2011 Exam questions and answers Flashcards
Identify key differences between entrepreneurial firms and traditional firms.
Discuss how these differences might impact on the ability of entrepreneurial firms to raise traditional debt finance
Traditional firms Liquid shares Passive investors Little private information Project Valuation straightforward Assets marketable Investors diversified
Entrepreneurial Firms Illiquid Active investors Widespread private information Cash flows uncertain Assets specialised Investors not equally diversified
Difficulties in Borrowing
Unproven -No track record
Little security due to specialised assets
High risk – uncertain cash flows
High potential for agency cost made more acute by extent of hidden information
Explain how Information asymmetry impacts on the ability of entrepreneurs and Angel investors to reach a deal
a) Information asymmetry arises because entrepreneurial firms have difficulty in credibly conveying information about true value of business. This arises due to
a) specialised nature of information and
b) proprietary nature of information
Primary reason for rejection by angels is lack of credible team and lack of credible plan. Over-optimism is endemic in entrepreneurial business plans. Business Angels rely on networking to bridge information gap. This may assist in team credibility issues but may not assist in product credibility issues. To correct for over-optimism Angels increase onerous nature of terms of contracts. This in turn leads to adverse selection problems Four out of every five offers made by angels are rejected.
Critically analyse the proposition that there is a role for government in matching entrepreneurs and Angel Investors
Matching or marriage bureau initiatives appear to make sense. Angels complain of search/selection difficulties. Ireland has a chronic shortage of angel investors. However, experience here and elsewhere
(Morgan Pierce) suggests limited success for these ventures. Angels preference for words of mouth introductions does not fit easily with more formalised introduction channels
The key elements of a business plan have been defined as: people; context; opportunity and risk and reward.
Using each of these headings, outline the attributes of a startup company which might persuade a venture capital investor to proceed to invest.
People Who are they What have they done What skills do they have How do they work together What is their level of commitment?
Opportunity
What is the hidden magic in particular how does this particular business present an opportunity for rapid growth.
What is the market like
Who are the customers how will they be acquired and retained
Who are the competitors
Context
What is the big picture here
What is the regulatory environment like
What is the macro-economic environment like
Risk and reward
What can go wrong and how they will deal with it
How will the investor get their money out
Critically evaluate the different strategic arguments for corporate involvement in Venture capital funding.
Strategies Driving current business Enabling complementary business Strategic options on new business Passive financial only
You are the general partner in a Venture Capital Firm. You are establishing a €20m fund which will target alternative energy ventures in Ireland and the UK. You are putting together 10 key slides to persuade a group of investors to invest a minimum of €500,000 each in this fund.
a) Briefly outline what each of these slides should address.
b) How would you respond to a comment raised during the presentation that your proposed fund is insufficiently diversified by industry or by region.
a)
Why Venture capital
The Team : Past experience Track record etc
The Investment strategy number of investments at which stage
Rationale for investment why this industry
Search/selection process How will they find them and where ?
Monitoring process what experience do they have what level of expertise
Exit strategy – how long to exit how to exit
The terms and conditions of participation minimum investment carry fees % return GP investment etc
Anticipated returns past returns expected returns etc
b) Venture capital investing offers a diversification opportunity Diversification should be looked at in terms of investors portfolio not in terms oof specific VC investment
In accepting Venture Capital funding entrepreneurs have an expectation that the venture capital firm will provide support and direction which will further the objectives of entrepreneur and investor alike.
Discuss the conflicts of interest that can arise between entrepreneurs and investors in the post-funding period and the consequences of this for the governance of start-up companies. You should reference a case-study with which you are familiar.
Question requires students to reference Fogdog case
Conflicts are as follows
Entrepreneur may steer company away from plan or may take undue risks
VCs may fail to deliver on promised mentoring and support ref Fogdog frequent changes at board level by VCs
Lack of expertise by VCs lack of ability to counteract CEO
VCs may rush to exit and focus on growth rather than long term survival Again ref Fogdog’s ill advised IPO
