CFA Practice Question
Venture capital can create value to the firm by
A. venture capitalists figuring out how to manage a firm in a poorly managed sector and then acquiring other firms in the same sector at low prices.
B. providing current management with new and additional funding.
C. investing in additional company assets.
Explanation: The venture capitalist believes that the managements of these acquired firms can be improved by using the same techniques that were used for the first company. The values of the acquired firms will therefore increase because of the improvement in the management.
User Contributed Comments 9
| User | Comment |
|---|---|
| timspear | How come providing management with funds for some new project doesn't create value? |
| snider | simply providing funds does not create value if the project's NPV is negative: many VC failed around 2000. |
| Will1868 | VC firm's have one primary objective: investing in (providing startup/growth/mezz financing to) companies. They do not generally "buy" the firms they invest in. That is more the profile of a Private Equity firm. |
| gastel | I guess acquiring the majority share of a firm is considered "buying the firm". |
| mark98007 | "figuring out how to manage one firm and then acquiring others atlow prices" (any more than just giving money) does not AUTOMATICALLY create value either... |
| Adkins | Agree with Will1868, VCs provide financing at critical stages of start-up firms to enable the firm to get over a hurdle. Secondary support is through management improvement, although that is mainly through meeting with existing management and giving guidance. PEs tend to kick out existing management (improve management) or sell the company in pieces. |
| birdperson | I agree with Will1868 as well as (A) is more of a description of LBO than VC. |
| ConnerVP1 | Agree with above statements. (a) describes a PE/LBO fund. VC can create value by providing new funding, provided it is positive NPV.. |
| ctschro | agree w all other posters here: A sounds like "typical" PE firm, not VC firm, which is not "typical" PE firm. |