F317 Review
One of the benefits of having a successful (higher than average) Internal Rate of Return (IRR) on a Venture Capital or Private Equity fund is that the general partners
All of the above adequately complete this sentence
A management buyout is
All of the above adequately completes the sentence
The future for private equity involves
All of the above adequately completes this sentence
In terms of managing the capitalization of a business, which of the following is true?
All of the above are true
Which of the following is true regarding the official start of a business
All of the above are true
Venture debt lenders make money from
All of the above completes this sentence
Venture debt is a loan to high growth businesses and is normally made by
Business development companies and small business investment companies
Characteristics of a strong Private Equity LBO investment include which of the following
Businesses with recession proof business models
When an entrepreneur accepts an investment from a venture capital firm they almost always:
Give up control
What is an investor in an entrepreneurial venture?
Principal
A PIPE stands for which of the following?
Private Investment in a Public Equity
Which of the following is a TRUE statement?
Private equity is a meritocracy as only the best fund managers with high fund IRRs can raise additional capital for new funds
Convertible debt is most often used in
Seed investments
A business's "Burn Rate" is defined as
The amount of money a business spends each month
Automatic conversion generally applies when a company completes
an IPO
On average, out of every 10 investments that an early stage venture capital firm makes in Series A round deals, what percentage of those deals end up as 20x or higher OIC harvest events.
10% (1 out of 10)
A startup's burn rate is related to
A company's liquidity and helps to predict how many months of capital availability
Entrepreneurial fatal flaws include which of the following?
All of the above
Entrepreneurs and investors should have a symbiotic relationship which means:
All of the above
For a high potential venture investment opportunity, which of the following indicates high potential for the complete management team?
All of the above
For high potential venture investment opportunities (talks about series a b and c and their COIC)
All of the above
From a venture capital investor's perspective, the rationale for Redemption rights are
All of the above
The problem with using convertible debt is (are) that:
All of the above
Transactions costs consists of
All of the above
Venture Capital and Private Equity firms raise money from a variety of entities including which of the following?
All of the above
Vesting
All of the above
Which of the following are control provisions?
All of the above
Which of the following is normally included in the capital structure of a leveraged buyout?
All of the above
Which of the following represents how Private Equity firms make money in a Leveraged Buyout investment opportunity?
All of the above
Which of the following statements is TRUE about venture capital and private equity funds?
All of the above are true
Private equity has become an ___ capital market relative to the public capital markets
Alternative
Which of the following is a TRUE statement regarding Anti-dilution provisions?
Anti-dilution provisions are only triggered when there is a down round.
A full-stack venture capital firm has operating partners that help portfolio companies across a variety of dimensions, including recruiting, operations, technology, sales, and marketing, but these partners
Are not decision makers in the investment process
In terms of organizational development and corporate culture, things that entrepreneurs may NOT want all employees to know about the business include which of the following?
Checkbook balance
Clara Moneymaker wedding planning business-Clara planned her own wedding
Clara should first rely on personal funds, sweat equity, and bootstrapping as investors typically want to see a more developed business to invest in
In terms of entrepreneurial team compensation systems, which of the following is a DISADVANTAGE of a stock option plan?
Complicates the capitalization table
A ______ is defined as when an investor in a preferred stock has the right to redemption or conversion into common stock
Convertible Preferred Stock
Venture debt
Could be underwritten based on recurring revenue such as software and media subscriptions
____ is when a later stage venture capital firm proposes changes to the terms of early round investors as a condition of their investment
Cramdown
Problems of cross fund investing include which of the following?
Cross fund investing is rarely done from the beginning of an investment, so the later rounds are done at a different price than earlier rounds
Equity crowd funding is
Dilutive to shareholders of a company
In terms of Entrepreneurial Team Compensation Systems, which of the following is an ADVANTAGE of a Phantom Equity (Stock Appreciation Plan)?
Does not complicate the capitalization table
Anti-dilution provisions are generally only applicable when there is a
Down round
Which is the best market entry point for an investment in a high potential venture?
Early majority phase
The only two things that really matter (key concepts) in a term sheet are
Economics and control
A business organized as a Sub-S corporation can complete an IPO and become a public company
False
A business's capitalization table is part of the net worth section of the business's balance sheet and lists how much money investors have invested in the business.
False
EBITDA stands for...and Accounting
False
Middle market private equity firms generally look for high potential ventures that have IPO potential
False
One of the differences between Venture Capital and Private Equity is that Venture Capital firms tend to do larger deals than Private Equity firms because they acquire higher percentages of companies and focus on bigger, more mature companies,
False
Prior to the JOBS act it was acceptable to raise money from investors who were accredited as long as general solicitations were made
False
Private equity firms consider stable and predictable Free Cash Flows paramount to a strong LBO investment opportunity so that the investment opportunity (the portfolio company) can make consistent dividend payments.
False
The use of the criteria for evaluating venture opportunities in only effective in helping investors spot high potential ventures...it is useless in identifying attractive small businesses.
False
Venture debt lenders structure loans to businesses with the primary source of repayment being assets of the business, specifically accounts receivable and inventory, and the secondary source of repayment being cash flows of the business
False
A Private Equity firm is also referred to as a ____
Financial Sponsor
When pitching investors an investment opportunity, entrepreneurs should
Focus on the length of time necessary to get to the next meaningful milestone
Stages of Business Growth
Formative Stage: Seed Round Financing Development Stage: Professional angels and early stage VCs as a financing source Early Stage: focus on market penetration Growth Stage: exploding profitability Maturity Stage: public capital markets as a financing source
Which of the following is a FALSE statement?
