Question 1

A/An ________ is a private, for-profit organization that purchases equity positions in young businesses that will potentially produce returns of 300 to 500 percent over five to seven years.
A) commercial bank
B) venture capital company
C) angel
D) SB-1 filing

Accepted Answer

A venture capital company is specifically designed to invest in high-risk, high-reward startups with the potential to earn significant returns. The other options are not as directly related to equity investments in young businesses. A commercial bank may provide loans or other financial services to small businesses, but they typically do not hold equity positions. An angel investor is an individual who provides financial support to startups, but they are not necessarily for-profit organizations. And an SB-1 filing is a type of registration statement that companies file with the SEC when going public, and it is not directly related to venture capital investments.

Question 2

Entrepreneurs needing between $100,000 and $3 million in the current financial environment will likely find acquiring financing to be:
A) challenging.
B) confusing.
C) attainable.
D) easy.

Accepted Answer

Acquiring financing can be challenging for entrepreneurs needing between $100,000 and $3 million in the current financial environment due to stricter lending criteria, increased risk aversion among lenders, and economic uncertainty caused by the COVID-19 pandemic.

Question 3

A method of raising capital that taps the power of social networking and allows entrepreneurs to post their elevator pitches and proposed investment terms on specialized Web sites and raise money from ordinary people who invest as little as $100 is called:
A) crowd funding.
B) angel financing.
C) venture capital.
D) bootstrapping.

Accepted Answer

The method described in the question is known as crowdfunding, where entrepreneurs seek small contributions from a large number of people, typically through online platforms. Angel financing refers to high net worth individuals providing funding in exchange for equity in the company. Venture capital involves investors providing large sums of capital to high-growth potential startups in exchange for equity. Bootstrapping refers to starting and growing a business with little to no outside funding.

Question 4

The primary disadvantage of equity capital is that the entrepreneur:
A) must repay it at some point with interest.
B) must give up some-perhaps most-of the ownership in the business to outsiders.
C) experiences the disadvantage of the risk/return tradeoff in the form of higher interest rates.
D) B and C above

Accepted Answer

Giving up ownership in the business is a significant disadvantage of equity capital, as it means the entrepreneur may lose control over decision-making and may have to share profits with others. While equity capital does not require repayment with interest, it also does not offer the security of a loan or the predictable cost of debt financing. The risk/return tradeoff is also not strictly relevant to equity capital, as it pertains to investments rather than financing. Therefore, option D is incorrect.

Question 5

Which of the following represents capital?
A) Inventory
B) Equipment and machinery
C) Cash
D) All of the above

Accepted Answer

The answer of Which of the following represents capital?
A) Inventory
B)...

Question 6

The Kauffman Foundation reports that the average amount of capital that entrepreneurs use to start small businesses in the U.S. is nearly:
A) $25,000.
B) $50,000.
C) $80,000.
D) $100,000.

Accepted Answer

The answer of The Kauffman Foundation reports that the average...

Question 7

The first place an entrepreneur should look for startup capital is:
A) a bank.
B) a venture capitalist.
C) the Small Business Administration.
D) his own savings.

Accepted Answer

The best choice for startup capital is typically one's own savings, as it allows the entrepreneur to retain full ownership and control of the company without accruing debt or giving up equity. While banks, venture capitalists, and the Small Business Administration may also offer funding options, they often come with additional requirements, restrictions, or costs that can be burdensome for a new business.

Question 8

Venture capitalists look for ________ as the most important ingredient in the success of any business.
A) innovation
B) a growth industry
C) a competitive edge
D) competent management

Accepted Answer

While all of the options listed are important, competent management is most crucial for venture capitalists as they need assurance that the company they are investing in has a leadership team that can execute on the business plan and navigate challenges. Without competent management, even the most innovative or competitive businesses may struggle to succeed.

Question 9

The primary advantage of equity capital is:
A) its lower interest rate.
B) that it is readily available to a large number of entrepreneurs from a variety of lenders.
C) that it does not have to be repaid like a loan does.
D) that it does not appear on a company's balance sheet.

Accepted Answer

The primary advantage of equity capital is that it does not have to be repaid like a loan does. Instead of being paid back with interest, investors in the company receive a share of the ownership and potential profits. This can be beneficial for entrepreneurs who do not want to take on additional debt, or who may not have the ability to repay a loan.

Question 10

Although there is no limit on the amount of stock it can buy, a typical venture capital firm will purchase less than ________ percent of the ownership in a small firm.
A) 21
B) 50
C) 70
D) 80

Accepted Answer

A typical venture capital firm will purchase less than 50% of the ownership in a small firm. This is because they usually invest in early-stage companies and want to leave enough ownership for the founders to stay motivated and committed to the business. Buying too much ownership may also limit the founders' ability to raise additional funding in the future.

Question 11

Angels are an excellent source of ________ money, often willing to wait ________ years or longer to cash out their investment.
A) immediate; 5
B) patient: 7
C) long-term; 10
D) passive; 20

Accepted Answer

Angels are known for their patience and willingness to invest for the long-term, often waiting for 7 years or more before seeking a return on their investment. Option A is incorrect as immediate money is not typically associated with angel investments. Option C is partially correct, but 10 years is not a set timeline for angels and could be longer or shorter. Option D is incorrect as passive money implies an inactive investment, whereas angels are often very involved in the companies they invest in.

Question 12

Unlike entrepreneurs of the past, today's entrepreneurs:
A) are finding more government interest and funding for business start-ups than in the past decade.
B) find fewer closed doors as small business start-ups have become less risky.
C) have to piece their capital together from several sources.
D) are spending a smaller percentage of their time raising capital for their businesses.

