Chapter 11: Professional Venture Capital

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 mall !usiness "dministration #as the first ma$or
government fora% into venture investing.
T. &. Created b% the mall !usiness "dministration, mall !usiness Investment
Companies possess important ta' advantages and #ere eligible to borro#
amounts up to four times their e(uit% base from the government.
). *. Initiall%, mall business Investment Companies access to borro#ed funds
appeared attractive. This #as because venture investing and debt service
commitments are an ideal mi'ture of financing for start+ups.
T. ,. Internet financing led the record level of venture investing in the 1---+2...
time period.
). /. T#o and t#ent% shops refers to investment management firms having a
contract that gives them t#o percent carried interest and 2. percent of assets
annual management fee.
). 0. 1hen the venture fund calls upon the investors to deliver their investment
funds, it reflects the deal flo#.
T. 2. The deal flo# reflects the flo# of business plans and term sheets involved
in the venture capital investing process.
T. -. In the venture investing conte't, due diligence describes the process of
investigating a potentiall% #orth% concept or plan.
). 1.. The summar% of the investment terms and conditions accompan%ing an
investment proposed b% the venture capitalist is kno#n as the statement of
strengths and #eaknesses.
T. 11. 3ost venture investing came from #ealth% individuals and families prior
to 1orld 1ar II.
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Chapter 11: Professional Venture Capital
). 12. The beginning of professional venture capitalists began #ith the formation
of "merican 4esearch and 5evelopment in 1-//.
T. 1&. In 1-,2 the mall !usiness "dministration created mall !usiness
Investment Companies.
T. 1*. 6Carried interest7 is the portion of profits paid to the professional venture
capitalist as incentive compensation.
). 1,. The term 6capital call7 refers to the flo# of business plans and term sheets
involved in the venture capital investing process.
T. 1/. Professional venture capital, as #e kno# it toda%, did not e'ist before
1orld 1ar II.
). 10. The first ma$or government fora% into venture investing came #ith the
formation of the mall !usiness "dministration 8!"9 in 1-*0.
T. 12. The "merican 4esearch and 5evelopment 8"459 compan% #as formed in
1-*/.
T. 1-. Pension funds are the dominant source of funds for venture investing.
). 2.. Individuals and families are more important suppliers of venture capital
relative to finance and insurance firms.
T. 21. :ndo#ments and foundations are more important suppliers of venture
capital relative to individuals and families.
T. 22. 65ue diligence,7 in venture investing conte't, is the process of
ascertaining the viabilit% of a business plan.
). 2&. ;<4 stands for 6standard letter of recognition.7
T. 2*. " 6term sheet7 is a summar% of the investment terms and conditions
accompan%ing an investment b% venture capitalists.
T. 2,. T#o t%pical issues addressed in a term sheet are valuation and the si=e and
staging of financing.
T. 2/. <nce the venture capital firm has received e'it proceeds from a venture in
the form of cash or securities, some method of returning the proceeds 8less the
carried interest9 must be determined.
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Chapter 11: Professional Venture Capital
MultipleC!oi"e Questions
d. 1. Venture Capital firms tend to speciali=e in publicl% identified niches
because of the potential for value+added investing b% venture capitalists.
1hich is not one of these niches>
a. industr% t%pe
b. venture stage
c. si=e of investment
d. management st%le
e. geographic area
e. 2. "s venture firms attract mone% from investors, it is placed in a fund.
Important issues that must be put in place #ith the establishment of the fund
include all of the follo#ing e'cept>
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 borro#er
d. &. "ll of the follo#ing are t%picall% part of a venture fund?s t%pical
compensation and incentive structure e'cept>
a. some percent annual fee on invested capital
b. a percent share of an% profits to the managing general partner
c. carried interest
d. salar% for the general partners
b. *. In a Venture Capital )und Placement 3emorandum, #hich of the follo#ing
is not a front matter declarations>
a. description of limited manner of the offering
b. targeted fund si=e
c. imposition of confidentialit%
d. notice of lack of :C registration
e. declaration of the highl% risk% nature of investment
c. ,. In a Venture Capital )und Placement 3emorandum, #hich of the follo#ing
is not part of the offering summar%>
a. ob$ective of formation
b. declaration of general partner
c. management fee
d. minimum capital restrictions
e. targeted fund si=e
e. /. In a Venture Capital )und Placement 3emorandum, #hich of the follo#ing
is not part of the fund overvie#>
2.
Chapter 11: Professional Venture Capital
a. fund si=e
b. investment focus
c. fund management
d. portfolio si=e
e. general partners? capital contributions
e. 0. In a Venture Capital )und Placement 3emorandum, all of the follo#ing are
part of the e'ecutive summar% e'cept>
a. special limited partners
b. general partners? capital contributions
c. limitation of liabilit%
d. allocation of gains and losses
e. imposition of confidentialit%
b. 2. In a Venture Capital )und Placement 3emorandum, all of the follo#ing are
included in the summar% of terms e'cept>
a. indemnification
b. ob$ective
c. li(uidation
d. valuation
e. e'penses
