Chapter 10 Getting Financing or Funding
1) inDinero, the company profiled in the opening feature for Chapter 10, is described by its
cofounders as "the fastest way for small businesses to manage their finances." Which of the
following is not true about inDinero's founding story?
A) In 2009, inDineor's founders applied to TechStars, which is a Boulder, CO-based seed-stage
fund/incubator, and were turned down.
B) The idea for inDinero originated in mid-2009 while its cofounders were still in college.
C) In April 2010, the founders of inDinero applied to Y Combinator, an organization that
provides seed-stage funding, mentorship, and networking opportunities to participants, and were
turned down.
D) inDinero reportedly has over 15,000 users .
E) In late 2009 and early 2010, the founders of inDinero tried to raise angel funding and were
unsuccessful.
Answer: C
Rationale:
According to the question, the statement that is not true about inDinero's founding story is C.
This is because it claims that inDinero's founders applied to Y Combinator in April 2010 and
were turned down, which is false. The correct statement should be that they applied to TechStars
and were turned down.
2) According to the textbook, many entrepreneurs go about the task of raising capital
haphazardly because:
A) they are uncomfortable talking about money and they haven't written a business plan
B) they lack experience in this area and because they don't know much about their choices
C) they are focused on the nuts and bolts of starting their business
D) they haven't completed a feasibility analysis or business plan
E) they are intimidated by the process and they are unsure of how much money they need
Answer: B
Rationale:
The correct answer is B because it explains that many entrepreneurs raise capital haphazardly
due to their lack of experience in this area and their limited knowledge about their choices. This
suggests a lack of understanding or preparation regarding the fundraising process.
3) Kimberly Jones is the founder of a company in the medical equipment industry. Kimberly's
firm is still in the feasibility analysis stage and doesn't have a product that is ready to sell. The
company is spending about $25,000 per month and expects to maintain that level of spending
until it reaches profitability. The $25,000 a month is Kimberly's:
A) consumption rate
B) utilization rate
C) burn rate
D) usage rate
E) liquidity rate
Answer: C
Rationale:
The correct term for the $25,000 a month that Kimberly's firm is spending is "burn rate," which
refers to the rate at which a company is spending its capital before it starts generating positive
cash flow from operations.
4) The three reasons startups need funding are:
A) cash flow challenges, capital investments, and lengthy product development cycles
B) business research, cash flow challenges, and costs associated with building a brand
C) bonuses for members of the new venture team, attorney fees, and lengthy product
development cycles
D) attorney fees, capital investments, and marketing research
E) bonuses for members of the new venture team, marketing research, and personnel costs
Answer: A
Rationale:
The correct answer is A because it lists three common reasons why startups need funding: cash
flow challenges (to cover operating expenses before revenue is generated), capital investments
(to purchase assets and invest in growth), and lengthy product development cycles (to fund the
creation and refinement of products/services).
5) In startup firms, inventory must be purchased, employees must be trained and paid, and
advertising must be paid for before cash is generated from sales. Which of the following reasons
that motivate firms to seek funding or financing is illustrated in this example?
A) cash flow challenges
B) marketing costs
C) personnel costs
D) capital investments
E) lengthy product development cycles
Answer: A
Rationale:
The correct answer is A because the example illustrates the need for funding to cover cash flow
challenges, which arise when expenses must be paid before revenue is generated from sales.
6) For startup firms, the cost of buying real estate, building facilities, and purchasing equipment
often exceeds the firm's ability to provide funds for those needs on its own. Which of the
following reasons that motivate firms to seek funding or financing is illustrated in this example?
A) lengthy product development cycles
B) costs associated with building a brand
C) cash flow challenges
D) capital investments
E) personnel costs
Answer: D
Rationale:
The correct answer is D because the example highlights the need for funding to cover capital
investments, such as purchasing assets and facilities, which are essential for the startup but may
exceed the firm's initial resources.
