1. What level of involvement will a venture capital firm typically have?
- None; their investment is passive
- Very active; a venture capital team member will be on site daily
- Somewhat active; weekly visits to the target company
- No day to day involvement; involvement through participation in the board of directors only
2. How are the investments in a venture capital firm structured typically?
- As limited partners
- As shareholders
- As a limited liability company
- No formal structure agreements are needed
3. What is a sweeper clause?
- It is a clause that requires that the books of the company be kept clean and free of fraud.
- It is a clause that requires the attendance of three management personnel at all meetings.
- It is a clause that allows the venture capitalist to make requests for financial information from the company from time to time.
- It is a clause that allows the venture capitalist not to attend meetings.
4. When investigating the target market of the potential investment, what will the venture capitalists focus on specifically?
- The pricing of the product
- The Intellectual Property and any competitors with similar IP
- The customer base, the competition, and the opportunity in the market space
- Location of competition
5. What do veto rights allow the venture capitalist to do?
- Call board meetings at any point
- Require liquidation within 30 days
- Overturn decisions made by the company directors
- Fire the management
6. What are the “conversion rights”, typically stated on a term sheet?
- They are terms that allow a venture capitalist to sell off their stock at any point.
- They are terms that stipulate that the venture capitalists can convert their preferred shares into common shares which will be more easily liquidated.
- They are terms that allow the target company to surrender more equity to the venture capitalist if the venture is growing quickly.
- They are terms that prevent anyone from selling stock for the first three years.
7. What is meant by the right to “observer rights”?
- The venture capitalist doesn’t have to come to the board meetings
- The venture capitalist can bring in an observer, who can not vote, to the board meeting
- The company is only allowed to watch board meetings, and not to participate
- The company management is required to be present at all board meetings
8. What purpose do milestones serve in the term sheet?
- They protect the target company in case they don’t perform well.
- They prevent outsiders from investing until specific goals are met.
- They force the management to make decisions they would not want to make otherwise.
- They stipulate the goals the target company has to meet in order to receive subsequent amounts of funding.
9. What is the main reason why a venture capitalist does its own evaluation of a target company’s projected financials?
- Due to their lack of trust in the target company
- To check that assumptions are reasonable and the model covers all aspects of the company
- To see if there’s potential for even more revenue
- To spot check for formula errors
10. How often do venture capital firms change the investments within their portfolios, on an average?
- Often, several times a year
- Every three to five years
- Almost never
11. What role do the investors play in a venture capital firm?
- That of investment screeners
- That of managing directors
- That of advisors
- That of due diligence experts
12. What is the importance of the intellectual property (IP) which venture capitalists focus heavily on?
- Companies with no IP will never succeed
- Companies who have IP may be competing against firms with similar IP
- Venture capitalists want to make sure the company is not at risk of being sued over the IP
- IP can be a key deciding factor, as the target company’s success or failure may hinge on the IP they own
13. When was the largest burst of activity in the venture capital industry witnessed?
- In the 1960s
- In late 2000s
- In mid 2000s
- In early 2000s
14. What does an exit effectively do?
- It allows the investor to put more money into a company to get a better return.
- It makes everyone involved rich.
- It determines the value of the company at the given point.
- It allows the venture capitalist to sell their equity in some fashion, either on the stock market, or to the owners, or to the new owners.
15. What is meant by Post-money valuation?
- It is the expected value of the company after it has received the venture capital investment.
- It is the expected value of the company before it has received the venture capital investment.
- It is the expected value of the company after five years.
- it is the expected value of the company once the venture capitalist exits the company.
16. When will the venture capitalist show the most active involvement with the company post funding?
- At the beginning, offering direction and guidance
- After a year, when the company begins to grow
- Towards the exit point
- Throughout the process
17. What does “deal syndication” on the term sheet address?
- It prevents outsiders from investing at all.
- It discusses what happens in the event the company fails to execute.
- It allows venture capitalists to merge two or more of their investments into one company.
- It discusses the process required for additional investors to invest in the target company.