d. -. "ll of the follo#ing are t%pical issues addressed in a term sheet e'cept>
a. valuation
b. board structure
c. registration rights
d. management fees
e. emplo%ment contracts
a. 1.. 1hich of the follo#ing has been the largest source of venture capital funds
since 1-0- #hen it #as clarified that 6portfolio diversification #as a legitimate
consideration in determining the prudence of an individual investment7>
a. pension funds
b. individuals and families
c. endo#ments and foundations
d. corporate venture capital
e. finance and insurance
e. 11. 1hen evaluating the prospects of a ne# venture, venture capital firms
consider #hich of the follo#ing>
a. characteristics of the proposal
b. characteristics of the entrepreneur@team
c. nature of the proposed industr%
d. both b and c
e. all of the above
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Chapter 11: Professional Venture Capital
d. 12. 1hen screening prospective ne# ventures, venture capital firms first
consider its o#n firm re(uirement. 1hich of the follo#ing is not part of its
o#n firm re(uirements revie#ed>
a. investor control
b. rate of return
c. si=e of investment
d. e'pertise of ne# ventures management
e. financial provisions for investors
d. 1&. 1hen evaluating the prospects of a ne# venture, venture capital firms
consider the characteristics of the entrepreneur and its team. 1hich of the
follo#ing is not part of revie# of the entrepreneur@team>
a. its background and e'perience
b. its managerial capabilities
c. management?s stake in the firm
d. the VC firms? abilit% to cash out
e. the capabilit% to sustain an effort
b. 1*. 1hen screening prospective ne# ventures, venture capital firms must
consider the nature of the proposed industr%. 1hich of the follo#ing is not
part of the screening of the proposed industr%>
a. market attractiveness
b. managerial references
c. potential si=e
d. technolog%
e. threat resistance
c. 1,. 1hich of the follo#ing is not one of the four likel% outcomes of the
venture firm?s 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. standard letter of re$ection
c. 1/. Professional venture investing usuall% involves setting up a venture capital
firm as a:
a. proprietorship
b. corporation
c. partnership
d. corporation
b. 10. "fter a ne# professional venture capital fund is organi=ed, the fund
managers:
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Chapter 11: Professional Venture Capital
a. conduct due diligence and activel% invest
b. solicit investments and obtain commitments
c. arrange harvest or li(uidation
d. identif% prospective venture investments and then solicit
investments
d. 12. 1hich one of the follo#ing sources has been the largest supplier of
venture capital over the past 2, or so %ears>
a. )inance and insurance companies
b. :ndo#ments and foundations
c. Individuals and families
d. pension funds
e. corporate venture capital
a. 1-. 1hen screening possible investments, a venture capital firm might issue
an ;<4 #hich stands for:
a. standard letter of re$ection
b. standing letter of reconciliation
c. standard letter of reassessment
d. senior letter of reference
b. 2.. "fter determining the ne't fund?s ob$ectives and policies, the 6professional
venture investing c%cle?s7 ne't step is:
a. solicit investments in ne# fund
b. organi=e the ne# fund
c. obtain commitments for a series of capital calls
d. conduct due diligence and activel% invest
e. arrange harvest or li(uidation
d. 21. The term 6carried interest7 refers to:
a. interest not currentl% paid but #hich must be paid in the future b% a
professional venture capitalist
b. interest transported directl% to a bank
c. interest o#ed on a loan in default
d. portion of profits paid to the professional venture capitalist as
incentive compensation
a. 22. " summar% of the investment terms and conditions accompan%ing an
investment is referred to as a:
a. term sheet
b. business plan
c. fund created b% professional venture capitalists
d. due diligence in venture investing
e. capital call
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Chapter 11: Professional Venture Capital
b. 2&. The beginning of professional venture capitalists is considered to have
occurred:
a. prior to 1orld 1ar II
b. 1-*/
c. 1-,/
d. 1-//
e. after the Vietnam 1ar
c. 2*. The beginning of professional venture capitalists is considered to have
begun #ith the establishment or formation of:
a. mall !usiness "dministration
b. mall !usiness Investment Companies
c. "merican 4esearch and 5evelopment organi=ation
d. Professional Venture Capitalists organi=ation
b. 2,. 6Carried interest7 refers to the:
a. interest paid b% professional venture capitalists to help
entrepreneurs finance #ith borro#ed funds
b. portion of profits paid to the professional venture capitalist as
incentive compensation
c. annual management fee charged on assets
d. portion of e'it value paid to the professional venture capitalist

e. 2/. 1hich one of the follo#ing sources has been the smallest supplier of
venture capital over the past 2, or so %ears>
a. )inance and insurance companies
b. :ndo#ments and foundations
c. Individuals and families
d. pension funds
e. corporate venture capital
a. 20. 1hich one of the follo#ing sources has been the second largest supplier of
venture capital over the past 2, or so %ears>
a. )inance and insurance companies
b. :ndo#ments and foundations
c. Individuals and families
d. pension funds
e. corporate venture capital

b. 22. <f the total venture capital supplied over the past 2, or so %ears, #hat
appro'imate percentage has been supplied b% individuals and families>
a. 2A
b. 1.A
c. 21A
d. 2,A
2*