7) Peter Simmons owns an electronic games company. Although Peter's game designers and
programmers are very good, it takes 2-3 years to develop a good electronic game. This example
illustrates the need for funding or financing referred to as:
A) personnel costs
B) marketing costs
C) costs associated with building a brand
D) lengthy product development cycles
E) cash flow challenges
Answer: D
Rationale:
The correct answer is D because the example demonstrates the need for funding to support
lengthy product development cycles, which require sustained investment over a period of time
before a product is ready for market.
8) For startup firms, some products are under development for years before they generate
earnings. The upfront costs often exceed a firm's ability to fund these activities on its own.
Which of the following reasons that motivate firms to seek funding or financing is illustrated in
this example?
A) cash flow challenges
B) marketing costs
C) capital investments
D) personnel costs
E) lengthy product development cycles
Answer: E
Rationale:
The correct answer is E because the example shows the need for funding to support lengthy
product development cycles, where upfront costs exceed the firm's ability to fund these activities
until the product generates earnings.
9) According to our textbook, the seed money that gets a company off the ground typically
comes from:
A) angel investors
B) venture capitalists
C) commercial banks
D) governmental agencies
E) the founders of the firm
Answer: E
Rationale:
The correct answer is E because seed money, which is the initial capital used to start a business,
typically comes from the founders of the firm themselves, as they invest their own resources to
get the company off the ground.
10) Jason Graham's startup, which is in the electronics industry, was launched on January 1,
2009. However, prior to its formal launch, Jason spent many hours working on his business,
particularly during the feasibility analysis stage. The time and effort that entrepreneurs put into
their venture, that can't be easily measured from a financial point of view, is referred to as:
A) effort equity
B) intangible equity
C) sweat equity
D) worry equity
E) fret equity
Answer: C
Rationale:
The correct term for the time and effort that entrepreneurs put into their venture, which can't be
easily measured from a financial point of view, is "sweat equity." This represents the value that
the founders contribute through their hard work and dedication to the startup.
11) According to the textbook, beyond their own funds, the second source of funds for many new
ventures is:
A) government grants
B) business angels
C) friends and family
D) banks
E) venture capital
Answer: C
Rationale:
The correct answer is C because friends and family are often the second source of funds for
many new ventures after the founders' own funds. Friends and family are typically more willing
to invest in early-stage ventures than other types of investors.
12) Bill and Megan Tempelton are planning to open a smoothie restaurant near a large soccer
complex in Greeley, Colorado, and need $75,000 to get started. They have $15,000 of their own
money, which leaves $60,000. After getting turned down by a couple of banks, they decided to
turn to their relatives and acquaintances for help. Fortunately, they were able to raise the money
through a gift from Bill's grandfather, a loan from Megan's parents, and a small investment by
Bill's best friend in college, Kevin. The money that an entrepreneur raises in this manner is
referred to as:
A) friends and family
B) bootstrapping
C) networking money
D) compassion money
E) legacy money
Answer: A
Rationale:
The correct answer is A because the money raised from relatives and acquaintances in this
scenario is referred to as friends and family funding, which is a common source of early-stage
financing for entrepreneurs.
13) Amy Clark just opened a soup and salad restaurant near Golden Gate Park in San Francisco.
Rather than borrow money or raise funds from investors, Amy used her creativity and ingenuity
and figured out how to get her business up and running without the need for external funding.
Amy is utilizing a technique referred to as:
A) networking
B) reaching
C) scrounging
D) prospecting
E) bootstrapping
Answer: E
Rationale:
The correct answer is E because bootstrapping refers to the practice of starting a business with
minimal capital and finding creative ways to fund operations without external financing.
14) Which of the following was not identified in the textbook as a common (and sound)
bootstrapping strategy?
A) coordinate purchases with other businesses
B) hire interns
C) minimize personal expenses
D) buy rather than lease equipment
E) obtain payments in advance from customers
Answer: D
Rationale:
The correct answer is D because buying rather than leasing equipment is not typically identified
as a common bootstrapping strategy. In many cases, leasing equipment can be a more costeffective option for startups with limited capital.
