New Venture Creation Entrepreneurship for the 21st Century 10th Edition by Stephen, Robert TEST BANK

Chapter 01 The Global Entrepreneurial Revolution for a Flatter World Answer Key

True / False Questions

1.

According to Thomas Friedman, his book titled "The World is Flat" refers to the convergence

(p. 05) of technology and world events that are playing a role in bringing about significant changes in

traditional value chains.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

2.

Gearing entrepreneurs for competitiveness is likely to hinder the process of entrepreneurial

(p. 05) revolution.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

3.

Entrepreneurship training works well in schools of business and engineering, but it has not

(p. 05) proven to be useful in fields such as architecture, medicine, and life sciences.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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4.

Entrepreneurship educators believe that expertise, wisdom, and knowledge are housed solely

(p. 06) in the faculty brain or in the library.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

5.

The best entrepreneurship faculties are generally able to determine in advance who among

(p. 06) their incoming students will be the most effective entrepreneurs.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

6.

David Birch, an MIT researcher, found that new and growing smaller firms had little effect on

(p. 07) the economy as a whole.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

7.

According to the U.S. Small Business Administration's Office of Advocacy, small firms

(p. 08) accounted for all of the net new jobs in 2010.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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8.

A 2010 report by The Guardian Life Small Business Research Institute indicated that women-

(p. 08) owned businesses have been steadily decreasing over the past few decades.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

9.

While various surveys of high school seniors indicate a strong interest in entrepreneurship, a

(p. 08) 2004 Gallup Poll showed that a large percentage of American parents would prefer that their

children pursue a less risky career.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

10.

According to a study conducted in 2006, the self-employed report the lowest levels of personal

(p. 09) satisfaction, challenge, pride, and remuneration.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

11.

Research in the 1980s and 1990s found that since World War II, small entrepreneurial firms

(p. 11) have been responsible for half of all innovation and a large percentage of all radical innovation

in the United States.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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12.

Studies indicate that smaller firms generate twice as many innovations per research and

(p. 11- development (R&D) dollar spent as the established multinationals.

12)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

13.

Value creation is a linear process as it requires a short-term perspective.

(p. 14)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

14.

Entrepreneurship will result in equal incomes among the masses.

(p. 15)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

15.

When the entrepreneurial process will take over, it will result in economic expansion and

(p. 15) accompanying social mobility.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Multiple Choice Questions

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16.

Rick, an entrepreneur, is in the process of selecting a manager for his new venture. To

(p. 02) successfully run the venture, who is he most likely to select?

A. Fiona, who prefers minimal investment in human resources B. Saeed, who complements the needs of the venture C. Garcia, who views change and ambiguity as detrimental for the venture D. Maria, who has a different vision for the venture Accessibility: Keyboard Navigation Blooms: Apply Level of Difficulty: 3 Hard

17.

Which of the following is a critical factor in enhancing entrepreneurship?

(p. 05)

A. Restricting entrepreneurship at the regional level B. Discouraging entrepreneurs from expressing competitiveness C. Reducing restrictions that block the flow of finance D. Removing programs based on "learning by doing" Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

18.

Which of the following is an entrepreneurial transformation that is changing the world?

(p. 05)

A. Entrepreneurship is now being discouraged in corporate America.

B. Entrepreneurship topics and related issues are being removed from the curricula of business schools as they are self-taught.

C. Entrepreneurship is becoming a tool to create social and economic equalities.

D. Entrepreneurship is becoming a dominant management model for running nonprofit businesses.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

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19.

What is the characteristic of entrepreneurship educators whose views and attitudes toward

(p. 06) learning differ radically from traditional academic approaches?

A. They are faculty centric.

B. They do not prefer a work-in-progress philosophy of teaching.

C. They do believe that expertise, wisdom, and knowledge are housed solely in the faculty.

D. They are likely to see their role as mentors, coaches, and advocates for students.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

20.

What is the difference between entrepreneurial educators and traditional academicians?

(p. 06)

A. Entrepreneurial educators are faculty centric, whereas traditional academicians are student centric.

B. Entrepreneurial educators follow a rigid training module, whereas traditional academicians follow a more hands-on philosophy.

C. Entrepreneurial educators treat the learning process as solely occurring in the classroom, whereas traditional academicians treat it as more of an apprenticeship.

D. Entrepreneurial educators are opportunity centric, whereas traditional academicians are faculty centric.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

21.

Which of the following is true of new venture creation?

(p. 08)

A. It is process oriented and not result oriented.

B. It gives importance to one's nationality.

C. It creates economic and social mobility.

D. It reduces competitiveness.

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Level of Difficulty: 2 Medium

22.

At the heart of the entrepreneurial process is a(n):

(p. 11)

A. rigid organizational structure.

B. resistance to ambiguity.

C. innovative spirit.

D. resistance to change.

Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

23.

Who among the following is most likely to be called a philanthropist?

(p. 13)

A. Lydia, an entrepreneur, who acquires a foreign company B. Ahmed, an entrepreneur, who exercises monopoly in the highly profitable oil and natural gas sector C. Zainab, an entrepreneur, who funds the construction of a public school in her locality D. Eric, an entrepreneur, who sells his innovation in the aviation industry Accessibility: Keyboard Navigation Blooms: Apply Level of Difficulty: 3 Hard

24.

