Chapter 14 - Chapter 14 1 What are venture capital firms...

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Chapter 14: 1. What are venture capital firms? And what characteristics do they seek in their investments? Answer: A venture capital firm is a specific type of financial intermediary that has a unique organizational structure and a specific market niche. Venture capital firms tend to seek out young companies with the potential for rapid and substantial growth and companies that require a substantial amount of capital investment to finance growth. Venture capital fills the gap between early-stage private investment by the entrepreneur, their friends and business angels, and the established-company market for public capital or private corporate acquisition. Venture capital firms provide both financing and managerial help. 2. Institutional investors, such as endowments, pensions, and insurance companies provide a significant fraction of investment capital to venture capital funds. What factors contribute to their choice to make such investments? Answer: Venture investing is a long-term proposition that exposes the investor to illiquidity. Until the investment is harvested, by IPO or other means, there is no convenient means to achieve liquidity. Because institutional investors have long-term investment horizons and large portfolios of more liquid assets, the lack of liquidity is not as significant a problem as for other types of investors. Also, institutions fit the profile of investors who can be trusted to contribute capital on schedule and who are not very sensitive to the timing of distributions. As a result, compared to other investors, institutions view venture capital investing as more attractive relative to alternatives. 3. “Managing a fund with multiple closings gives rise to opportunism.” True, false, or uncertain? Explain. Answer: Multiple closings may enable investors to get into the fund at different times, existing investors would not want new investors to buy into existing successes at low prices, and prospective investors would not want to buy into existing failures at high prices. 4. Why does the prospect of multiple closings increase the importance of an accurate valuation of the fund’s existing portfolio? Answer: The concern is with opportunism, where an earlier-stage investor may try to take advantage of later-stage investors, and vice versa. Hence, to abate these problems, ownership claims need to be based on accurate valuations. Alternatively, the fund manager can try to address potential opportunism by segregating existing and new investment by forming separate venture funds for each.
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5. Provide examples of how venture capitalists can add value to new ventures. Do you think they add enough value to justify their compensation?
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Chapter 14 - Chapter 14 1 What are venture capital firms...

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