15) Equity financing (or funding) means:
A) exchanging partial ownership in a firm, usually in the form of stock, for funding
B) getting a grant or outright gift
C) getting a loan
D) getting a lease
E) getting a loan guarantee
Answer: A
Rationale:
The correct answer is A because equity financing involves exchanging partial ownership in a
firm, usually in the form of stock, for funding, which provides investors with a stake in the
company's ownership and future profits.
16) Which of the following is not a source of equity funding?
A) initial public offering
B) angel investors
C) private placement
D) venture capital
E) government grants
Answer: E
Rationale:
The correct answer is E because government grants are not typically considered a source of
equity funding. Government grants are more akin to non-dilutive funding sources, as they do not
involve exchanging ownership in the company for funding.
17) Equity investors typically have a ________ investment horizon.
A) 1 to 3 year
B) 2 to 4 year
C) 3 to 5 year
D) 4 to 6 year
E) 5 to 7 year
Answer: C
Rationale:
The correct answer is C because equity investors typically have a 3 to 5 year investment horizon,
during which they expect to see a return on their investment through capital gains or other
means.
18) Which of the following statements is incorrect regarding equity funding?
A) Equity investors expect to get their money back, along with a substantial capital gain, through
the sale of their stock.
B) Angel investors are a common source of equity funding.
C) Equity funding is not a loan.
D) Equity investors are very demanding.
E) Equity investors fund the majority of the plans they consider.
Answer: E
Rationale:
The correct answer is E because it is incorrect to say that equity investors fund the majority of
the plans they consider. In reality, equity investors are selective and typically fund only a small
percentage of the plans they evaluate.
19) The three most common forms of equity funding are:
A) friends and family, venture capital, bank loans
B) SBIR grants, SBA guaranteed loans, bank loans
C) initial public offerings, business angels, venture capitalists
D) friends and family, business angels, bootstrapping
E) SBIR grants, venture capital, initial public offerings
Answer: C
Rationale:
The correct answer is C because the three most common forms of equity funding are initial
public offerings (IPOs), business angels (angel investors), and venture capitalists.
20) Which of the following set of characteristics places a startup in the strongest position to
apply for equity funding?
A) weak cash flow, high leverage, low-to-moderate growth, unproven management
B) strong cash flow, low leverage, audited financials, good management, healthy balance sheet
C) unique business idea, strong cash flow, low-to-moderate growth, broad market
D) strong cash flow, high leverage, low-to-moderate growth, unproven management
E) unique business idea, high growth, niche market, proven management
Answer: E
Rationale:
The correct answer is E because a startup with a unique business idea, high growth potential, a
niche market, and proven management is more likely to attract equity funding. These
characteristics indicate a strong potential for high returns on investment, which is attractive to
equity investors.
21) A brief carefully constructed statement that outlines the merits of a business opportunity is
called a(n):
A) subway speech
B) sway speech
C) bootstrap speech
D) teaser speech
E) elevator speech
Answer: E
Rationale:
The correct answer is E because an elevator speech is a concise and compelling summary of a
business idea that can be delivered in the time it takes to ride an elevator, typically around 30
seconds to 2 minutes.
22) The Partnering for Success feature in Chapter 10 focuses on TechStars and Y Combinator: A
New Breed of Start-Up Incubators. TechStars is headquartered in ________ while Y Combinator
is headquartered in ________.
A) the Silicon Valley, Chicago
B) Boulder, CO, New York City
C) Austin, TX, New York City
D) the Silicon Valley, Austin, TX
E) Chicago, Boulder, CO
Answer: B
Rationale:
The correct answer is B because TechStars is headquartered in Boulder, CO, and Y Combinator
is headquartered in New York City.
23) According to a study cited in the textbook, ________ of private companies meet the criterion
established by business angels for investment.
A) 2 percent to 4 percent
B) 10 percent to 15 percent
C) 18 percent to 30 percent
D) 32 percent to 48 percent
E) 60 percent to 70 percent
Answer: B
Rationale:
The correct answer is B because the study cited in the textbook indicates that 10 percent to 15
percent of private companies meet the criterion established by business angels for investment.
24) Which of the following statement is not correct regarding business angels?
