Chapter 12 - ENT2612
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%
_______ is frequently used to assess the short-term solvency of a venture or its ability to meet its short-term debts.
Current ratio
The ______ provides an entrepreneur a way to assess a firm's ability to meet all its obligations (short and long-term).
Debt Ratio
__________ evaluates a firm's capital structure.
Debt to equity ratio
The process of deal evaluation in the venture-capital process is referred to as ___________________.
Due Diligence
_____________ is the longest stage in the venture-capital process, involving a duration of one to three months.
Due Diligence
Which of the following is most likely a feature of state-sponsored venture capital funds?
Each fund is usually required to invest a certain share of its capital in a particular state.
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
Which of the following guidelines should be followed by an entrepreneur when approaching a venture capitalist? (Check all that apply.)
The entrepreneur should disclose any significant problems or negative situations in the initial meetings with the venture capitalist. The entrepreneur should avoid selling the project on the basis that other venture capitalists have committed themselves.
Which of the following should an entrepreneur do to be successful in crowdfunding? (Check all that apply.)
The entrepreneur should include an emotional appeal in the crowdfunding video. The entrepreneur should structure some rewards that are appropriate for what he or she is trying to get funded.
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.
In the context of startups, identify the true statements about informal investors, or angels, in the United States. (Check all that apply.)
They usually invest in firms that are within one day's travel. The investment made by informal investors in a firm ranges from $100,000 to $500,000.
What is the name given to individual investors who act alone and are known to make the largest number of investments in the private equity market?
Angel Investors
Which entities act as sources of funding for early-stage financing of a startup?
Angel Investors Family
Which one of the following statements about the informal risk-capital market is true?
Business angels in the informal risk-capital market grant the funds needed in all stages of financing, especially in the start-up.
Identify the formula for calculating inventory turnover.
Cost of goods sold / Inventory
The _____ is created from the resources of wealthy individuals or institutions who are limited partners.
Equity Pool
True or false: Market conditions need not be considered by an entrepreneur when deciding the timing of his or her company going public.
False
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
True or false: The venture capitalist necessarily seeks control of a company he or she invests in.
False
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
From 10-K - ? From 10-Q - ? From 8-K - ?
From 10-K - Used to file annual reports From 10-Q - Used to file quarterly reports From 8-K - Used to file specific transaction or event reports
Which of the following are traditional areas of concentration of venture capitalists in the United States? (Check all that apply.)
New York Los Angeles
Identify the true statements about small-business investment companies (SBIC firms). (Check all that apply.)
SBIC firms were the beginning of the formal venture capital industry. The Small Business Investment Act of 1958 led to the formation of SBIC firms.
Which of the following should be done when calculating the book value of the stock of a company?
The balance sheet should be adjusted to reflect the higher values of the assets.
Identify a true statement about current ratios used by entrepreneurs for valuation.
The current liabilities must be covered from cash or its equivalent.
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.
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.
Which of the following statements are true about an equity pool? (Check all that apply.)
The pool is managed by a general partner. The pool is managed in exchange for a percentage of the gain generated on the investment and a fee.
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.
Identify the formula used for calculating the debt ratio.
Total liabilities / Total assets
True or false: A company that has gone public should designate an information officer to respond in a timely manner to information requests.
True
True or false: A state-sponsored venture capital fund is typically required to invest a certain percentage of its capital in a particular state.
True
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.
The book value of the stock of a company is the ______.
acquisition cost (less accumulated depreciation) minus liabilities
Actions of underwriters to help support the price of stock after the public offering are referred to as ______.
aftermarket support
A similarity between lending crowdfunding and equity crowdfunding is that they ______.
allow individuals to raise funds without going to the traditional providers of debt-commercial banks
Informal investors or angels reject investment opportunities in a startup when there is ______.
an inadequate risk/return ratio
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 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 usually consists 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
The objective of a venture-capital firm is to ________________.
create long-term capital appreciation through debt and equity investments
The _____________________ evaluates the worth of a company by taking into account its present and future earnings.
earnings approach
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
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 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 ______ 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
If an entrepreneur is invited to present to an angel investor group, which of the following guidance is typically provided?
presentation advice business plan refinement
Although all three risk-capital markets can provide funds for stage-one financing, the ______ is available only for high-potential ventures, when high technology is involved.
public-equity market
Lending crowdfunding sites allow borrowers (usually companies) to ______.
raise funds for items such as short-term inventory
Debt to equity ratio provides a measure of ________________.
risk to creditors by considering the funds invested by creditors (debt) and investors (equity)
Small companies with some government funds that invest in other companies are known as ______.
small-business investment companies
Which of the following startups fulfill the general criteria that most venture capitalists expect a company to satisfy before committing funding to the venture? (Check all that apply.)
