Reading 34: Alternative Investm....olio Management－LOS h purpose

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CFA Institute Area 8-11, 13: Asset Valuation
Session 11: Alternative Investments for Portfolio Management
Reading 34: Alternative Investments Portfolio Management
LOS h: Discuss the major issuers and buyers of venture capital, the stages through which private companies pass (seed stage through exit), the characteristic sources of financing at each stage, and the purpose of such financing.

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With respect to the terms formative-stage companies and expansion-stage companies, which are considered issuers of venture capital?

A) Both formative-stage companies and expansion-stage companies.

B) Neither formative-stage companies nor expansion-stage companies.

C) Expansion-stage companies only.

D) Formative-stage companies only.

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Answer and Explanation

Issuers of venture capital include formative-stage companies that are either new or young and expansion-stage companies that need funds to expand their revenues or prepare for an IPO.

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With respect to buyers of venture capital, which group represents the first group to invest in the company after the initial entrepreneurs and their friends and family?

A) Venture capitalists.

B) Strategic partners.

C) Angel investors.

D) Formative-stage companies.

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Answer and Explanation

Buyers of venture capital include angel investors who are usually accredited investors and the first outside investors after the family and friends of the company founders. Venture capitalists come in later after identifying companies with potential but need financial and strategic support. Large companies come later still and engage in corporate venturing. The large companies are usually in the same industry as the issuer and are also called strategic partners.

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With respect to the seed and start-up point in the early stage of venture capital, which of the two represents a point where the company has already started generating revenue?

A) In neither the seed nor start-up point.

B) Not at the start-up point, but revenue has begun at the seed point.

C) Not at the seed point, but revenue has begun at the start-up point.

D) Revenue has begun by the time the firm has reached the seed and start-up points.

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Answer and Explanation

The stages through which private companies pass are the early-stage, later-stage, and exit stages. The early stage consists of i) seed: the small amount of money provided by the entrepreneur to get the idea off the ground, ii) start-up: usually a pre-revenue stage that brings the entrepreneurs idea to commercialization, iii) first stage: additional funds if the idea is sound but start-up funds have run out. The later-stage occurs after revenue has started.