A) Business angels invest in more startups on a yearly basis than venture capitalists.
B) The number of angel investors has decreased dramatically over the past decade.
C) Business angels usually take a seat on the board of directors of the firms in which they invest.
D) Business angels are valuable because of their willingness to make relatively small
investments.
E) Business angels are difficult to find.
Answer: B
Rationale:
The correct answer is B because the number of angel investors has not decreased dramatically
over the past decade. In fact, angel investing has been on the rise in recent years.
25) According to the textbook, the unique value provided by business angels is:
A) they are willing to make relatively large investments
B) they are willing to make relatively small investments
C) they require a fairly low rate of return on their money
D) they invest money but typically don't take a seat on a company's board of directors
E) they are easy to find
Answer: B
Rationale:
The correct answer is B because business angels are valuable for their willingness to make
relatively small investments in early-stage ventures, which can be critical for startups seeking
initial funding.
26) ________ are limited partnerships of money managers who raise money in "funds" to invest
in startups and growing firms.
A) Venture capital firms
B) Business angels
C) Institutional investors
D) Investment bankers
E) Business capitalists
Answer: A
Rationale:
The correct answer is A because venture capital firms are structured as limited partnerships
where money managers raise funds from investors to invest in startups and growing firms.
27) Venture capital firms are ________ of money managers who raise money in "funds" to
invest in startups and growing firms.
A) limited partnerships
B) finance associations
C) consortiums
D) collations
E) strategic partnerships
Answer: A
Rationale:
The correct answer is A because venture capital firms are structured as limited partnerships,
where money managers raise funds from investors to invest in startups and growing firms.
28) In 2010, venture capital firms funded ________ deals .
A) 800
B) 3,276
C) 1,265
D) 6,211
E) 7,255
Answer: B
Rationale:
The correct answer is B because in 2010, venture capital firms funded 3,276 deals, indicating a
significant level of investment in startups and growing firms.
29) According to a source cited in the textbook, venture capitalists anticipate that the percentage
of investments that will be home runs is about ________ or less.
A) 20 percent
B) 50 percent
C) 5 percent
D) 33 percent
E) 45 percent
Answer: A
Rationale:
The correct answer is A because venture capitalists anticipate that approximately 20 percent or
less of their investments will be highly successful, generating significant returns (home runs).
30) Once a venture capitalist makes an investment in a firm, subsequent investments are made in
rounds and are referred to as:
A) later funding
B) successive funding
C) subsequent backing
D) follow-on funding
E) ensuing backing
Answer: D
Rationale:
The correct answer is D because subsequent investments made by venture capitalists in a firm
after the initial investment are referred to as follow-on funding, which occurs in rounds as the
company grows and requires additional capital.
31) An important part of obtaining venture capital funding is going through ________, which
refers to the process of investigating the merits of a potential venture and verifying the key
claims made by the business plan.
A) appropriate diligence
B) fit diligence
C) due diligence
D) prior diligence
E) responsible diligence
Answer: C
Rationale:
The correct answer is C because due diligence is the process of investigating and verifying the
key claims made by a business plan to ensure the merits of a potential venture before making an
investment.
32) In regard to the stages (or rounds) of venture capital funding, the stage of funding that occurs
when an investment is made very early in a venture's life to fund the development of a prototype
and feasibility analysis is referred to as:
A) seed funding
B) second-stage funding
C) first-stage funding
D) mezzanine financing
E) startup funding
Answer: A
Rationale:
The correct answer is A because seed funding is the stage of funding that occurs very early in a
venture's life to fund the development of a prototype and feasibility analysis, helping to validate
the business idea.
33) The first sale of stock by a firm to the public is referred to as a(n):
A) original public submission
B) first unrestricted offering
C) preemptive initial offering
D) original open offering
E) initial public offering
Answer: E
Rationale:
The correct answer is E because an initial public offering (IPO) is the first sale of stock by a firm
to the public, marking the transition from private to public ownership.
34) A(n) ________ is an institution, such as Credit Suisse First Boston, that acts as an
underwriter or agent for a firm engaged in an initial public offering.
