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Chapter 11: Professional Venture Capital

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CHAPTER 11
PROFESSIONAL VENTURE CAPITAL
TrueFalse Questions
T.

1. In addition to having personal financial stakes in their portfolio of


investments, professional venture capitalists have raised funds from other
investors to invest in the portfolio.

T.

2. The establishment of the Small Business Administration was the first major
government foray into venture investing.

T.

3. Created by the Small Business Administration, Small Business Investment


Companies possess important tax advantages and were eligible to borrow
amounts up to four times their equity base from the government.

F.

4. Initially, Small business Investment Companies access to borrowed funds


appeared attractive. This was because venture investing and debt service
commitments are an ideal mixture of financing for start-ups.

T.

5. Professional venture capital, as we know it today, did not exist before World
War II.

T.

6. Most venture investing came from wealthy individuals and families prior to
World War II.

F.

7. The beginning of professional venture capitalists began with the formation


of American Research and Development in 1966.

T.

8. In 1958 the Small Business Administration created Small Business


Investment Companies.

F.

9. The first major government foray into venture investing came with the
formation of the Small Business Administration (SBA) in 1947.

T.

10. The American Research and Development (ARD) company was formed in
1946.

T.

11. Internet financing led the record level of venture investing in the 19992000 time period.

F.

12. The phrase two and twenty shops refers to investment management
firms having a contract that gives them two percent carried interest and 20
percent of assets annual management fee.

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Chapter 11: Professional Venture Capital

F.

13. When the venture fund calls upon the investors to deliver their
investment funds, it reflects the deal flow.

T.

14. The deal flow reflects the flow of business plans and term sheets involved
in the venture capital investing process.

T.

15. In the venture investing context, due diligence describes the process of
investigating a potentially worthy concept or plan.

F.

16. The summary of the investment terms and conditions accompanying an


investment proposed by the venture capitalist is known as the statement of
strengths and weaknesses.

T.

17. Carried interest is the portion of profits paid to the professional venture
capitalist as incentive compensation.

F.

18. The term capital call refers to the flow of business plans and term
sheets involved in the venture capital investing process.

T.

19. Pension funds are the dominant source of funds for venture investing.

F.

20. Individuals and families are more important suppliers of venture capital
relative to finance and insurance firms.

T.

21. Endowments and foundations are more important suppliers of venture


capital relative to individuals and families.

T.

22. Due diligence, in venture investing context, is the process of


ascertaining the viability of a business plan.

T.

23. When a syndicate of VCs invests in a venture, the investor in charge of


organizing the due diligence process is known as the lead investor.

F.

24. SLOR stands for standard letter of recognition.

T.

25. SLOR stands for standard letter of rejection.

T.

26. A term sheet is a summary of the investment terms and conditions


accompanying an investment by venture capitalists.

F.

27. Term sheets consist of the terms and conditions accompanying an


investment, as stipulated by the founders of the venture.

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T.

28. Two typical issues addressed in a term sheet are valuation and the size and
staging of financing.

T.

29. Term sheets may contain demands regarding the voting rights of shares
issued to venture investors.

T.

30. Once the venture capital firm has received exit proceeds from a venture in
the form of cash or securities, some method of returning the proceeds (less the
carried interest) must be determined.

Multiple-Choice Questions
b.

1. The beginning of professional venture capitalists is considered to have


occurred:
a. prior to World War II
b. 1946
c. 1956
d. 1966
e. after the Vietnam War

c.

2. The beginning of professional venture capitalists is considered to have


begun with the establishment or formation of:
a. Small Business Administration
b. Small Business Investment Companies
c. American Research and Development organization
d. Professional Venture Capitalists organization

a.

3. Which of the following has been the largest source of venture capital funds
since 1979 when it was clarified that portfolio diversification was a legitimate
consideration in determining the prudence of an individual investment?
a. pension funds
b. individuals and families
c. endowments and foundations
d. corporate venture capital
e. finance and insurance

d.

4. Venture Capital firms tend to specialize in publicly identified niches


because of the potential for value-added investing by venture capitalists.
Which is not one of these niches?
a. industry type
b. venture stage
c. size of investment
d. management style
e. geographic area

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Chapter 11: Professional Venture Capital

e.

5. As venture firms attract money from investors, it is placed in a fund.


Important issues that must be put in place with the establishment of the fund
include all of the following except:
a. determine the general partners
b. establishing a fee structure
c. a profit sharing arrangement
d. establish its governance
e. the management team assigned to each borrower

d.

6. All of the following are typically part of a venture funds typical


compensation and incentive structure except:
a. some percent annual fee on invested capital
b. a percent share of any profits to the managing general partner
c. carried interest
d. salary for the general partners

e.

7. When evaluating the prospects of a new venture, venture capital firms


consider which of the following?
a. characteristics of the proposal
b. characteristics of the entrepreneur/team
c. nature of the proposed industry
d. both b and c
e. all of the above

d.

