MGNT 3234 Ch. 12
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%
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.
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
_____ 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
_____ refers to financing used to buy another company.
Acquisition financing
_____ 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
Identify the entities that act as sources of funding for early-stage financing of a startup. (Check all that apply.)
Angel investors Family
Informal risk-capital markets
Areas of risk-capital markets consisting mainly of individuals
Reward-based crowdfunding sites
AuraMusic.com provides individuals who fund musician entrepreneurs with a copy of their new musical album
_____ 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.
Fourth stage
Bridge financing to equip company for public offering
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.
Identify the formula for calculating inventory turnover.
Cost of goods sold / Inventory
Identify the formula for calculating the acid test ratio.
Current assets−Inventory / Current liabilities
_____ is frequently used to assess the short-term solvency of a venture or its ability to meet its short-term debts.
Current ratio
_____ evaluates a firm's capital structure.
Debt to equity ratio
_____ refers to financing that helps rapidly expand a business.
Development financing
_____ 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.
Third stage
Extensive expansion for company with rapid sales growth
True or false: The venture capitalist necessarily seeks control of a company he or she invests in
False
Lending crowdfunding sites
FundingMany.com provides entrepreneurs with the access to apply for loans from individuals who are willing to fund ventures.
Equity crowdfunding sites
FundingShip.com provides individuals who fund private entrepreneurial ventures with a percentage share of the ventures.
_____ assesses the efficiency of a venture in managing and selling its inventory.
Inventory turnover
Seed capital
It is generally a relatively small amount of capital required for proof of concept and market feasibility studies.
Real estate crowdfunding
It is involved in buying properties, providing mortgages, or funding solar energy projects.
Third stage
It is the longest stage of the process, involving between one to three months.
Startup capital
It is used for developing and selling some initial products of a venture to determine if commercial sales are feasible.
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.
Leveraged buyouts
Management buying out the present owners
Which of the following are traditional areas of concentration of venture capitalists in the United States? (Check all that apply.)
New York Los Angeles
_____ 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
_____ refer to markets providing debt and equity to nonsecure financing situations.
Risk-capital markets
Venture-capital markets
Risk-capital markets consisting of formal firms
Public-equity markets
Risk-capital markets consisting of publicly owned stocks of companies
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 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.
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.
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 business opportunity must have significant capital appreciation. The product offered by the company must be unique. The company should have a strong management team composed of individuals with solid experience and backgrounds.
replacement value
The cost of replacing all assets of a company
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 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.
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.
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 the factors that need to be considered when deciding the timing of a company going public. (Check all that apply.)
The finances that the company requires for fulfilling its needs. The amount of the company's earnings. The size of the company.
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
Book value
The indicated worth of the assets of a company
Identify a true statement about angel investor groups.
The individual members of the angel group make the investment either individually or with others interested.
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 in exchange for a percentage of the gain generated on the investment and a fee. The pool is managed by a general partner.
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.
present value of future cash flow
The value of the cash flow of the business for the time value of money and the business and economic risks
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.
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 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.
Identify the formula used for calculating the debt ratio.
Total liabilities / Total assets
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
True or false: Crowdfunding brings together different individuals who contribute money to projects and firms they want to support.
True
True or false: The book value of the stock of a company is usually not a good indicator of its fair market value.
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
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
The book value of the stock of a company is the _____.
acquisition cost (less accumulated depreciation) minus liabilities
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
Investment opportunities in a startup are rejected by informal investors, or angels, 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 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
The objective of a venture-capital firm is to _____.
create long-term capital appreciation through debt and equity investments
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 process of deal evaluation in the venture-capital process is referred to as
due dilienece
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
The private equity market, which is also known as the _____, can be a source of capital for privately held ventures.
enterprise capital market
The _____ is created from the resources of wealthy individuals or institutions who are limited partners.
equity pool
______ refer to control mechanisms to test the financial strength of a new venture.
financial ratios
A disadvantage of going public for a venture is that it can _____.
lead to potential loss of control
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
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
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
A(n) _____ includes materials submitted to the Securities Exchange Commission for approval to sell stock to the public.
registration statement
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
Unlike traditional companies, Internet companies often have _____
their real value in the form of their human capital