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CHAPTER 11
PROFESSIONAL VENTURE CAPITAL
TrueFalse Questions
T.
T.
2. The establishment of the Small Business Administration was the first major
government foray into venture investing.
T.
F.
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.
T.
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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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.
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.
T.
T.
F.
T.
T.
F.
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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.
c.
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.
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e.
d.
e.
d.
d.
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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.
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.
a.
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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.
b.
a.
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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
c.
e.
e.
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a.
b.
c.
d.
e.
b.