What is true of the majority of America's self-made entrepreneurs?

(p. 14)

A. They accumulated their wealth through luck.

B. They are invisible to most Americans.

C. They fit the media stereotype.

D. They prefer social status to financial independence.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

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25.

Which of the following is a characteristic of private equity creation?

(p. 14)

A. It is a linear process.

B. It requires a long-term perspective.

C. It hinders entrepreneurship.

D. It targets quick returns on investments made over a short period of time.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

Fill in the Blank Questions

26.

_____ is becoming a dominant management model for running nonprofit businesses and in the

(p. 05) emerging field of social ventures.

Entrepreneurship Blooms: Remember Level of Difficulty: 1 Easy

27.

_____ entrepreneurship means new venture creation.

(p. 08)

Classical Blooms: Remember Level of Difficulty: 1 Easy

28.

_____ showed the highest rate of increase of any minority group in owning businesses

(p. 08) according to the U.S. Census Bureau in 2007.

African Americans/Blacks Blooms: Remember Level of Difficulty: 1 Easy

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29.

When successful entrepreneurs get involved in the nonprofit sector directly by offering

(p. 13- strategic assistance, like long-term planning and leveraging relationships to identify additional 14)

resources and facilitate partnerships, it is referred to as _____ philanthropy. high-engagement

Blooms: Remember Level of Difficulty: 1 Easy

Short Answer Questions

30.

What is the impact of small firms in driving innovation in the United States?

(p. 1112)

The U.S. Department of Commerce found that since World War II, small entrepreneurial firms have been responsible for half of all innovation and 95 percent of all radical innovation in the United States. Other studies showed that research and development at smaller entrepreneurial firms were more productive and robust than at large firms; smaller firms generated twice as many innovations per R&D dollar spent as the giants, twice as many innovations per R&D scientist as the giants, and 24 times as many innovations per R&D dollar versus those large firms with more than 10,000 employees.

Blooms: Remember Level of Difficulty: 1 Easy

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31.

Briefly discuss the role of angel investors in the creation of new ventures.

(p. 13)

The angel investor market in 2010, following a considerable contraction in investment dollars in 2008 and 2009, exhibited a rise in investment dollars and in the number of investments.

Similar to the venture capitalists, these angels bring far more than money to the entrepreneurial process. As successful entrepreneurs themselves, they bring experience, networks, wisdom, and maturity to the companies they fund. As directors and advisors, they function as coaches, confidants, mentors, and cheerleaders.

Blooms: Remember Level of Difficulty: 1 Easy

32.

Briefly discuss the role of successful American entrepreneurs as philanthropists.

(p. 1314)

A lesser known and largely ignored role of American entrepreneurs is that of philanthropists and creative community leaders. A majority of new buildings, classrooms, athletic facilities, and universities have been funded by an entrepreneur who wanted to give back. When a successful entrepreneur gets involved in the nonprofit sector, the engagement involves strategic business skills like long-term planning, board and executive recruitment, coaching, and leveraging relationships. These high-engagement philanthropists have a stronger focus and deeper investments in a smaller, more select number of investment partners, and a healthy ambition for the long-term reach of their efforts.

Blooms: Remember Level of Difficulty: 1 Easy

Essay Questions

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33.

Explain the four entrepreneurial transformations that are changing the world.

(p. 05)

Evidence and trends point to at least four entrepreneurial transformations that profoundly impact how the world lives, works, learns, and enjoys leisure. They are as follows: 1. Entrepreneurship is the new management paradigm: Entrepreneurial thinking and reasoning—so common in dynamic, higher-potential, and robust new and emerging firms—are now becoming infused and embedded into the strategies and practices of corporate America.

2. Entrepreneurship has spawned a new education paradigm for learning and teaching.

3. Entrepreneurship is becoming a dominant management model for running nonprofit businesses and in the emerging field of social ventures.

4. Entrepreneurship is rapidly transcending business schools: Engineering, life sciences, architecture, medicine, music, liberal arts, and K-12 are new academic grounds that are exploring and embracing entrepreneurship in their curricula.

Blooms: Understand Level of Difficulty: 2 Medium

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34.

How do entrepreneurial faculties drive the rapid explosion of entrepreneurship?

(p. 0607)

The energizing process for faculty and students alike is also driving the rapid explosion of entrepreneurship education worldwide. First, the field seems to attract, by its substance and nature, highly entrepreneurial people. Historically, entrepreneurial thinkers and doers have been few and far between in the vast majority of schools in the United States and abroad.

These creative, can-do, resilient, and passionate people bring their entrepreneurial ways of thinking, acting, doing, and building to their courses, their research, and their institutions. They are the change agents—the movers and shakers. Second, their entrepreneurial bent brings a new mind-set to universities and schools: They think and act like owners. They are creative, courageous, and determined to make it work and happen; they build teams, practice what they preach, are institution builders, and do not let myopic allegiance to their disciplines impede becoming better educators. Students, deans, and colleagues can be energized by the leadingby-example pace they establish. Third, entrepreneurship faculties constantly think in terms of opportunity. Entrepreneurial faculty realize that money follows superior teams and superior opportunities, so they create them. They find ways to innovate, raise money, and implement curricula in resource-strapped universities. They match innovative ideas with wealthy entrepreneurs and their foundations to raise money and launch programs. Fourth, they create powerful strategic alliances with others—colleagues, alumni, and entrepreneurs by practicing the teamwork principles of entrepreneurship they teach. There is something exciting and compelling about being around highly intelligent and creative entrepreneurs as the centerpiece of your subject matter. They invariably inspire other faculty and students as well.