18. What is the purpose of having portfolios?
- To segregate investments into specific categories with similar criteria
- To deal with tax implications
- To rule out potential investments
- To meet the requirements of the SEC
19. What has been the largest area which venture capitalists have been actively investing in for the last decade?
- Local government municipalities, such as utilities
- Small businesses such as a brick and mortar store, or a coffee shop
- Professional services industries, such as lawyers and accountants
- Internet based companies, such as an e-commerce site
20. What are the typical returns a venture capital firm expects when exiting from a successful investment?
- At least 10 times their original investment
- The market interest rate, compounded annually
- Double their investment
- Enough to break even and hold on to some equity
21. What is meant when a venture capitalist talks about the “burn rate”?
- The interest rate they expect to earn on their investment
- How quickly a target company may burn out, or fail
- The monthly amount of cash spent on an average by a target company, which can then be used to calculate how far investment dollars will take the company
- How quickly the management team members are phased out
22. What role do committees play?
- They act as specialized arms of the board to address specific topics such as Human Resources or Accounting and Finance Matters.
- They are at a higher level than the board, and are called in to make decisions when the board can not agree.
- They are the key management personnel in the company.
- They are formed to organize things such as employee birthday parties.
23. What would be the attraction of offering a debt round to a target company?
- It can earn more money than equity when the company performs well.
- It is easier to sell off debt.
- It limits how well the management has to perform.
- It is less risky, gives the right to demand repayment, and earns interest.
24. Which of the following would be a possible portfolio for a venture capital firm?
- High tech, Entertainment, E-commerce, Food and Beverage
- High Risk, Low Risk, Zero Risk
- Local, National, Global
- Equity, Bonds, Debt, Convertible Debt
25. What protection do investors in a venture capital fund have?
- They are guaranteed at least a 3% return on the investment.
- They are guaranteed to double their money within one year.
- There is no protection. They are not guaranteed a return on their investment, and it is made very clear that investing in new ventures is risky.
- There is no protection. They are told that they may lose their money, but most likely, they will make a lot of money.
26. What is meant by “exit strategy”?
- It is how the venture capitalist plans to merge with another venture capitalist.
- It is how the target company is planning to liquidate all investors and give them a return for their investment.
- It is how the target company plans to fire key personnel.
- It is how the target company plans to exit their target markets if they are not successful.
27. What options does a venture capitalist have when holding convertible debt?
- They can choose immediately if they want debt or equity.
- They can convert back and forth between debt and equity depending on which is more beneficial.
- They can sell off some of the debt before converting the rest to equity.
- They can keep their investment as debt, or convert to equity given some predetermined circumstances have occurred.
28. How much in funding, in general, will an investor want to invest?
- Enough to allow the company to survive for three years
- Enough to cover management salaries
- Enough to allow the company to reach traction and prove their business model, regardless of time line
- One year’s operating expenses
29. What is a “first round” investment?
- An investment in a company which is at the idea stage
- An investment in a company which is early in its growth, typically one generating some revenue
- An investment in a company where the venture capitalist is the very first investor
- An investment in a company in its first year
30. What is the term sheet used for once it is agreed upon and signed?
- It is the legally documented agreement between the venture capitalist and the target company.
- It is used as an outline for the legal team to draw up the official legal agreement between the venture capital firm and the target company.
- It is a guideline for future operations.
- It is similar to a business plan for the upcoming year.
31. Which of the following would be considered an exit strategy?
- Making a private company public via an initial public offering
- Bringing in additional investors
- Firing the management to bring in a more experienced management
- Converting debt to shares
32. What is the primary source of a venture capital firm’s funding?
- The venture capital firm invests its own equity in other companies.
- The partners of the venture capital firm invest individually.
- The money is raised through the stock market for the purpose of investing it in companies.
- Other companies invest in the venture capital firm which then invests in new ventures.
33. What is the overall venture capital portfolio expectation?
- That ten out of ten companies will be huge successes
- That all the ten will perform satisfactorily
- That five of the ten will succeed, five will fail
- That out of every ten companies invested in, at least one will be a tremendous success, at least five will fail completely, and the other four will break even or be marginally successful
34. When is the due diligence process done?
- After the initial engagement, but before the completion of the deal
- Before getting engaged with the potential target investment
- As a final step before the deal is completed
- The target investment company would do this before approaching the venture capitalist
35. What is the main difference between equity and debt?
- Equity represents ownership, debt represents a loan to the company.
