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Venture Capital Midterm Exam Key Terms (Ch. 1-9) fully solved
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Venture Capital Midterm Exam Key Terms (Ch. 1-9) fully solved
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Venture Capital Midterm Exam KeyTerms (Ch. 1-9)
venture capital - correct answer ✔✔Capital used by specialized financial intermediaries for investment in
private companies with the intention of helping these companies to grow.
venture capitalists - correct answer ✔✔Financial intermediaries who invest in and monitor private
companies with the intention of helping these companies to grow.
screening - correct answer ✔✔The activities of analyzing companies, performing due diligence, and
making investment decisions.
monitoring - correct answer ✔✔The collection of VC activities to watch over and help portfolio
companies.
exit - correct answer ✔✔This term has two related meanings. First, an exit refers to the sale or initial
public offering (IPO) of a portfolio company. Second, an exit refers to the sale of a VC's stake in a
portfolio company. These two definitions are not always the same (e.g., a VC usually must hold his stock
for at least six months after an IPO). Then, we have the paradox of an IPO "exit" followed by the VC "exit"
six months later.
financial intermediary - correct answer ✔✔Any economic actor that stands between a supplier of capital
and the real investment of that capital.
limited partner (lp) - correct answer ✔✔In a private equity fund, the limited partners provide the capital,
which is then invested by the general partner.
general partner (gp) - correct answer ✔✔The investment manager of a limited-partnership VC fund.
portfolio companies - correct answer ✔✔A company that has received VC investment and has not yet
been exited.
,small business investment companies (sbic) - correct answer ✔✔a type of privately-owned investment
company that is licensed by the Small Business Administration (SBA). Small business investment
companies supply small companies with both equity and debt financing. They provide a viable
alternative to venture capital firms for many small enterprises seeking startup capital.
initial public offering (ipo) - correct answer ✔✔A company's first sale of securities in public markets.
Historically, IPOs have been the most lucrative exits for VCs.
angel investors (angels) - correct answer ✔✔A wealthy individual that invests in young, growth
companies. An angel differs from a venture capitalist because the former is using her own money
alternative investments - correct answer ✔✔A diverse asset class that typically includes private equity,
real estate, and commodities. It provides an alternative to traditional investments, such as debt and
equity securities.
private equity - correct answer ✔✔In its broadest meaning, private equity includes all investments that
cannot be resold in public markets. In its more narrow meaning, private equity refers to a class of
investments, managed by private equity firms, which make investments in VC, leveraged buyouts,
mezzanine, or distress
strategic investing - correct answer ✔✔Investing with goals beyond the maximization of financial
returns.
corporate venture capital - correct answer ✔✔VC investment by corporations. Although traditional VC
seeks to maximize financial returns, corporate venture capital often mixes financial and strategic goals.
preboom - correct answer ✔✔In this book, the period before 1995.
boom - correct answer ✔✔As used in this book, the period between 1995 and 2000, inclusive
postboom - correct answer ✔✔In this book, the period since 2001.
, early-stage - correct answer ✔✔: The definitions of early stage, midstage (5 Expansion stage), and later
stage are imprecise. The NVCA definitions (Exhibit 1-5) indicate that this stage "provides financing to
companies completing development where products are mostly in testing or pilot production".
mid-stage (expansion) - correct answer ✔✔The NVCA definitions (Exhibit 1-5) indicate that "this stage
involves applying working capital to the initial expansion of a company. The company is now producing,
is shipping, and has growing accounts receivables and inventories. It may or may not be showing a
profit".
late-stage - correct answer ✔✔The NVCA definitions (Exhibit 1-5) indicate that "capital in this stage is
provided for companies that have reached a fairly stable growth rate; that is, companies that are not
growing as fast as the rates attained in the expansion stages".
mezzanine - correct answer ✔✔: This has two meanings within private equity—in both cases the
meanings rely on a generic definition of mezzanine as "middle". In the first meaning, mezzanine refers to
the "middle of capital structure", as in subordinated debt. This debt is typically purchased by specialized
mezzanine lenders in leveraged buyout transactions. In the second meaning, mezzanine refers to the
"middle of a company's development", as in the last private financing round before an IPO. This second
meaning of mezzanine has gone out of favor in recent years, with most investors substituting terms like
growth capital, expansion stage, or late stage.
growth capital - correct answer ✔✔Capital used for VC investing beyond the early stage.
leveraged buyouts (LBOs) - correct answer ✔✔When a company is purchased using a significant amount
of debt.
distress investing (special situations) - correct answer ✔✔Investing in companies that have a significant
risk of going out of business
hedge funds - correct answer ✔✔Hedge funds comprise a wide class of investment vehicles, with
mandates that include virtually any strategy that can be imagined. Hedge funds differ from mutual funds
in that the former has much lighter regulation. Hedge funds differ from private equity funds in that the
former tends to focus mostly on publicly traded securities, although the distinctions between these
types of funds has blurred somewhat in recent years. With more liquid investments, hedge funds
typically have much shorter lockup periods for investors than do private equity funds.
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