Blooms: Understand Level of Difficulty: 2 Medium

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35.

Describe a typical American entrepreneur.

(p. 14)

American entrepreneurs typically accumulated their wealth through hard work, self-discipline, planning, and frugality—all very entrepreneurial virtues. Two-thirds of them still working are self-­employed and are self-made. The vast majority (80 percent) are ordinary people who have accumulated their wealth in one generation, live below their means, and prefer financial independence to social status. Majority of them are invisible to most Americans and do not fit the media stereotype. They get rich slowly, with the average millionaire being 57 years old.

Their businesses are ordinary ones they started and built like ambulance services, citrus farming, cafeteria services, consulting services, janitorial services, job training schools, meat processors, mobile home parks, pest controllers, newsletter publishers, rice farmers, and sandblasting contractors.

Blooms: Understand Level of Difficulty: 2 Medium

Chapter 02 The Entrepreneurial Mind: Crafting a Personal Entrepreneurial Strategy Answer Key Is At the End of Each Chapter True / False Questions

1. The psychological motivation of entrepreneurial behavior states that the need for achievement is the need to build a relationship with others.

True

False

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2. In the context of psychological motivation of entrepreneurial behavior, the need for power is the need to influence others to achieve a goal.

True

False

3. In the context of entrepreneurial behavior, the need for affiliation is the need to excel.

True

False

4. Entrepreneurs motivated purely by monetary reward typically build companies of substantial value.

True

False

5. All successful business people share characteristics of raw energy and intelligence.

True

False

6. The third volume of the Praeger Perspectives examines people and refers to a wide and diverse range of contextual factors that influence the entrepreneur and the entrepreneurial process.

True

False

7. Successful entrepreneurs possess a well-developed capacity to exert influence without formal power.

True

False

8. Entrepreneurs are self-starters who are internally driven by a strong desire to compete and attain challenging goals.

True

False

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9. Research has shown that an entrepreneur is more driven by the conservation of resources, whereas a manager is more opportunity-driven.

True

False

10. Studies show a strong connection between the presence of role models and the emergence of entrepreneurs.

True

False

11. Entrepreneurs are their own bosses and completely independent.

True

False

12. Successful entrepreneurs seek power and control over others.

True

False

Multiple Choice Questions

13. Which of the following is defined as the need for measurable personal accomplishment?

A. The need for achievement B. The need for power C. The need for affiliation D. The need for attachment

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14. Which of the following is the least characteristic motivational need of successful entrepreneurs?

A. Achievement B. Control C. Power D. Affiliation 15. Which of the following volumes of the Praeger Perspectives proceeds through the life cycle of a new venture startup by tackling several key steps in the course of action?

A. People B. Process C. Place D. Plan 16. Which of the following is not an entrepreneurial attribute?

A. Being a calculated risk taker B. Being a perfectionist C. Being obsessed with value creation D. Being intensely curious in the face of risk 17. In the context of creativity, self-reliance, and adaptability, which of the following attitudes of an entrepreneur is desirable?

A. Skepticism about conflicts and failure B. Ability to be a lone wolf C. Restlessness with the status quo D. High need for status and power

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18. In the troika of the foundation of a successful new venture, which of the following is an external environmental influence?

A. Value creation B. Ethical behavior C. Focus D. Adaptability 19. Successful entrepreneurs consistently focus on:

A. seizing a market-based opportunity.

B. obtaining resources.

C. networking.

D. making money.

20. When compared to an entrepreneur, a manager is more:

A. resource-driven.

B. opportunity-driven.

C. creative.

D. innovative.

21. According to research, which of the following statements about entrepreneurs is false?

A. Many successful entrepreneurs are well educated.

B. Most successful entrepreneurs start companies in their early 20s.

C. Most successful entrepreneurs follow a pattern of apprenticeship.

D. Family firms spawn entrepreneurs.

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22. According to research studies on the career paths of entrepreneurs and the self-employed, which of the following is the central factor for a successful venture creation?

A. Networking B. The ability to marshal resources C. Experience and know-how D. The ability to attract and motivate an effective team 23. According to an old maxim, how long will venture capitalists work with a startup before declaring the company a "lemon"?

A. Up to a year B. About two and a half years C. At least three years D. Three to five years 24. Which of the following is the most important component of opportunity recognition?

A. Experimenting with new ideas B. Exhibiting low tolerance toward change C. Being risk aversive D. Being a perfectionist 25. Which of the following statements demystifies the myth that entrepreneurs are gamblers?

A. Entrepreneurs consider an idea and an opportunity as the same.

B. Successful entrepreneurs try to influence the odds, often by getting others to share the risk.

C. Successful entrepreneurs are completely independent and their own bosses.

D. Entrepreneurs are driven by instant gratification through high salaries and perks.

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26. Which of the following is a reality and not a persistent myth about entrepreneurs?