A) venture bank
B) statutory bank
C) fiduciary bank
D) investment bank
E) public bank
Answer: D
Rationale:
The correct answer is D because an investment bank is an institution that acts as an underwriter
or agent for a firm engaged in an initial public offering (IPO), helping to facilitate the offering
process.
35) As part of drumming up support for an IPO, the investment bank typically takes the top
management team of the firm wanting to go public on a ________, which is a whirlwind tour
that consists of meetings in key cities where the firm presents its business plan to groups of
investors.
A) pitch show
B) road show
C) pitch tour
D) road trip
E) tornado tour
Answer: B
Rationale:
The correct answer is B because a road show is a series of meetings in key cities where the top
management team of a firm wanting to go public presents its business plan to groups of
investors, organized by the investment bank.
36) Debt financing involves:
A) raising venture capital or securing a private placement
B) selling corporate bonds or selling stock via an IPO
C) getting a grant or selling corporate bonds
D) getting a loan or raising venture capital
E) getting a loan or selling corporate bonds
Answer: E
Rationale:
The correct answer is E because debt financing involves obtaining a loan or selling corporate
bonds to raise capital, which must be repaid with interest over time.
37) Historically, commercial banks:
A) have been a good source of funds for startup firms
B) have not funded startup firms at all
C) have been a good source of funds for manufacturing firm startups but not for service firm
startups
D) have been a good source of funds for service firm startups but not for manufacturing firm
startups
E) have not been a good source of funds for startup firms
Answer: E
Rationale:
The correct answer is E because historically, commercial banks have not been a good source of
funds for startup firms, as they tend to prefer lending to more established businesses with a
proven track record.
38) There are two major advantages of getting a loan versus investment capital:
A) the money doesn't have to be paid back and lenders typically take an active interest in their
borrowers
B) banks are reliable sources of funding for startups and interest payments are tax deductible
C) the money doesn't have to be paid back and no ownership in the firm is surrendered
D) no ownership in the firm is surrendered and interest payments are tax deductible
E) banks are reliable sources of funding for startups and lenders typically take an active interest
in borrowers
Answer: D
Rationale:
The correct answer is D because the two major advantages of getting a loan versus investment
capital are that no ownership in the firm is surrendered, and interest payments are tax deductible,
unlike dividends paid to equity investors.
39) The most notable SBA program available to small businesses is the:
A) SBA 1060 Guaranty
B) Code 604 Guaranty Program
C) 7(A) Guaranty Program
D) SBA 101 Program
E) Small Business 401 Program
Answer: C
Rationale:
The correct answer is C because the most notable Small Business Administration (SBA) program
available to small businesses is the 7(a) Guaranty Program, which provides loan guarantees to
lenders to encourage them to provide loans to small businesses.
40) According to a survey conducted by the National Small Business Association between
August 2008 and December 2009, between ________ percent of business owners utilized vendor
credit.
A) 12 and 18
B) 17 and 21
C) 22 and 29
D) 35 and 40
E) 52 and 58
Answer: C
Rationale:
The correct answer is C because according to the survey, between 22 and 29 percent of business
owners utilized vendor credit, highlighting its importance as a source of financing for small
businesses.
41) ________ is a financial transaction whereby a business sells its accounts receivable to a third
party at a discount in exchange for cash.
A) Factoring
B) Vendor credit
C) Peer-to-peer lending
D) Crowdfunding
E) Leasing
Answer: A
Rationale:
The correct answer is A because factoring is the process by which a business sells its accounts
receivable to a third party (factor) at a discount in exchange for immediate cash.
42) Prosper is the best known:
A) factor
B) provider of SBA guaranteed loans
C) peer-to-peer lending network
D) provider of vendor credit
E) crowdfunding network
Answer: C
Rationale:
The correct answer is C because Prosper is best known as a peer-to-peer lending network, where
individuals can lend money to other individuals or businesses through an online platform.
43) A(n) ________ is a written agreement in which the owner of a piece of property allows an
individual or business to use the property for a specified period of time in exchange for
payments.
