late 1960s, with the venture capital company acting as the general partner that received a management fee and a percentage of the profits earned on a deal.

Private venture capital firms

Identify a true statement about the relationship that an entrepreneur should maintain with the financial community after his or her company goes public.

The entrepreneur should release public disclosures through formal press releases.

The most widely used method of valuing a company is the _____, as it provides the potential investor with the best estimate of the probable return on investment.

earnings approach

Debt to equity ratio provides a measure of _____.

risk to creditors by considering the funds invested by creditors (debt) and investors (equity)

Unlike traditional companies, Internet companies often have _____.

their real value in the form of their human capital

Identify the formula used for calculating the debt ratio.

total liabilities/ total assets

Identify a true statement about the informal risk-capital market.

Business angels in the informal risk-capital market grant the funds needed in all stages of financing, especially in the start-up.

_____ is frequently used to assess the short-term solvency of a venture or its ability to meet its short-term debts.

Current ratio

_____ refers to financing that helps rapidly expand a business.

Development financing

Seed capital

It is generally a relatively small amount of capital required for proof of concept and market feasibility studies.

Investment opportunities in a startup are rejected by informal investors, or angels, when there is _____.

an inadequate risk/return ratio

Which of the following are primary advantages of going public for a venture? (Check all that apply.)

Enhanced ability to borrow Ability to obtain equity capital

True or false: The venture capitalist necessarily seeks control of a company he or she invests in.

False

Third stage

It is the longest stage of the process, involving between one to three months.

Leveraged buyouts

Management buying out the present owners

Identify a true statement about private venture capital firms that emerged during the late 1960s.

The limited partners, who supplied the funding, were usually institutional investors.

In the context of investment in ventures by venture capitalists, the return on investment measures the _____.

ability of a venture to manage its total investment in assets

In the process of locating venture capitalists, an entrepreneur should _____.

approach only those venture capitalists who may have an interest in their investment opportunity

The _____ is created from the resources of wealthy individuals or institutions who are limited partners.

equity pool

A _____ is the additional information on price and distribution submitted to the Securities Exchange Commission to develop the final prospectus.

pricing amendment

Identify the factors that an entrepreneur should consider when valuing a venture. (Check all that apply.)

Book value (net value) of the stock of the company Market price of equity of companies engaged in the same or similar lines of business

Third stage

Extensive expansion for company with rapid sales growth

Identify the entities that act as sources of funding for early-stage financing of a startup. (Check all that apply.)

Family Angel investors

Which of the following is used to determine the share of the company a venture capitalist will want for a given amount of investment? [VC= venture capital, n= number of years]

VCinvestment×VCinvestmentmultipledesiredCompany'sprojectedprofitsinyear5×Price−earningsmultipleofcomparablecompanyVCinvestment×VCinvestmentmultipledesiredCompany'sprojectedprofitsinyear5×Price-earningsmultipleofcomparablecompany

_____ play an active role in granting funds at the development financing stage.

Venture capitalists

A social analytics Internet startup is being analyzed for acquisition by WIN Systech Inc., a well-established Internet company. Which of the following factors should WIN Systech Inc. consider when evaluating the startup?

WIN Systech Inc. should value the startup based on the number of users they have and the data generated.

Second stage

Working capital for initial growth phase, but no clear profitability or cash inflow yet

In the context of valuation of a venture, return on equity indicates the _____.

ability of the venture in generating a return to the stockholders

Actions of underwriters to help support the price of stock after the public offering are referred to as _____.

aftermarket support

The Jump Start Our Business Act (JOBS Act) of 2010 has effectively allowed companies to be more active in their intent to raise money in what is often referred to as _____.

crowdfunding

The form of the transaction when money is obtained by a company is referred to as _____.

deal structure

The _____ provides an entrepreneur a way to assess a firm's ability to meet all its obligations (short and long term).

debt ratio

The valuation approach that gives the lowest value of a business is the _____.

liquidation value

The average collection period helps an entrepreneur assess the _____.

liquidity of accounts receivable

The first factor and the starting point that an entrepreneur should consider when valuing a venture is the _____.

nature and history of the business

Full and fair disclosure refers to the _____.

nature of all material submitted to the Securities Exchange Commission for approval

Primary Stages of the Venture Capital Process

First stage Involves evaluation of the company's business plan Second stage Involves discussions between the entrepreneur and the venture capitalist to agree on general terms Third stage Involves a detailed review of the company's history, its business plan, its financial history, and target market customers Fourth stage Involves the preparation of a comprehensive, internal investment memorandum

Which of the following are the disadvantages of going public for an entrepreneur? (Check all that apply.)

Increased expenses Significant loss of control over decision making in the entrepreneur's company Increased responsibilities to public stockholders

Which of the following guidelines should be followed by an entrepreneur when approaching a venture capitalist? (Check all that apply.)

The entrepreneur should avoid selling the project on the basis that other venture capitalists have committed themselves. The entrepreneur should disclose any significant problems or negative situations in the initial meetings with the venture capitalist.

Identify a guideline that should be followed by an entrepreneur when approaching a venture capitalist.

The entrepreneur should take care in selecting the right venture capitalist to approach based on the venture capitalist's area of specialization.

Which of the following are factors that an entrepreneur should consider when valuing a venture? (Check all that apply.)

The financial data of the venture compared with those of other companies in the industry The dividend-paying capacity of the venture

In the context of startups, identify the true statements about informal investors, or angels, in the United States. (Check all that apply.)

The investment made by informal investors in a firm ranges from $100,000 to $500,000. They usually invest in firms that are within one day's travel.

Identify the factors that need to be considered when deciding the timing of a company going public. (Check all that apply.)

The size of the company The finances that the company requires for fulfilling its needs The amount of the company's earnings

Second stage

The venture capitalist seeks a basic understanding of the principal terms of the deal.

Identify the practices that help entrepreneurs achieve success in crowdfunding. (Check all that apply.)

They should create a strong crowdfunding video that clearly explains the idea of their venture. They should determine which crowdfunding site is ideal to raise the capital needed.