A. Entrepreneurs are born, not made.

B. Entrepreneurs are gamblers.

C. Solo entrepreneurs limit their own potential for growth.

D. Entrepreneurs should be young, energetic, and in their 20s.

27. Which of the following is a myth about successful entrepreneurs?

A. They are driven by the need for achievement.

B. They are driven by the need to control others.

C. They have the ability to exert influence.

D. They have the ability to be patient even in adverse situations.

28. According to venture investors, what is the realistic time frame for growing a high potential business to the point where a capital gain can be realized?

A. 1-3 years B. 2-5 years C. 5-7 years D. 7-8 years 29. Successful entrepreneurs are driven by:

A. the quest for power for its own sake.

B. a personal need for authority expressed by control over others.

C. the quest for achievement and results.

D. a need to seek money as an end in itself.

Fill in the Blank Questions

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30. The need for _____ is the need to excel and the need for measurable personal accomplishment. ________________________________________ 31. The need to build a relationship with others is known as the need for ___. ________________________________________ 32. The first volume of the Praeger Perspectives deals with _____ and takes a broad view of entrepreneurship as a form of human action, pulling together the current research with respect to cognitive, economic, social, and institutional factors that influence entrepreneurial behavior. ________________________________________ 33. An entrepreneur who displays a high energy level and a sense of urgency is known as a ___. ________________________________________ 34. Based on the entrepreneurial leadership paradigm, when the competencies of others are sought and used, it is referred to as ___. ________________________________________ 35. Entrepreneurs who are internally driven by a strong desire to compete and attain challenging goals are typically known as ___. ________________________________________ 36. Although the skills of a manager and an entrepreneur overlap in the area of solid management skills, a manager is more driven by the conservation of resources, while the entrepreneur is more ___. ________________________________________

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37. Numerous studies show a strong connection between the presence of _____ and the emergence of successful entrepreneurs. ________________________________________ 38. Successful entrepreneurs are not gamblers; they take ___. ________________________________________ 39. Most successful entrepreneurs have had a _____ to help them achieve their dreams and goals, both implicitly and explicitly. ________________________________________

Short Answer Questions

40. Write a short note on the Praeger Perspectives.

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41. In the context of the seven dominant themes of desirable and acquirable attitudes and behavior of entrepreneurs, briefly describe the role of creativity, self-reliance, and adaptability.

Essay Questions

42. Discuss any two myths and realities about entrepreneurs.

43. Describe at least three important aspects of courage in entrepreneurship.

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Chapter 02 The Entrepreneurial Mind: Crafting a Personal Entrepreneurial Strategy Answer Key

True / False Questions

1.

The psychological motivation of entrepreneurial behavior states that the need for achievement

(p. 29) is the need to build a relationship with others.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

2.

In the context of psychological motivation of entrepreneurial behavior, the need for power is

(p. 29) the need to influence others to achieve a goal.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

3.

In the context of entrepreneurial behavior, the need for affiliation is the need to excel.

(p. 29)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

4.

Entrepreneurs motivated purely by monetary reward typically build companies of substantial

(p. 29) value.

FALSE Accessibility: Keyboard Navigation 1-23 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

SOURCE: Browsegrades.net

Blooms: Remember Level of Difficulty: 1 Easy

5.

All successful business people share characteristics of raw energy and intelligence.

(p. 30)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

6.

The third volume of the Praeger Perspectives examines people and refers to a wide and

(p. 31) diverse range of contextual factors that influence the entrepreneur and the entrepreneurial

process.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

7.

Successful entrepreneurs possess a well-developed capacity to exert influence without formal

(p. 33) power.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

8.

Entrepreneurs are self-starters who are internally driven by a strong desire to compete and

(p. 34) attain challenging goals.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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9.

Research has shown that an entrepreneur is more driven by the conservation of resources,

(p. 35) whereas a manager is more opportunity-driven.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

10.

Studies show a strong connection between the presence of role models and the emergence of

(p. 36) entrepreneurs.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

11.

Entrepreneurs are their own bosses and completely independent.

(p. 37)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

12.

Successful entrepreneurs seek power and control over others.

(p. 38)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Multiple Choice Questions

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13.

Which of the following is defined as the need for measurable personal accomplishment?

(p. 29)

A. The need for achievement B. The need for power C. The need for affiliation D. The need for attachment Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

14.

Which of the following is the least characteristic motivational need of successful

(p. 30) entrepreneurs?

A. Achievement B. Control C. Power D. Affiliation Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

15.

Which of the following volumes of the Praeger Perspectives proceeds through the life cycle of

(p. 30) a new venture startup by tackling several key steps in the course of action?

A. People B. Process C. Place D. Plan Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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16.

Which of the following is not an entrepreneurial attribute?

(p. 31)

A. Being a calculated risk taker B. Being a perfectionist C. Being obsessed with value creation D. Being intensely curious in the face of risk Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

17.

In the context of creativity, self-reliance, and adaptability, which of the following attitudes of an

(p. 31) entrepreneur is desirable?

A. Skepticism about conflicts and failure B. Ability to be a lone wolf C. Restlessness with the status quo D. High need for status and power Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

18.

In the troika of the foundation of a successful new venture, which of the following is an

(p. 33) external environmental influence?

A. Value creation B. Ethical behavior C. Focus D. Adaptability Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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19.

Successful entrepreneurs consistently focus on:

(p. 33)

A. seizing a market-based opportunity.

B. obtaining resources.

C. networking.

D. making money.

Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

20.