- Debt represents steady earnings, equity represents up and down earnings.
- Debt can be secured by assets but equity can not be.
- Debt is easier to sell than equity.
36. What does a venture capitalist look like to its investors, based on the way it operates?
- A stock broker
- A mutual fund
- An investment bank
- An options trader
37. What role does “valuation” play in selecting the most appropriate investment areas?
- Valuation gives the venture capitalist a definite value of the target in five years.
- Valuation doesn’t matter as much as the management team.
- Valuation is the target company’s expected value at some point in the future, typically five years, and helps the venture capitalist see the potential.
- Valuation helps the venture capitalist decide which portfolio to place the target company in.
38. What is the typical process overview?
- Submission of Business Plan, Term Sheet, Due Diligence, Legal Closing
- Term Sheet, Submission of Business Plan, Legal Closing
- Evaluation, Due Diligence, Legal Closing, Business Plan Review
- Screening, Kick off Meeting, Evaluation, Initial Due Diligence, Negotiation of Terms, Due Diligence, Legal Closing
39. What is meant by the “anti-dilution rights”, often found on a term sheet?
- Terms that guarantee a specific return on investment
- Terms that restrict the target company to no more than three founders owning stock
- Terms that protect the venture capitalist from dilution of their investment by the target company by offering subsequent investments at lower valuations to other investors
- Terms that prevent original owners from having more stock than the venture capitalist
40. What is the first step in the process between the target company and the venture capitalist?
- The venture capital firm will look online for companies who are looking for capital.
- The venture capital firm holds monthly open casting calls for potential companies.
- The target company contacts the venture capitalist to introduce the opportunity.
- The target company mails the venture capital firm a full business plan and due diligence package.
41. How long does the initial due diligence process last?
- 4 to 6 weeks
- 1 to 2 weeks
- 10 to 12 weeks
- Any duration from 1 week to a year
42. When does the target company actually receive the investment?
- Mid way through the process
- Usually within two weeks from the start of the process
- After the legal closing, on a stipulated closing date
- They never receive the full amount and have to request disbursements weekly
43. What is the minimum that a venture capitalist would expect at the monthly board meeting?
- Detailed financial statements, explaining the expenses line by line
- That the company invested in is meeting the goals stipulated in the negotiation process, and if not, has an action plan to rectify
- An exciting presentation by the CEO
- Meeting with individual employees
44. Does a venture capital exit have any negative impact on the original founders of the company?
- Yes; it will definitely drive down the value of the company.
- Typically no; the exit just means the end of a successful relationship.
- Yes; the employees will question why the venture capitalist is now exiting.
- No; it will usually bolster the stock price.
45. What is meant by “screening” in the investment process?
- Online submission of the business plan by the target company
- Initial examination of the potential investment by the venture capitalist to see whether it fits in their portfolio
- The meet and greet meeting held after the venture capitalist has expressed interest in the target company
- Examination of the target company by the legal team
46. What is the attraction of convertible debt to a venture capitalist?
- It allows them to gain more control over the firm.
- It gives them the potential to hold debt or equity, depending on how the firm grows and what will be most profitable.
- It allows them to liquidate more easily.
- It limits any risk.
47. What is the average size of a venture capitalist’s investment in a target company?
- From 1 million to 50 million dollars
- From 100 thousand to 1 million dollars
- At least 50 million dollars
- There is no limit
48. What is a Term Sheet?
- It is a document which stipulates the term of the investment.
- It is a document which the company receiving funding prepares, stating what their expected revenues for the upcoming years are.
- It is another term for “executive summary”.
- It is a document which stipulates the venture capital firm’s terms for the investment, such as the amount they will invest, the percentage of equity they require in exchange for the investment, and their expectations of the company they are investing in.
49. Which of the following would be a red flag for a venture capitalist?
- No one else has entered the market space.
- All the members of the management team come from different backgrounds.
- Several competitors have entered and left the market due to low traction.
- The company hasn’t yet talked to other venture capitalists.
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