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Venture Capital - Midterm #1 questions with correct answers
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Venture Capital - Midterm #1 questions with correct answers
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Venture Capital - Midterm #1What do Venture Capitalists do? - correct answer ✔✔1) Finance new and growing companies (#1)
2) Purchase equity securities
3) Assist in the development of new products or services
4) Add value to the company through *active participation* in the operations
5) Take higher risks with the expectation of higher rewards
6) Have a long-term orientation
Attributes of Alternative Investments - correct answer ✔✔Liquidity = Less liquid
Price Discovery = less accessible (less aware of what you're buying); more negotiation between buyer
and seller
Types of Alternative Investments - correct answer ✔✔Private Equity:
-Distressed situations (close to bankruptcy)
-Buyouts
-Mezzanine ("bridge loans")
-Venture Capital / Seed Investments
Hedge Funds
Primary definition of VC: - correct answer ✔✔invest cash in exchange for equity stake in the company;
highly risky investment because they risk losing their entire investment
Typical benchmark for the *market return* - correct answer ✔✔11%
What is an *outsized* market return - correct answer ✔✔13-24% annualized return *over* the market
return (i.e. 23-35% total return)
Homerun = - correct answer ✔✔investment 10x your initial investment
, Limited Partners: - correct answer ✔✔-private and public pension funds
-Endowments and foundations
-corporations
-wealthy individuals and foreign investors
-VC's themselves
What is it called when Venture Capitalists invest money into one of the portfolio companies they are
currently invested in with their LP's? - correct answer ✔✔*sidecar* investment (Private Equity)
*angel investment* (VC)
For a $100MM VC fund: - correct answer ✔✔1) ~15 deals / year
2) 4 total employees: 2 GPs, 1 admin., 1 analyst/associate
3) 7-8 board seats sat on by each VC
4) Management Fee Allocation:
-GPs - 50/50 split of 75% - 90% of the total fees
-Admin. - 2.5% (about $50K)
-Analyst/Associate - about $150,000
Vintage Year - correct answer ✔✔When the fund is founded
Committed Capital - correct answer ✔✔The amount that the limited partners have agreed to provide to
the private equity fun
Carried Interest - correct answer ✔✔percentage of the investment gains that accrue to the LPs and GPs;
typically negotiated at 80/20 (80% of the porofits to LP's, 20% to the GP's)
Capital Call / Takedown - correct answer ✔✔when capital is actually invested and management fees are
paid
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