When compared to an entrepreneur, a manager is more:

(p. 35)

A. resource-driven.

B. opportunity-driven.

C. creative.

D. innovative.

Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

21.

According to research, which of the following statements about entrepreneurs is false?

(p. 36)

A. Many successful entrepreneurs are well educated.

B. Most successful entrepreneurs start companies in their early 20s.

C. Most successful entrepreneurs follow a pattern of apprenticeship.

D. Family firms spawn entrepreneurs.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

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22.

According to research studies on the career paths of entrepreneurs and the self-employed,

(p. 36) which of the following is the central factor for a successful venture creation?

A. Networking B. The ability to marshal resources C. Experience and know-how D. The ability to attract and motivate an effective team Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

23.

According to an old maxim, how long will venture capitalists work with a startup before

(p. 38) declaring the company a "lemon"?

A. Up to a year B. About two and a half years C. At least three years D. Three to five years Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 2 Medium

24.

Which of the following is the most important component of opportunity recognition?

(p. 36)

A. Experimenting with new ideas B. Exhibiting low tolerance toward change C. Being risk aversive D. Being a perfectionist Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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25.

Which of the following statements demystifies the myth that entrepreneurs are gamblers?

(p. 37)

A. Entrepreneurs consider an idea and an opportunity as the same.

B. Successful entrepreneurs try to influence the odds, often by getting others to share the risk.

C. Successful entrepreneurs are completely independent and their own bosses.

D. Entrepreneurs are driven by instant gratification through high salaries and perks.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

26.

Which of the following is a reality and not a persistent myth about entrepreneurs?

(p. 37)

A. Entrepreneurs are born, not made.

B. Entrepreneurs are gamblers.

C. Solo entrepreneurs limit their own potential for growth.

D. Entrepreneurs should be young, energetic, and in their 20s.

Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

27.

Which of the following is a myth about successful entrepreneurs?

(p. 38)

A. They are driven by the need for achievement.

B. They are driven by the need to control others.

C. They have the ability to exert influence.

D. They have the ability to be patient even in adverse situations.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

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28.

According to venture investors, what is the realistic time frame for growing a high potential

(p. 38) business to the point where a capital gain can be realized?

A. 1-3 years B. 2-5 years C. 5-7 years D. 7-8 years Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

29.

Successful entrepreneurs are driven by:

(p. 38)

A. the quest for power for its own sake.

B. a personal need for authority expressed by control over others.

C. the quest for achievement and results.

D. a need to seek money as an end in itself.

Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Fill in the Blank Questions

30.

The need for _____ is the need to excel and the need for measurable personal

(p. 29) accomplishment.

achievement Blooms: Remember Level of Difficulty: 1 Easy

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31.

The need to build a relationship with others is known as the need for ___.

(p. 29)

affiliation Blooms: Remember Level of Difficulty: 1 Easy

32.

The first volume of the Praeger Perspectives deals with _____ and takes a broad view of

(p. 30) entrepreneurship as a form of human action, pulling together the current research with respect

to cognitive, economic, social, and institutional factors that influence entrepreneurial behavior. people Blooms: Remember Level of Difficulty: 1 Easy

33.

An entrepreneur who displays a high energy level and a sense of urgency is known as a ___.

(p. 34)

pacemaker Blooms: Remember Level of Difficulty: 1 Easy

34.

Based on the entrepreneurial leadership paradigm, when the competencies of others are

(p. 34) sought and used, it is referred to as ___.

mentoring Blooms: Remember Level of Difficulty: 1 Easy

35.

Entrepreneurs who are internally driven by a strong desire to compete and attain challenging

(p. 34) goals are typically known as ___.

self-starters Blooms: Remember Level of Difficulty: 1 Easy

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36.

Although the skills of a manager and an entrepreneur overlap in the area of solid management

(p. 35) skills, a manager is more driven by the conservation of resources, while the entrepreneur is

more ___. opportunity-driven Blooms: Remember Level of Difficulty: 1 Easy

37.

Numerous studies show a strong connection between the presence of _____ and the

(p. 36) emergence of successful entrepreneurs.

role models Blooms: Remember Level of Difficulty: 1 Easy

38.

Successful entrepreneurs are not gamblers; they take ___.

(p. 37)

calculated risks Blooms: Remember Level of Difficulty: 1 Easy

39.

Most successful entrepreneurs have had a _____ to help them achieve their dreams and

(p. 39) goals, both implicitly and explicitly.

personal strategy Blooms: Remember Level of Difficulty: 1 Easy

Short Answer Questions

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40.

Write a short note on the Praeger Perspectives.

(p. 3031)

The Praeger Perspectives is a three volume series from 2007 that researched entrepreneurship from three perspectives: people, process, and place. This study brings together insights into the field of entrepreneurship by some of the leading scholars in the world. The first volume, people, takes a broad view of entrepreneurship as a form of human action, pulling together the current ­research with respect to cognitive, economic, social, and institutional factors that influence entrepreneurial behavior. The second volume, process, proceeds through the life cycle of a new venture startup by tackling several key steps in the process: idea, opportunity, team building, resource acquisition, growth management, and entering global markets. The third volume in the series examines place, which refers to a wide and diverse range of contextual factors that influence the entrepreneur and the entrepreneurial process.