A) assurance
B) loan
C) guarantee
D) warranty
E) lease
Answer: E
Rationale:
The correct answer is E because a lease is a written agreement where the owner of a property
allows another party to use the property for a specified period in exchange for periodic payments.
44) The major advantage of leasing is that:
A) it enables a company to have access to average or above average facilities and equipment
B) it enables a company to acquire the use of assets with little or no down payment
C) it is cheaper in the long run than purchasing
D) a lease agreement is easier to negotiate than a purchase agreement
E) it is easier to obtain credit on a lease than a purchase
Answer: B
Rationale:
The correct answer is B because one major advantage of leasing is that it allows a company to
acquire the use of assets with little or no down payment, preserving capital for other uses.
45) The ________ is a competitive grant program that provides over $1 billion per year to small
businesses for early-state and development projects.
A) SBTA Program
B) SBIR Program
C) SBAP Program
D) SAIR Program
E) SBTR Program
Answer: B
Rationale:
The correct answer is B because the SBIR (Small Business Innovation Research) Program is a
competitive grant program that provides over $1 billion per year to small businesses for earlystage and development projects.
46) Which "phase" of the SBIR Program is intended to demonstrate the proposed innovation's
technical feasibility?
A) Phase I
B) Phase II
C) Phase III
D) Phase V
E) Phase X
Answer: A
Rationale:
The correct answer is A because Phase I of the SBIR Program is intended to demonstrate the
technical feasibility of the proposed innovation through a small-scale research project.
47) The SBIR is a ________, meaning that firms that qualify have the potential to receive more
than one grant to fund a particular proposal.
A) two-phase program
B) three-phase program
C) six-phase program
D) nine-phase program
E) twelve-phase program
Answer: B
Rationale:
The correct answer is B because the SBIR Program is a three-phase program, and firms that
qualify have the potential to receive more than one grant to fund a particular proposal through
each phase.
48) The main difference between the SBIR and the STTR programs is that the STTR program
requires the participation of:
A) an attorney
B) a venture capitalist
C) researchers working at universities or other research institutions
D) a certified public accountant
E) a government agency in conducting the research
Answer: C
Rationale:
The correct answer is C because the main difference between the SBIR (Small Business
Innovation Research) and the STTR (Small Business Technology Transfer) programs is that the
STTR program requires the participation of researchers working at universities or other research
institutions.
49) Which of the following statements is incorrect about grant programs?
A) Granting agencies are very visible and well-known, so it's normally not hard to find one.
B) The federal government has grant programs beyond the SBIR and STTR programs.
C) It's important to avoid grant-related scams.
D) There are a limited number of organizations that offer new businesses grants.
E) There are private foundations that grant money to both existing and startup firms.
Answer: A
Rationale:
The correct answer is A because granting agencies are not always very visible and well-known,
and it can be challenging to find relevant grant opportunities for new businesses.
50) The What Went Wrong? feature in Chapter 10 focuses on GoCrossCampus, a company that
developed a strategy game in which students from opposing schools competed online to conquer
each other's campuses. Which of the following was not identified as one of the reasons that led to
GoCrossCampus's failure?
A) The company never generated the revenue it needed to be a viable ongoing business.
B) The fund-raising process was time-consuming.
C) Products were released quickly, and in some cases before they were ready.
D) Having five cofounders proved to be problematic.
E) The company was never able to raise investment capital.
Answer: E
Rationale:
The correct answer is E because the failure of GoCrossCampus was not due to the company's
inability to raise investment capital. Instead, the company faced challenges related to revenue
generation, product development, and team dynamics.
51) There are three reasons that most firms need to raise money during their early life: cash flow
challenges, capital investments, and lengthy product development cycles.
Answer: True
Rationale:
The statement is true. Most firms need to raise money during their early life to address cash flow
challenges, make capital investments, and support lengthy product development cycles.
52) Typically, the seed money that gets a company off the ground comes from a commercial
bank.
Answer: False
Rationale:
The statement is false. Typically, the seed money that gets a company off the ground comes from
the founders' personal funds, friends and family, or other sources like bootstrapping, rather than
from a commercial bank.