A company that is predicted to grow exponentially in the next few months A company that has a unique product in a large and growing market
_____________ is a meticulous test of the short-term liquidity of a venture since it eliminates inventory, which is the least liquid current asset.
Acid test ratio
Which phrase refers to financing used to buy another company?
Acquisition financing
_____________ indicates the average number of days required to convert accounts receivable into cash.
Average collection period
Why do ventures avoid an initial public offering (IPO)? (Check all that apply.)
Because of the potential loss of control that can occur in a publicly traded company Because of the need for increased reporting for a publicly traded company
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.)
Book value Earnings Dividend-paying capacity
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.
Identify the formula for calculating the acid test ratio.
Current assets−Inventory / Current liabilities
__________________ refer to control mechanisms to test the financial strength of a new venture. (Enter one word in each blank.)
Financial Ratios
First Stage - ? Second Stage - ? Third Stage - ? Fourth Stage - ?
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
First Stage - ? Second Stage - ? Third Stage - ? Fourth Stage - ?
First Stage - The venture capitalist analyzes the economy of the industry and evaluates whether the company is in the industry specified for investment. Second Stage - The venture capitalist seeks a basic understanding of the principal terms of the deal. Third Stage - It is the longest stage of the process, involving between one to three months. Fourth Stage - A document detailing the venture capitalist's findings and the terms and conditions of the investment transaction is prepared.
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
Informal Risk-Capital Markets - ? Venture-Capital Market - ? Public-Equity Markets - ?
Informal Risk-Capital Markets - Areas of risk-capital markets consisting mainly of individuals Venture-Capital Market - Risk-capital markets consisting of formal firms Public-Equity Markets - Risk-capital markets consisting of publicly owned stocks of companies
_________________ assesses the efficiency of a venture in managing and selling its inventory.
Inventory turnover
Lending Crowdfunding - ? Equity Crowdfunding - ? Real Estate Crowdfunding - ?
Lending Crowdfunding - It lets borrowers (usually companies) occur debt funds without going to the traditional providers of debt-commercial banks. Equity Crowdfunding - It lets individuals invest in a private firm for a percentage share of the firm. Real Estate Crowdfunding - It is involved in buying properties, providing mortgages, or funding solar energy projects.
Leveraged Buyouts - ? Going Private - ?
Leveraged Buyouts - Management buying out the present owners Going Private - A publicly held firm buying out existing stockholders
___________________ 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
Second Stage - ? Third Stage - ? Fourth Stage - ?
Second Stage - Working capital for initial growth phase, but no clear profitability or cash inflow yet Third Stage - Extensive expansion for company with rapid sales growth Fourth Stage - Bridge financing to equip company for public offering
Seed Capital - ? Startup Capital - ?
Seed Capital - It is generally a relatively small amount of capital required for proof of concept and market feasibility studies. Startup Capital - It is used for developing and selling some initial products of a venture to determine if commercial sales are feasible.
Which of the following are true about lending crowdfunding sites? (Check all that apply.)
Small loans are provided to local entrepreneurs to fund items such as short-term inventory. Individuals who want to lend money to entrepreneurs can create their own loan portfolios.
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.
Which of the following criteria does a venture capitalist expect a company to satisfy before committing funding to the company? (Check all that apply.)
The product offered by the company must be unique. The business opportunity must have significant capital appreciation. The company should have a strong management team composed of individuals with solid experience and backgrounds.
Which of the following is the need of the investors providing funds to companies?
The required rate of return
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
True or false: Crowdfunding brings together different individuals who contribute money to projects and firms they want to support.
True
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]
VC investment × VC investment multiple desired / Company's projected profits in year 5 × Price − earnings multiple of comparable company
________________ play an active role in granting funds at the development financing stage.
Venture Capitalists
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
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 private equity market, also known as the ______, can be a source of capital for privately held ventures.
enterprise capital market
A preliminary prospectus that is filled as a part of the registration process by a company is called a(n)___________________________ , because a statement printed in red ink appears on the front cover.
red herring
The preliminary prospectus of a potential public offering is referred to as ______.
red herring
Which of the following is true about an angel fund?
the private investors or their designated representatives in an angel fund make the investment decisions.
Unlike traditional companies, Internet companies often have ______.
their real value in the form of their human capital
A disadvantage of going public for a venture is that it can ______.
lead to potential loss of control
The first factor and the starting point that an entrepreneur should consider when valuing a venture is the ______.
nature and history of the business
A(n) ______ includes materials submitted to the Securities Exchange Commission for approval to sell stock to the public.
registration statement