Blooms: Remember Level of Difficulty: 1 Easy

41.

In the context of the seven dominant themes of desirable and acquirable attitudes and

(p. 34) behavior of entrepreneurs, briefly describe the role of creativity, self-reliance, and adaptability.

High levels of uncertainty and rapid change characterizing new ventures require organizations that can respond quickly. The most successful entrepreneurial teams have the ability to focus on a goal with outstanding execution, while being flexible enough to shift when the market and circumstances require it. At the same time, entrepreneurs are not afraid of failing; rather, they are more intent on succeeding.

Blooms: Remember Level of Difficulty: 1 Easy

Essay Questions

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42.

Discuss any two myths and realities about entrepreneurs.

(p. 37)

Myth 1—Entrepreneurs are born, not made.

Reality—While entrepreneurs are born with certain native intelligence, a flair for creating, and energy, these talents by themselves are like unmolded clay or an unpainted canvas. The making of an entrepreneur occurs by accumulating the relevant skills, know-how, experiences, and contacts over a period of years and includes large doses of self-development. The creative capacity to envision and then pursue an opportunity is a direct descendant of at least 10 or more years of experience that lead to pattern recognition.

Myth 2—Anyone can start a business.

Reality—Entrepreneurs who recognize the difference between an idea and an opportunity, and who think big enough, start businesses that have a better chance of succeeding. Luck, to the extent it is involved, requires good preparation. The easiest part is starting. What is hardest is surviving, sustaining, and building a venture so its founders can realize a harvest.

Perhaps only one in 10 to 20 new businesses that survive five years or more results in a capital gain for the founders.

Blooms: Understand Level of Difficulty: 2 Medium

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43.

Describe at least three important aspects of courage in entrepreneurship.

(p. 33)

Courage has at least three important aspects in entrepreneurship. The first aspect is moral strength and principles. This refers to the character and the personal integrity to know right from wrong, and the will and commitment to act accordingly. The second aspect of courage is being a fearless experimenter. Fearless experimentation suggests restlessness with convention and a rejection of the status quo. This relentless experimentation is enhanced by a third aspect of courage, which is a lack of fear of failing at the experiment and a lack of fear of conflicts that may arise. In other words, there is a mental toughness that is quite impervious to fears but is not ignorant or oblivious to possible consequences.

Blooms: Understand Level of Difficulty: 2 Medium

Chapter 03 The Entrepreneurial Process

True / False Questions

1. Entrepreneurship results in the creation, enhancement, realization, and renewal of value, not just for owners, but for all participants and stakeholders.

True

False

2. The classic expression of entrepreneurship is the raw start-up company, an innovative idea that develops into a high-growth company.

True

False

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3. Too much control and an obsession with orderliness are prerequisites to a successful entrepreneurial approach.

True

False

4. Entrepreneurship requires inflexible strategies and tactics that are not nimble.

True

False

5. Building long-term equity requires large, continuous reinvestment in people, products, and services in advance of revenues.

True

False

6. One of the biggest strategic mistakes aspiring entrepreneurs make is that they think too small.

True

False

7. Small, simple businesses that are more affordable, more manageable, and less demanding are more profitable than high-potential ventures.

True

False

8. While government data, research, and business mortality statisticians may not agree on the precise failure and survival figures for new businesses, they do agree that moderate success is the rule, not the exception with new ventures.

True

False

9. Knowing the difference between a good idea and a real opportunity is vital for would-be entrepreneurs.

True

False

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10. In case of competition, the entrepreneurial task is to find a way to direct the arena of competition toward the areas where a new venture is at a competitive disadvantage.

True

False

11. The threshold concept proposes that the odds of success change as a venture reaches a critical mass of over $8 million in sales and 50 employees.

True

False

12. Successful entrepreneurs avoid creating their own investment pools, and they do not compete directly with venture capitalists for deals.

True

False

13. Like venture capitalists, private investors are constrained by having to invest a lot of money in a relatively short period.

True

False

14. Private investors are funding more and more early-stage businesses, enabling risk mitigation before larger, institutional venture funds invest.

True

False

15. There is often a direct correlation between creativity and innovation and the level of resources available at the start of a venture.

True

False

16. "Durability" refers to the market advantage a company can enjoy by developing proprietary barriers to entry.

True

False

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17. In entrepreneurial companies, bootstrapping is a way of life that can create significant competitive advantages.

True

False

18. One of the leading practices of fast-growth companies to achieve market penetration is to initially deliver product and service benefits at below-market prices.

True

False

19. Fast-growth firms maintain control by selectively granting employee stock ownership.

True

False

20. While developing management strategies, fast-growth firms are careful not to link a defined exit strategy in the business plan with what the lead entrepreneur envisions as his or her long-term objectives.

True

False

21. The most effective entrepreneurial leaders of fast-growth companies avoid linking job performance standards to a business plan practice top-down management and administration.

True

False

Multiple Choice Questions

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22. What is at the heart of the entrepreneurial process?

