Exam 12: Informal Risk Capital, venture Capital, and Going Public

A venture capitalist would rather invest in a first-rate product and a second-rate management team than the reverse.

In the venture-capital process,______ is absolutely essential for preliminary screening.

With the enactment of the Sarbanes-Oxley Act in 2002,the expense and administrative responsibilities of being a public company,as well as the liability risks of officers and directors,are significantly greater.

In private venture capital firms,limited partners provide the funding and the general partner manages the fund.

Which section of the prospectus is of great interest to potential purchasers?

The valuation approach that gives the lowest value of the business is:

The quiet period is a 90-day period in going public when company information that will help increase stock price should and can be released.

The valuation approach that gives the lowest value of the business is the earnings approach.

Which of the methods of valuation of a company provides the potential investor with the best estimate of the probable return on investment?

SBIC firms are small companies with some government money that invest in other companies.

Venture capital firms prefer to invest in:

Under the ________,reporting requirements are increased and due dates of reports to the SEC are accelerated.

________ were authorized in 1958 to marry private capital and government funds for investment in small companies.

Identify and describe,in order,each of the major stages of the venture capital process. A.Preliminary screening - a good business plan is essential in the venture-capital process.As the starting point,the business plan must have a clear-cut mission and clearly stated objectives that are supported by an in-depth industry and market analysis and pro forma income statements.The executive summary is an important part of this business plan,as it is used for initial screening in this preliminary evaluation.Many business plans are never evaluated beyond the executive summary.When evaluating the business,the venture capitalist first determines if the deal or similar deals have been seen previously.The investor then determines if the proposal fits his or her long- term policy and short-term needs in developing a portfolio balance.In this preliminary screening,the venture capitalist investigates the economy of the industry and evaluates whether he or she has the appropriate knowledge and ability to invest in that industry.The investor reviews the numbers presented to determine whether the business can reasonably deliver the ROI required.In addition,the credentials and capability of the management team are evaluated to determine if they can carry out the plan presented. B.Agreement on principal terms - the venture capitalist wants a basic understanding of the principal terms of the deal at this stage of the process before making the major commitment of time and effort involved in the formal due diligence process. C.Due Diligence - there is a detailed review of the company's history,the business plan,the resumes of the individuals,their financial history,and target market customers.The upside potential and downside risk are assessed,and there is a thorough evaluation of the markets,industry,finances,suppliers,customers,and management.Process takes from one to three months. D.Final approval - a comprehensive,internal investment memorandum is prepareD.This document reviews the venture capitalist's findings and details the investment terms and conditions of the investment transaction.This information is used to prepare the formal legal documents that both the entrepreneur and venture capitalist will sign to finalize the deal.

Most angel investors are individuals who accumulated their wealth through inheritance.

The prospectus portion of the registration statement is almost always written in a concise form,since it is the selling document of the company.

Identify the main advantages and disadvantages of going public. A.Advantages - ability to obtain equity capital,enhanced ability to borrow,enhanced ability to raise equity,liquidity and valuation,prestige,personal wealth. B.Disadvantages - Increased risk of liability,expense,regulation of corporate governance policies and procedures,disclosure of information,pressures to maintain growth pattern,loss of control.

Early stage financing is typically:

The Small Business Investment Company Act of 1958 married the use of private capital with government funds to finance small businesses.

If there is a significant disparity between the offering price of the shares and the price paid for shares by officers,directors,or founding stockholders,a dilution section is necessary in the prospectus.