Deck 9: Ethical Decision Making and the Entrepreneur

Question 1

Within the fundraising strategy, each source has particular requirements and costs that can have an impact on future financing options.

Answer 1

True

Question 2

The least important concept in determining the external financing requirements of the venture is free cash flow.

Answer 2

False

Question 3

Longer-term borrowings are used for working capital and/or to finance the purchase of property or equipment.

Answer 3

True

Question 4

One of the toughest trade-offs for any young company is to balance the need for start-up and growth capital with preservation of equity.

Question 5

Earnings before interest and taxes (EBIT)
Less Tax exposure (tax rate times EBIT)
Plus Depreciation, amortization, and other non-cash charges
Less Increase in operating working capital
Less Capital expenditures
This formula is used to calculate cash flow.

Question 6

A new or existing business needs to obtain both equity and debt financing if it is to have a sound financial foundation.

Question 7

An existing business seeking expansion capital or funds for a temporary use has a much easier job obtaining both debt and equity.

Question 8

Long-term loans are debt instruments that mature in as few as three years.

Question 9

Long-term borrowings mature in more than 1 year.

Question 10

Capital is one of the least important factors in the success of higher potential ventures.

Question 11

Short-term debt is incurred in 4 years or less.

Question 12

Major sales increases and profit increases can have a significant impact on the cash flow required to finance the increased receivables and inventory.

Question 13

Longer-term borrowings are used to finance the purchase of property or equipment that serve as collateral for the loan.

Question 14

Short-term debt is most often used by a business for working capital and is repaid out of the proceeds of its sales.

Question 15

As a rough rule, a start-up may be able to obtain debt for working capital purposes that is equal to its equity and subordinated debt.

Question 16

Transactions cash balances
Plus Accounts receivable
Plus Inventory
Plus Other operating current assets (e.g., prepaid expenses)
Less Accounts payable
Less Taxes payable
Less Other operating current liabilities (e.g., accrued expenses)
This formula is used to calculate operating working capital.

Question 17

Informal investors prefer to invest in local ventures.

Question 18

An entrepreneur's bargaining power is directly related to the cash position of the venture.

Question 19

Strategies that optimize or maximize the amount of money to be raised decrease the risk in new and emerging companies.

Question 20

Spreadsheets are best used for modelling the complex financial and strategic interrelationships inherent in many entrepreneurial ventures.

Question 21

ESOP stands for Employee Share Ownership Plan.

Question 22

If an entrepreneur has obtained a referral, he or she needs to get permission to use the name of the person making a referral when the investor is contacted.

Question 23

Most venture capital funds are organized as limited partnerships, in which the fund managers are the general partners and the investors are the limited partners.

Question 24

While corporate venture capitalists are similar to traditional VCs in that they look for promising young companies on the verge of a spike in sales, corporations tend to be more risk-averse and specialized.

Question 25

The verification of facts, backgrounds, and reputations of key people, market estimates, technical capabilities of the product, proprietary rights, and the like is an investigation for investors called due diligence.

Question 26

Capital that is between senior debt financing and common shares is called mezzanine financing.

Question 27

Subordinated debt often carries an equity "kicker" consisting of warrants or a conversion feature into common shares.

Question 28

A central idea with obtaining risk capital is that a smaller percentage of a larger pie is preferred to a larger percentage of a smaller pie.

Question 29

Interest from a venture capitalist can be predicted by the amount needed and the required rate of return expected.

Question 30

Effective entrepreneurs set up meetings that allow them to present to more than one informal investor at the same time.

Question 31

Adding key team members, new customers or suppliers, or referring additional investment are basic ways to add value.

Question 32

Angels or wealthy individuals are often sought because they are more easily sold than formal investors (e.g., venture capitalists and private placements).

Question 33

The most effective means of reaching informal investors is to consult online directories that have been developed for that purpose.

Question 34

Investment agreements with an informal investor will often include some form of a "put", whereby the investor has the right to require the venture to repurchase his or her shares after a specified number of years at a specified price.

Question 35

It is best to be vague about other investors you are speaking with.

Question 36

In the majority of the high-technology start-ups and early-stage companies, debt is normally secured to fund research and development, prototype development and product marketing, launch, and cover early losses.

Question 37

Whether or not the outcome of a presentation is continued investment interest, the entrepreneur needs to try to obtain the names of other potential investors from this meeting.

Question 38

There are only two classes of investors in new and young private companies: value-added investors and all the rest.

Question 39

An equity investment requires that the executive team firmly believes that investors can and will add value to the venture.

Question 40

If all you receive from an investor, especially a venture capitalist or a substantial private investor, is money, then you may not be getting a bargain.

Question 41

The venture capital investing process generally occurs over what time frame?

A) 1-3 years
B) 3-5 years
C) up to 10 years
D) 10-15 years
E) over 15 years

Question 42

Going public enables a firm to raise more capital with less dilution than occurs with private placements or venture capital.

Question 43

Private Placements are used for firms that are not in a position to pursue an IPO.

