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LOS g, (Part 1): Explain the stages in venture capital investing.

Q1. Venture-capital investing will appeal to investors who:

A)   have a short time horizon.

B)   are willing to accept a high-risk profile and illiquidity.

C)   make investment decisions based on historical risk and return data.

Q2. The different stages of venture capital investing are generally grouped according to the:

A)   rights and responsibilities of the investor.

B)   stage of development of the venture.

C)   liquidity of the investment.

Q3. The founders of the ABCD Corporation believe their idea for a new weight-loss pill will be tremendously successful. ABCD Corporation is currently seeking venture capitalists to invest in their company so they can do further research and hopefully someday develop their idea into a marketable product. This stage of venture capital investing can best be described as:

A)   first-stage.

B)   formative-stage.

C)   seed-stage.

Q4. A manufacturing company would seek mezzanine financing in which of the following scenarios?

A)   A company already producing and selling a product, seeking an initial expansion of operations.

B)   A company ready for a major marketing campaign.

C)   A company preparing for an initial public offering.

Q5. A venture capitalist would typically do all of the following EXCEPT:

A)   manage the company after it has gone public.

B)   provide business expertise and confidentiality.

C)   force the entrepreneur to carefully consider the viability of the project through the development of a business plan.

LOS g, (Part 1): Explain the stages in venture capital investing. fficeffice" />

Q1. Venture-capital investing will appeal to investors who:

A)   have a short time horizon.

B)   are willing to accept a high-risk profile and illiquidity.

C)   make investment decisions based on historical risk and return data.

Correct answer is B)

Venture capital investments are characterized by illiquidity and a high-risk profile. Venture capital is a long-term investment not suitable for investors with short time horizons. There is little historical data available for venture-capital investments, so investors who depend on such data to make decisions are not likely to invest in this arena.

Q2. The different stages of venture capital investing are generally grouped according to the:

A)   rights and responsibilities of the investor.

B)   stage of development of the venture.

C)   liquidity of the investment.

Correct answer is B)

The stages of venture capital investment are categorized according to the point the venture is in the business cycle.

Q3. The founders of the ABCD Corporation believe their idea for a new weight-loss pill will be tremendously successful. ABCD Corporation is currently seeking venture capitalists to invest in their company so they can do further research and hopefully someday develop their idea into a marketable product. This stage of venture capital investing can best be described as:

A)   first-stage.

B)   formative-stage.

C)   seed-stage.

Correct answer is C)

First-stage financing is used to begin manufacturing and sales of a product. Formative-stage financing includes the seed-stage and the early-stage, but is too broad of a description for this situation. Seed-stage best describes this scenario, because ABCD is seeking financing to support product development and market research.

Note: there is some overlap between the stages, so read the question carefully.

Q4. A manufacturing company would seek mezzanine financing in which of the following scenarios?

A)   A company already producing and selling a product, seeking an initial expansion of operations.

B)   A company ready for a major marketing campaign.

C)   A company preparing for an initial public offering.

Correct answer is C)

All of the above scenarios are different stages of later-stage financing. A company ready for a major marketing campaign or a physical plant expansion is seeking third-stage financing. An initial expansion of operations describes second-stage financing. The capital provided to prepare for an initial public offering is at the mezzanine stage.

Q5. A venture capitalist would typically do all of the following EXCEPT:

A)   manage the company after it has gone public.

B)   provide business expertise and confidentiality.

C)   force the entrepreneur to carefully consider the viability of the project through the development of a business plan.

Correct answer is A)        

Venture capitalists also provide risk capital.

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