A. Innovation and creativity B. Opportunity recognition C. Team work D. Marshalling resources 23. The entrepreneurial process starts with:

A. strategy.

B. networks.

C. team.

D. opportunity.

24. According to the threshold concept, which of the following ventures is likely to overcome failure?

A. A venture that reaches a critical mass of 10 people with $500,000 in revenues B. A venture that reaches a critical mass of 5 people with $2 million in revenues C. A venture that reaches a critical mass of 15 people with $2.5 million in revenues D. A venture that reaches a critical mass of 6 people with $1.5 million in revenues 25. According to the Timmons Model, which of the following is true of resources as a key element in an entrepreneurial process?

A. An entrepreneur should stay away from bootstrapping, especially with new ventures.

B. An entrepreneur must understand that having too much money early on in the venture is the biggest factor that contributes to its success.

C. An entrepreneur must avoid doing more with fewer resources as it is detrimental to a company's competitive advantage.

D. An entrepreneur must strive to minimize and control resources, but not necessarily own them.

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26. Which of the following forms the base of the Timmons Model?

A. Profitability B. Sustainability C. Lifestyle D. Harvest 27. In entrepreneurship, "durability" of an opportunity relates to the:

A. return on investment.

B. market demand.

C. barriers to entry.

D. market readiness.

28. Which of the following refers to consumer trends and behaviors that seek new products or services?

A. Entrepreneurial durability B. Market readiness C. Business plan feasibility D. Product diversification 29. Considering that the entrepreneurial process is opportunity-driven, in which of the following circumstances is there a possibility of greater opportunity?

A. When there are greater gaps in available information and knowledge B. When there are greater consistencies in existing services and quality C. When there are fewer inconsistencies in lead and lag times D. When there is less robustness of the gross and net margins

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30. Fast-growth firms should strive to create high-impact, new product and service improvements with development expenditures that account for no more than approximately _____ percent of revenues.

A. 2 B. 6 C. 10 D. 15 31. Which of the following is one of the leading financial practices of fast-growth firms?

A. Refraining from linking an entrepreneur's long-term objectives to a defined exit strategy in a business plan B. Granting stock ownership to every employee C. Anticipating only a single round of financing D. Utilizing financing vehicles that retain an entrepreneur's voting control

Fill in the Blank Questions

32. Entrepreneurs for whom issues of family roots and location take precedence and thereby wish to be with and work with their family may lead them to develop a ________ business. ________________________________________ 33. A(n) _____ provides the language and code for communicating the quality of the three driving forces of the Timmons Model and of their fit and balance. ________________________________________

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34. In the entrepreneurial process depicted in the Timmons Model, the required shape, size, and depth of a team and resources are established by the shape, size, and depth of a(n) ____. ________________________________________ 35. Rounding out the Timmons model of the three driving forces is the concept of _____ between and among these forces. ________________________________________ 36. Building a ________ venture means achieving economic, environmental, and social goals without compromising the same opportunity for future generations. ________________________________________ 37. As depicted in the Timmons Model, the entrepreneurial process can be appreciated as a constant balancing act, requiring continual assessment, revised strategies and tactics, and a(n) _____ approach. ________________________________________

Short Answer Questions

38. What are the central themes or driving forces that dominate a highly dynamic entrepreneurial process?

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39. According to the Timmons Model, what are the three driving forces of an entrepreneurial process?

40. Write a brief note on the importance of timing in the entrepreneurial process.

Essay Questions

41. Discuss the overall paradoxical conflict inherent in the entrepreneurial process.

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42. Discuss the potential advantages and disadvantages of lifestyle ventures.

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Chapter 03 The Entrepreneurial Process Answer Key

True / False Questions

1.

Entrepreneurship results in the creation, enhancement, realization, and renewal of value, not

(p. 77) just for owners, but for all participants and stakeholders.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

2.

The classic expression of entrepreneurship is the raw start-up company, an innovative idea

(p. 77) that develops into a high-growth company.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

3.

Too much control and an obsession with orderliness are prerequisites to a successful

(p. 78) entrepreneurial approach.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

4.

Entrepreneurship requires inflexible strategies and tactics that are not nimble.

(p. 78)

FALSE Accessibility: Keyboard Navigation Blooms: Remember

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SOURCE: Browsegrades.net

Level of Difficulty: 1 Easy

5.

Building long-term equity requires large, continuous reinvestment in people, products, and

(p. 78) services in advance of revenues.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

6.

One of the biggest strategic mistakes aspiring entrepreneurs make is that they think too small.

(p. 78)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

7.

Small, simple businesses that are more affordable, more manageable, and less demanding

(p. 78) are more profitable than high-potential ventures.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

8.

While government data, research, and business mortality statisticians may not agree on the

(p. 79) precise failure and survival figures for new businesses, they do agree that moderate success

is the rule, not the exception with new ventures.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

1-47 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

SOURCE: Browsegrades.net

9.

Knowing the difference between a good idea and a real opportunity is vital for would-be

(p. 80) entrepreneurs.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

10.

In case of competition, the entrepreneurial task is to find a way to direct the arena of

(p. 80) competition toward the areas where a new venture is at a competitive disadvantage.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

11.

The threshold concept proposes that the odds of success change as a venture reaches a

(p. 80) critical mass of over $8 million in sales and 50 employees.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

12.

Successful entrepreneurs avoid creating their own investment pools, and they do not compete

(p. 81) directly with venture capitalists for deals.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

1-48 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

SOURCE: Browsegrades.net

13.

Like venture capitalists, private investors are constrained by having to invest a lot of money in

(p. 81) a relatively short period.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

14.