8. When screening prospective new ventures, venture capital firms consider


their own funds requirements. Which of the following is not one of the
venture firms requirements relating to its own funds?
a. investor control
b. rate of return
c. size of investment
d. probable stock listing exchange for the mature venture
e. financial provisions for investors

d.

9. When evaluating the prospects of a new venture, venture capital firms


consider the characteristics of the entrepreneur and its team. Which of the
following is not part of the review of the entrepreneur/team?
a. its background and experience
b. its managerial capabilities
c. managements stake in the firm
d. the VC firms ability to cash out
e. the capability to sustain an effort

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b.

10. When screening prospective new ventures, venture capital firms must
consider the nature of the proposed industry. Which of the following is not
part of the screening of the proposed industry?
a. market attractiveness
b. managerial references
c. potential size
d. technology
e. threat resistance

c.

11. Professional venture investing usually involves setting up a venture capital


firm as a:
a. proprietorship
b. corporation
c. partnership
d. S corporation

b.

12. After a new professional venture capital fund is organized, the fund
managers:
a. conduct due diligence and actively invest
b. solicit investments and obtain commitments
c. arrange harvest or liquidation
d. identify prospective venture investments and then solicit
investments

b.

13. After determining the next funds objectives and policies, the professional
venture investing cycles next step is:
a. solicit investments in new fund
b. organize the new fund
c. obtain commitments for a series of capital calls
d. conduct due diligence and actively invest
e. arrange harvest or liquidation

d.

14. The term carried interest refers to:


a. interest not currently paid but which must be paid in the future by a
professional venture capitalist
b. interest transported directly to a bank
c. interest owed on a loan in default
d. the portion of profits paid to the professional venture capitalist as
incentive compensation

a.

15. If an investment management firm is known to be a two and twenty


shop, this implies that the firm:
a. receives an annual 2% fee on invested capital, and a 20% carried
interest

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Chapter 11: Professional Venture Capital

b. receives an annual 20% fee on invested capital, and a 2% carried


interest
c. receives an annual 2% fee on gross operating profits, and a 20%
carried interest
d. receives an annual 20% fee on gross operating profits, and a 2%
carried interest
c.

16. A venture fund calls upon its investors to deliver their investment funds.
This is known as:
a. due diligence
b. deal flow
c. a capital call
d. carried interest
e. a SLOR

d.

17. All of the following are typical issues addressed in a term sheet except?
a. valuation
b. board structure
c. registration rights
d. management fees
e. employment contracts

b.

18. Term sheets are usually drafted by:


a. the mangers of the venture seeking VC funding
b. the VC fund seeking to fund the venture
c. management and founders
d. it is usually done by an third party, in order to
ensure the fair treatment of both parties

b.

19. In a syndicate of venture investors, the investor who is responsible for


governing the process of due diligence is:
a. the primary investor
b. the lead investor
c. a small group of secondary investors
d. the investor in charge of issuing SLORs for the syndicate
e. it is a democratic process that is shared by all investors in the group

a.

20. A summary of the investment terms and conditions accompanying an


investment is referred to as a:
a. term sheet
b. business plan
c. fund created by professional venture capitalists
d. due diligence in venture investing
e. capital call

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a.

21. When screening possible investments, a venture capital firm might issue
an SLOR which stands for:
a. standard letter of rejection
b. standing letter of reconciliation
c. standard letter of reassessment
d. senior letter of reference

c.

22. Which of the following is not one of the four likely outcomes of the
venture firms screening process?
a. seek the lead investor position
b. seek a non-lead investor position
c. close the capital fund
d. refer the venture to more appropriate financial market participants
e. issue a standard letter of rejection

Questions Relating to Web Extension for Chapter 11


b.

23. In a Venture Capital Fund Placement Memorandum, which of the


following is not a front matter declaration?
a. description of limited manner of the offering
b. targeted fund size
c. imposition of confidentiality
d. notice of lack of SEC registration
e. declaration of the highly risky nature of investment

c.

24. In a Venture Capital Fund Placement Memorandum, which of the


following is not part of the offering summary?
a. objective of formation
b. declaration of general partner
c. management fee
d. minimum capital restrictions
e. targeted fund size

e.

25. In a Venture Capital Fund Placement Memorandum, which of the


following is not part of the fund overview?
a. fund size
b. investment focus
c. fund management
d. portfolio size
e. general partners capital contributions

e.

26. In a Venture Capital Fund Placement Memorandum, all of the following


are part of the executive summary except?

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a.
b.
c.
d.
e.
b.

special limited partners


general partners capital contributions
limitation of liability
allocation of gains and losses
imposition of confidentiality

27. In a Venture Capital Fund Placement Memorandum, all of the following


are included in the summary of terms except?
a. indemnification
b. objective
c. liquidation
d. valuation
e. expenses