Accepted Answer

Today's entrepreneurs have to piece their capital together from several sources, as traditional sources of funding such as banks are less likely to lend to small businesses. While there may be some government interest and funding available, it is often limited and competitive. Small business start-ups are still considered risky, so entrepreneurs may need to rely on personal savings, crowdfunding, and other alternative sources to gather enough capital to launch their businesses. As a result, raising capital can still be a significant challenge and time-consuming process for modern entrepreneurs.

Question 13

Before entering into any partnership arrangement, entrepreneurs must consider:
A) the partnership will only have an impact on sharing profits.
B) what interest rate the partner is expecting.
C) the impact of giving up some personal control and sharing profits with others.
D) the ramifications of having another person on the payroll.

Accepted Answer

Entrepreneurs must consider the impact of giving up some personal control and sharing profits with others before entering into any partnership arrangement. This is a crucial element in any partnership and requires careful consideration. Factors such as decision-making, workload distribution, and financial contributions all need to be addressed beforehand. It is not just about sharing profits, but also about sharing responsibility and accountability in running the business. The other options mentioned, such as interest rates and having another person on the payroll, may be important but are not the primary concerns in forming a partnership.

Question 14

The average venture capital firm screens about ________ investment proposals each year and ultimately invests in ________ of them.
A) 10,000; 12
B) 1,000; 1
C) 5,000; 13
D) 5,000; 80

Accepted Answer

The answer of The average venture capital firm screens about...

Question 15

When searching for capital to launch their companies, entrepreneurs should remember several "secrets" to successful financing. Which of the following is not one of those secrets?
A) Choosing the right sources of capital can be just as important as choosing the right form of ownership or the right location.
B) The money is out there, but the key is knowing where to look.
C) Creativity counts when searching for financing.
D) Raising money should not take very long; therefore, if it does not come quickly, it probably will not come at all.

Accepted Answer

Raising money for a startup can often be a lengthy and challenging process, and it may take longer than expected to secure enough funding. It's important not to give up too soon or assume that if funding doesn't come quickly, it won't come at all.

Question 16

The largest single source of external equity capital for small businesses is:
A) angels.
B) venture capitalists.
C) Small Business Administration loans.
D) the stock market; i.e., "going public."

Accepted Answer

According to research, angels (wealthy individuals who invest in early-stage businesses) are the largest single source of external equity capital for small businesses. They typically invest smaller amounts of funding than venture capitalists, but they are more likely to invest in riskier ventures and offer more personalized support and guidance to entrepreneurs. Small Business Administration loans and "going public" are not as common or feasible for most small businesses.

Question 17

When looking for an angel, the key is:
A) networking.
B) waiting until you need the money.
C) looking across industries.
D) using computer matches.

Accepted Answer

Networking is crucial in finding an angel investor as they often invest based on recommendations and referrals from trusted sources. Building relationships with individuals in your industry and attending relevant events can increase your chances of connecting with potential angels.

Question 18

Entrepreneurs are most likely to give up more equity in their businesses in the ________ phase of their companies than in any other.
A) startup
B) product development
C) product testing
D) product shipping

Accepted Answer

At the startup phase, entrepreneurs are typically seeking funding to get their business off the ground and may need to give up a larger portion of equity in order to secure investment. As the company progresses into later phases such as product development, testing, and shipping, the need for outside funding may decrease and the entrepreneurs may have more leverage in negotiations with investors.

Question 19

The general trend of angel financing is that it has ________ as a source of capital for entrepreneurs over the past 9 years.
A) increased
B) stabilized
C) decreased
D) disappeared

Accepted Answer

According to the information provided, the general trend of angel financing has increased as a source of capital for entrepreneurs over the past 9 years.

Question 20

Which of the following is not a characteristic of a typical angel investor?
A) Investing money locally
B) Purchasing majority ownership in the company
C) Investing in the startup phase of the company
D) Willing to wait seven years or more to cash out an investment

Accepted Answer

Angel investors typically invest in the startup phase of a company, invest locally, and are willing to wait several years to cash out their investment. However, they usually do not purchase majority ownership in the company, as they prefer to have a minority stake and not interfere with the founder's vision and decision-making.

Quiz 13: Sources of Financing: Debt and Equity

A/An ________ is a private, for-profit organization that purchases equity positions in young businesses that will potentially produce returns of 300 to 500 percent over five to seven years.

Entrepreneurs needing between $100,000 and $3 million in the current financial environment will likely find acquiring financing to be:

A method of raising capital that taps the power of social networking and allows entrepreneurs to post their elevator pitches and proposed investment terms on specialized Web sites and raise money from ordinary people who invest as little as $100 is called:

The primary disadvantage of equity capital is that the entrepreneur:

Which of the following represents capital?

The Kauffman Foundation reports that the average amount of capital that entrepreneurs use to start small businesses in the U.S. is nearly:

The first place an entrepreneur should look for startup capital is:

Venture capitalists look for ________ as the most important ingredient in the success of any business.

The primary advantage of equity capital is:

Although there is no limit on the amount of stock it can buy, a typical venture capital firm will purchase less than ________ percent of the ownership in a small firm.

Angels are an excellent source of money, often willing to wait years or longer to cash out their investment.

Unlike entrepreneurs of the past, today's entrepreneurs:

Before entering into any partnership arrangement, entrepreneurs must consider:

The average venture capital firm screens about investment proposals each year and ultimately invests in of them.

When searching for capital to launch their companies, entrepreneurs should remember several "secrets" to successful financing. Which of the following is not one of those secrets?

The largest single source of external equity capital for small businesses is:

When looking for an angel, the key is:

Entrepreneurs are most likely to give up more equity in their businesses in the ________ phase of their companies than in any other.

The general trend of angel financing is that it has ________ as a source of capital for entrepreneurs over the past 9 years.

Which of the following is not a characteristic of a typical angel investor?