53) The vast majority of founders contribute personal funds along with sweat equity to their
ventures.
Answer: True
Rationale:
The statement is true. Most founders contribute their personal funds and sweat equity (effort and
time) to their ventures, especially in the early stages when external funding may be limited.
54) There are three common sources of "personal" financing for a startup firm: personal funds,
friends and family, and bootstrapping.
Answer: True
Rationale:
The statement is true. Personal funds, friends and family, and bootstrapping (using creativity and
ingenuity to obtain resources) are common sources of financing for startup firms.
55) Bootstrapping is the use of creativity, ingenuity, and any means possible to obtain resources
other than borrowing money or raising capital from traditional sources.
Answer: True
Rationale:
The statement is true. Bootstrapping involves using creativity and ingenuity to obtain resources
for a business without relying on borrowing money or raising capital from traditional sources.
56) The ideal candidate for a bank loan is a firm with a strong cash flow, low leverage, audited
financial statements, good management, and a healthy balance sheet.
Answer: True
Rationale:
The statement is true. A firm with a strong cash flow, low leverage, audited financial statements,
good management, and a healthy balance sheet is considered an ideal candidate for a bank loan
because it demonstrates financial stability and the ability to repay the loan.
57) Debt financing means exchanging partial ownership in a firm in exchange for cash.
Answer: False
Rationale:
The statement is false. Debt financing involves borrowing money that must be repaid with
interest, but it does not involve exchanging partial ownership in the firm.
58) Angel investors, private placement, venture capital, and initial public offerings are the most
common sources of equity funding.
Answer: True
Rationale:
The statement is true. Angel investors, private placement, venture capital, and initial public
offerings are among the most common sources of equity funding for businesses.
59) Venture capitalists are individuals who invest their personal capital directly in startups.
Answer: False
Rationale:
The statement is false. Venture capitalists are typically firms or groups that invest funds from
institutional investors, not individuals, directly in startups and growing companies.
60) The number of angel investors in the United States has decreased dramatically over the past
decade.
Answer: False
Rationale:
The statement is false. The number of angel investors in the United States has not decreased
dramatically over the past decade; in fact, it has remained relatively stable or even increased.
Angel investing continues to be an important source of funding for startups.
61) Most business angels remain fairly anonymous and are matched up with entrepreneurs
through referrals.
Answer: True
Rationale:
Business angels often prefer to remain anonymous and typically find entrepreneurs through
referrals from their network or through introductions from other investors or professionals.
62) Venture capital is money that is invested by venture capital firms in startups and small
businesses with exceptional growth potential.
Answer: True
Rationale:
Venture capital is a form of financing provided by venture capital firms to startups and small
businesses that have the potential for high growth and returns.
63) The percentage of the profits the venture capitalist gets is called the "carry."
Answer: True
Rationale:
The "carry" is the percentage of the profits that the venture capitalist receives as compensation
for managing the fund and making successful investments.
64) Venture capital involves getting a loan or selling corporate bonds.
Answer: False
Rationale:
Venture capital involves investors providing financing to startup companies and small businesses
that are believed to have long-term growth potential, in exchange for equity ownership in the
company.
65) Historically, commercial banks have been viewed as an excellent source of financing for
startup firms.
Answer: False
Rationale:
Historically, commercial banks have not been a preferred source of financing for startup firms, as
they often perceive startups as high-risk borrowers and prefer more established businesses with a
track record of revenue and profitability.
66) Approximately 80 percent of the 9,000 banks in the United States participate in the SBA
Guaranteed Loan Program.
Answer: False
Rationale:
While the exact percentage may vary, not all banks in the United States participate in the SBA
Guaranteed Loan Program. Participation is voluntary, and some banks may choose not to
participate for various reasons.
67) Crowdfunding is a financial transaction whereby a business sells its accounts receivable to a
third party at a discount in exchange for cash.
Answer: False
Rationale:
Crowdfunding is a method of raising capital through the collective effort of friends, family,
customers, and individual investors. It typically involves raising small amounts of money from a
large number of people, often via the internet.