From the entrepreneur's perspective, negotiating a high valuation is more important than negotiating other economic and control terms.
Types of Companies
General Partnership: all owners have unlimited liability Limited Partnership: chosen by venture capital funds Corporation: best choice for raising venture capital Sub-S Corporation: has pro rata income tax flow-through consequences Limited Liability Company: organizationally and administratively simple
From Tom Cole's lecture, there is a market shift of PE firms investing in which type of companies?
Growth companies
In terms of the criteria for evaluation venture opportunities, venture capital firms
Have specific and individualized criteria lists for each investment opportunity that they consider
Venture partners, operating partners, and entrepreneurs in residence
Have very similar roles and responsibilities within a venture capital firm
What is the best solution to the entrepreneurial plateau?
Hiring a professional manager to run the business
For due diligence, entrepreneurs should be prepared to establish a data site (data room) that consolidates business, financial, and legal records of the business located
In an enterprise grade cloud storage site, or a Dropbox, Box, Google, or Carta folder
If possible, why should an entrepreneur seek to obtain multiple term sheets from venture capital firms?
Increased competition allows entrepreneurs to negotiate the best terms
Participating preferred stock
Is generally the preferred choice by venture capital investors
What is the most important leg of the stool for mature enterprises?
Market
What is the most important leg of the stool for a start up business with high potential venture characteristics?
People
For an attractive small business investment opportunity, which of the following do investors look for?
Prefer fragmented market, and #2-#5 market position
Which of the following is a TRUE statement?
Private equity firms normally do NOT include control provisions in investment agreements like venture capital firms do because private equity firms take majority positions in portfolio companies that they invest in.
Big Time Corporation about sterilization of medical equipment and surgical devices
Professional Angel and Venture Capital Investors
Which of the following normally important terms of a term sheet?
Proprietary information and inventions agreement
An individual qualifies as an accredited investor if
She has a net worth exceeding $1 million either alone or jointly with her spouse
Product crowd funding is
Similar to a pre-order campaign
Which of the following is true about the Total Addressable Market (TAM) for an entrepreneurial business
TAM is a subset of the entire market opportunity and represents the specific market niche for a business's products or services being sold
A business's "Runway" is defined as
The number of months that a business can operate without raising additional capital
In terms of the fee structure paid to the general partners of Venture Capital and Private Equity funds,
There is normally a 2% annual management fee on capital commitments to the fund and a 20% carried interest on capital gains and profits
Matt Andrews Body builder question and wants to buy gyms
This is a marginal firm that looks like it would be a great lifestyle business for matt, but his challenge is to find adequate investors to finance the equity requirement. His best chance at finding investors would be friends and family angel investors.
A shareholder agreement governs the sale and/or transfer of shares among shareholders with the goal of controlling or limiting who may become future shareholders
True
An investor that chooses to invest in a convertible debt deal is planning to own equity in the company but are deferring the price discussion to the next financing?
True
Angel deals are usually done on a take it or leave it basis
True
Corporate venture capital is a relatively new phenomenon and primarily exists within large technology companies
True
EBITDA...Amortization
True
In most middle market Private Equity transactions, it is common for a Private Equity firm to provide for (and sometimes require) sellers to provide a rollover investment in the restructured entity after the purchase
True
In terms of Game Theory, venture financing is one of the easiest games there is as you: really can have a win-win outcome; don't negotiate in a vacuum; and this is not a single instance game
True
In terms of using the criteria for evaluating venture opportunities, it is important for the ivnestor to realize there is no such thing as a perfect deal, but the investor's goal is to realize that there are very few negative criteria for a better investment opportunities, and then help the entrepreneurs minimize the risk associated with any negative criterion
True
Middle market private equity firms generally sponsor management buyouts of attractive small businesses and incorporate leverage in the capital structure to enhance equity returns
True
One of the differences between Venture Capital and Private Equity is that Private Equity funds acquire mature companies, while Venture Capital firms invest in earlier-stage companies that are growing quickly or have the potential to grow quickly
True
One of the differences between Venture Capital and Private Equity is that Venture Capital funds normally take a minority interest in companies that they invest in, and Private Equity funds normally take a controlling interest in companies that they invest in
True
Secondary buy-out transactions are defined as when private equity firms sell portfolio companies to one another as a desired harvest option
True
Subordinated debt lenders typically loan money to leveraged buyout opportunities led by private equity firms
True
Traditional lenders (depository institutions) structure lines of credit with the primary source of repayment being assets of the business (specifically accounts receivable and inventory), and the secondary source of repayment being cash flows of the business
True
Venture Capital investors have a fiduciary duty to their investors (limited partners in the fund) but do not have a fiduciary duty to the other shareholders of the companies they invest in unless they are also board members in those companies
True
While seed deals have the lowest legal costs and usually involve the least contentious negotiations, they often allow for the most potential mistakes as the Seed Deal terms set an important precedent for future financings
True
With venture debt, warrants sometimes referred to as an "Equity kicker" are structured boost returns well beyond interest rate returns (all-in returns 12%-15% and sometimes higher)
True
From an entrepreneur's perspective, it is important to remember that
Venture capital money is institutional money, and the primary goal of the venture capitalist is to maximize return (ROI or IRR).
Did you learn the math problems?
Yes
Did you learn the new material articles?
Yes
Did you learn the new material book?
Yes
Did you learn the new material slides?
Yes