Question 44

Jill has bootstrapped her business that helps large bakeries increase the efficiency of their deliveries. After a recent spotlight in a trade magazine explaining how her customers can quickly lower their costs, her sales have doubled in three months. Since her system is a combination of proprietary software and hardware, this dramatic increase in installs has created a severe and unexpected cash flow challenge. Which of the following sources would be her best choice of immediate funds?

A) Friends and family
B) Angel investors
C) Advance payments from customers
D) Credit line from a bank
E) Business Development Bank of Canada

Question 45

In the financial strategy framework, degrees of strategic freedom include all of the following except:

A) Time to out of cash
B) Future alternatives
C) Risk/Reward
D) Burn rate
E) Personal concerns

Question 46

Mezzanine is a debt instrument that does not require regular interest payments.

Question 47

Short-term debt is incurred within what time frame?

A) Less than six months
B) One year or less
C) One to two years
D) Two to three years
E) Depends on the deal structure

Question 48

ESOPs are a potential source of funding used by existing companies that have low to moderate confidence in the stability of their future earnings and cash flow.

Question 49

What is the most likely source for early stage equity capital, under $250,000?

A) Informal investors
B) Business Development Bank of Canada
C) Corporations
D) Private placements
E) Personal savings

Question 50

With mezzanine financing, the principle amount may be converted into equity.

Question 51

John Savage was an engineer with an idea for a flexible solar-energy material that would have a wide-range of military and civilian apparel applications. He estimates that he will need approximately $300,000 to develop a prototype. Friends and family could provide about $75,000. What would be the best source for the balance?

A) Informal investors
B) Venture capitalists
C) A strategic partnership
D) Business Development Bank of Canada
E) Credit cards

Question 52

What is the primary concern of founders who trade equity for capital for their growing venture?

A) Control
B) Valuation
C) Investor capabilities
D) Capitalization
E) Team harmony

Question 53

What factor makes many leveraged buyouts much more risky than many start-ups?

A) Capital market imperfections
B) Leverage
C) Timing
D) Upside potential
E) Motivating workers

Question 54

An ESOP is a program in which the employees create an internal source of funding by becoming investors in the company.

Question 55

A private placement may not be offered after a company has already gone public.

Question 56

Which of the following is a likely source for funding a venture that is preparing for a harvest?

A) Strategic alliances
B) Mezzanine capital
C) Corporations
D) Friends and family
E) Business Development Bank of Canada

Question 57

In the financial strategy framework, financial requirements are driven by all of the following except:

A) Burn rate
B) Operating needs
C) Time to close
D) Asset requirements and sales
E) All of these

Question 58

What leads and drives the financial strategy framework?

A) Financial requirements
B) Opportunity
C) Sources and deal structures
D) Financial strategy
E) Value creation

Question 59

What is the prevailing financial mindset and strategy among highly successful entrepreneurs?

A) Fund raising
B) Forecasting
C) Creating long-term value
D) Maximizing quarterly earnings
E) Think profits first and expenses second

Question 60

A start-up can obtain loans through which of the following?

A) Suppliers
B) Manufacturers
C) Business Development Bank of Canada
D) Suppliers and Business Development Bank of Canada
E) All of the answers are correct

Question 61

What are the three central issues in entrepreneurial finance?

Question 62

What is the best way for an entrepreneur to learn about the reputation of a particular venture capital firm?

Question 63

Discuss the premise behind fund-raising strategies of the successful entrepreneur.

Question 64

What is meant by the following, and why are these important: cover your equity; angels; venture capital; valuation; due diligence; IPO; mezzanine; private placement; and ESOP?

Question 65

What is meant by free cash flow, and why do entrepreneurs need to understand this?

Question 66

What do early-stage entrepreneurs need to look for in an investor?

Question 67

What are the three central issues that should be considered when beginning to think about obtaining risk capital?

Question 68

Give an example of an important asset that would not appear on a balance sheet.

Question 69

What funding structure provides a sound financial foundation for growth without excessive dilution of an entrepreneur's equity?

Question 70

Explain why financial ratios are misleading when applied to most private entrepreneurial companies.

Question 71

Describe the stages in the venture capital fund investing process, including fund formation and adding value to investments.

Question 72

If pushed by a promising investor to indicate what other firms/angels you are talking to, you should:

A) Respectfully decline
B) Reveal only the strongest other prospects
C) Reveal only prospects that have co-invested with the prospective investor
D) Be up front and tell them what they want to know
E) Either respectfully decline or be up front and tell them what they want to know, depending upon the situation

Question 73

What are the three core principles of entrepreneurial finance?

Question 74

What is the average number of hours that a venture capitalist will spend conducting due diligence on a promising venture?

A) 25
B) 60
C) 120
D) 400
E) 600-800

Question 75

What is the standard form of organization for a venture capital fund?

A) Alliances
B) Limited partnership
C) Corporation
D) Cooperatives
E) The organization structure varies widely across the industry

Question 76

Name three non-monetary capabilities a venture capitalist brings to an investment.