68) A lease is a written agreement in which the owner of a piece of property allows an individual
or business to use the property for a specified period of time in exchange for payments.
Answer: True
Rationale:
A lease is a contractual arrangement between a lessor (property owner) and a lessee (tenant) that
allows the lessee to use the property for a specified period of time in exchange for periodic
payments.
69) The SBIR and STTR programs are two important sources of early stage funds for technology
firms.
Answer: True
Rationale:
The Small Business Innovation Research (SBIR) and Small Business Technology Transfer
(STTR) programs are federal government programs that provide funding to small businesses,
including technology firms, for research and development projects with commercial potential.
70) Historically, the vast majority of SBIR Phase 1 proposals are approved.
Answer: False
Rationale:
The SBIR program is competitive, and not all Phase 1 proposals are approved. The approval rate
can vary depending on the agency and the number of proposals received, but it is typically less
than 50 percent.
71) Why do most firms need funding? Provide a brief explanation of each reason.
Answer: There are three reasons that most new firms need to raise money during their early life:
cash flow challenges, capital investments, and lengthy product development cycles. In regard to
cash flow challenges, as a firm grows, it requires an increasing amount of cash to service its
customers. Often, equipment must be purchased and new employees hired and trained before the
increased customer base generates additional income. In regard to capital investments, firms
often need to raise money early on to fund capital investments. While it may be possible for the
firm's founders to fund its initial activities, it becomes increasingly difficult for them to do so
when it comes to buying property, constructing buildings, and purchasing equipment. In regard
to lengthy product development cycles, firms often need to raise money to finance the upfront
costs of lengthy product development cycles.
72) What is meant by the term "bootstrapping"? Provide several examples of the ways that
entrepreneurs bootstrap to raise money or cut costs?
Answer: Bootstrapping is the use of creativity, ingenuity, and any means possible to obtain
resources other than borrowing money or raising capital from traditional sources. There are many
ways entrepreneurs bootstrap to raise money or cut costs. Some of the more common examples
include the following:
∙ Buy used instead of new equipment
∙ Coordinate purchases with other businesses
∙ Leasing equipment rather than buying
∙ Obtain payments in advance from customers
∙ Minimize personal expenses
∙ Buy items cheaply but prudently through discount outlets or online auctions such as eBay.
∙ Share office space or employees with other businesses
∙ Hire interns
73) What is an elevator speech? How did it get its name?
Answer: An elevator speech is a brief, carefully constructed statement that outlines the merits of
a business opportunity. Why is it called an elevator speech? If an entrepreneur stepped into an
elevator on the 25th floor of a building and found that by a stroke of luck a potential investor was
in the same elevator, the entrepreneur would have the time it takes to get from the 25th floor to
the ground floor to try to get the investor interested in his or her business opportunity. In the
same fashion, entrepreneurs typically only have a few short minutes to interest any investor in a
business opportunity, whether it is in an elevator or any other setting.
74) What is the difference between equity funding and debt financing? What are the most
common sources of equity funding and debt financing?
Answer: Equity funding means exchanging partial ownership in a firm, usually in the form of
stock, for funding. Angel investors, private placement, venture capital, and initial public offering
are the most common sources of equity funding. Debt financing is getting a loan. The most
common sources of debt financing are commercial banks and the Small Business Administration
(through its SBA 7(A) Guaranty Loan Program).
75) What is a business angel? Describe the prototypical business angel. How much money do
business angels typically invest in a single company?
Answer: Business angels are individuals who invest their personal capital directly in startups.
The prototypical business angel is about 50 years old, has high income and wealth, is well
educated, has succeeded as an entrepreneur, and is interested in the startup process. These
investors generally invest between $10,000 and $500,000 in a single company. Business angels
are hard to find. They are typically located through referrals, by someone like an attorney or an
accountant.
Test Bank for Entrepreneurship: Successfully Launching New Ventures
Bruce R. Barringer, R. Duane Ireland
9780132555524, 9780131393905, 9780134729534, 9780133797190
