Ch. 12

Which of the following would not typically be part of a private venture capital fund? Money from pension funds Money from insurance companies Money from state governments Money from college endowment funds

Money from state governments

When private individual investors put money into a fund, which usually has a manager, then this becomes:

an angel fund

The ________ is calculated by dividing accounts receivable by average daily sales.

average collection period

The inventory turnover ratio measures the efficiency of the venture in managing its inventory. T/F?

True

The largest amount of venture-capital money raised was for later-stage and expansion-stage investments. T/F?

True

The private equity market provides capital for privately held ventures. T/F?

True

The underwriting syndicate is a group of firms involved in selling stock to the public. T/F?

True

To attract venture capital funding, an investment must have significant capital appreciation potential. T/F?

True

The securities of certain smaller companies going public must also be qualified under the ________ of each state where the securities will be offered.

blue sky laws

The longest stage of the venture capital process, at one to three months, is:

due diligence

A prospectus is a letter from the SEC to a company indicating corrections that need to be made in their submitted material. T/F?

False

Only individuals may invest in venture-capital limited partnerships. T/F?

False

The debt ratio is calculated by dividing total liabilities by total inventory. T/F?

False

The shorter the time before a company goes public, given that profits and sales growth occur, the less percentage of equity the entrepreneur will have to give up per dollar invested. T/F?

False

Venture capitalists view going public a highly disadvantageous step since the level of risks involved substantially increase. T/F?

False

Which factor in valuing your company is the most important?

Future earnings capacity

The industry sector receiving the largest share of venture capital in 2017 was in:

Internet

Which type of risk-capital market is available as a stage one funding source only for high-potential ventures?

public equity market

Dividing net profit by total assets shows a firm's:

return on investment

What are the eight factors usually considered when valuing the venture?

The first factor is the nature and history of the business. The characteristics of the venture and the industry in which it operates are fundamental aspects in every evaluation process. The second factor involves the financial data of the venture compared with those of other companies in the industry. Management's capability now and in the future is assessed, as well as the future market for the company's products/services. The third factor is the book value (net value) of the stock of the company and the overall financial condition of the business. The book value (often called owner's equity) is the acquisition cost (less accumulated depreciation) minus liabilities. Frequently, the book value is not a good indicator of fair market value. The fourth factor is the future earning capacity of the company and it is the most important factor in valuation. Income by product line is analyzed to judge future profitability and value. The fifth valuation factor is the dividend-paying capacity of the venture. It is the future capacity to pay dividends rather than actual dividend payments made that is important. An assessment of goodwill and other intangibles of the venture is the sixth valuation factor. These intangible assets usually cannot be valued without reference to the tangible assets of the venture. The seventh factor in valuation involves assessing any previous sale of equity. Previous equity transactions and their valuations represent future terms of sale, particularly if recent. The final valuation factor is the market price of equity of companies engaged in the same or similar lines of business. The critical issue is the degree of similarity between the publicly traded company and the company being valued.

A publicly traded company needs to disclose to the public all material information regarding the company, its operations, and its management. T/F?

True

Expansion or development financing is easier to obtain than early-stage financing. T/F?

True

In 2017, venture capital dollars were concentrated in the following three industries: internet, health care, and business products and services. T/F?

True

In most of the significant public offerings, the company technically sells the shares to the underwriters, who then resell the shares to the public investors. T/F?

True

List three reasons why an informal investor, or a business angel, may reject a proposal.

• Risk/return ratio not adequate • Inadequate management team • Not interested in proposed business area • Unable to agree on price • Principals not sufficiently committed • Unfamiliar with area of business