Private investors are funding more and more early-stage businesses, enabling risk mitigation

(p. 81) before larger, institutional venture funds invest.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

15.

There is often a direct correlation between creativity and innovation and the level of resources

(p. 82) available at the start of a venture.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

16.

"Durability" refers to the market advantage a company can enjoy by developing proprietary

(p. 83) barriers to entry.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

1-49 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

SOURCE: Browsegrades.net

17.

In entrepreneurial companies, bootstrapping is a way of life that can create significant

(p. 84) competitive advantages.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

18.

One of the leading practices of fast-growth companies to achieve market penetration is to

(p. 88) initially deliver product and service benefits at below-market prices.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

19.

Fast-growth firms maintain control by selectively granting employee stock ownership.

(p. 88)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

20.

While developing management strategies, fast-growth firms are careful not to link a defined

(p. 88) exit strategy in the business plan with what the lead entrepreneur envisions as his or her long-

term objectives.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

1-50 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

SOURCE: Browsegrades.net

21.

The most effective entrepreneurial leaders of fast-growth companies avoid linking job

(p. 88) performance standards to a business plan practice top-down management and

administration.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Multiple Choice Questions

22.

What is at the heart of the entrepreneurial process?

(p. 77)

A. Innovation and creativity B. Opportunity recognition C. Team work D. Marshalling resources Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 2 Medium

23.

The entrepreneurial process starts with:

(p. 77)

A. strategy.

B. networks.

C. team.

D. opportunity.

Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

1-51 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

SOURCE: Browsegrades.net

24.

According to the threshold concept, which of the following ventures is likely to overcome

(p. 80) failure?

A. A venture that reaches a critical mass of 10 people with $500,000 in revenues B. A venture that reaches a critical mass of 5 people with $2 million in revenues C. A venture that reaches a critical mass of 15 people with $2.5 million in revenues D. A venture that reaches a critical mass of 6 people with $1.5 million in revenues Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

25.

According to the Timmons Model, which of the following is true of resources as a key element

(p. 82) in an entrepreneurial process?

A. An entrepreneur should stay away from bootstrapping, especially with new ventures.

B. An entrepreneur must understand that having too much money early on in the venture is the biggest factor that contributes to its success.

C. An entrepreneur must avoid doing more with fewer resources as it is detrimental to a company's competitive advantage.

D. An entrepreneur must strive to minimize and control resources, but not necessarily own them.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

26.

Which of the following forms the base of the Timmons Model?

(p. 82)

A. Profitability B. Sustainability C. Lifestyle D. Harvest Accessibility: Keyboard Navigation Blooms: Remember 1-52 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

SOURCE: Browsegrades.net

Level of Difficulty: 1 Easy

27.

In entrepreneurship, "durability" of an opportunity relates to the:

(p. 83)

A. return on investment.

B. market demand.

C. barriers to entry.

D. market readiness.

Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 2 Medium

28.

Which of the following refers to consumer trends and behaviors that seek new products or

(p. 83) services?

A. Entrepreneurial durability B. Market readiness C. Business plan feasibility D. Product diversification Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

29.

Considering that the entrepreneurial process is opportunity-driven, in which of the following

(p. 84) circumstances is there a possibility of greater opportunity?

A. When there are greater gaps in available information and knowledge B. When there are greater consistencies in existing services and quality C. When there are fewer inconsistencies in lead and lag times D. When there is less robustness of the gross and net margins Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

1-53 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

SOURCE: Browsegrades.net

30.

Fast-growth firms should strive to create high-impact, new product and service improvements

(p. 88) with development expenditures that account for no more than approximately _____ percent of

revenues.

A. 2 B. 6 C. 10 D. 15 Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

31.

Which of the following is one of the leading financial practices of fast-growth firms?

(p. 88)

A. Refraining from linking an entrepreneur's long-term objectives to a defined exit strategy in a business plan B. Granting stock ownership to every employee C. Anticipating only a single round of financing D. Utilizing financing vehicles that retain an entrepreneur's voting control Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

Fill in the Blank Questions

32.

Entrepreneurs for whom issues of family roots and location take precedence and thereby wish

(p. 81) to be with and work with their family may lead them to develop a ________ business.

lifestyle Blooms: Remember Level of Difficulty: 1 Easy 1-54 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

SOURCE: Browsegrades.net

33.

A(n) _____ provides the language and code for communicating the quality of the three driving

(p. 82) forces of the Timmons Model and of their fit and balance.

business plan Blooms: Remember Level of Difficulty: 1 Easy

34.

In the entrepreneurial process depicted in the Timmons Model, the required shape, size, and

(p. 82) depth of a team and resources are established by the shape, size, and depth of a(n) ____.

opportunity Blooms: Remember Level of Difficulty: 1 Easy

35.

Rounding out the Timmons model of the three driving forces is the concept of _____ between

(p. 85) and among these forces.

fit and balance Blooms: Remember Level of Difficulty: 1 Easy

36.

Building a ________ venture means achieving economic, environmental, and social goals

(p. 85) without compromising the same opportunity for future generations.

sustainable Blooms: Remember Level of Difficulty: 2 Medium

37.

As depicted in the Timmons Model, the entrepreneurial process can be appreciated as a

(p. 85) constant balancing act, requiring continual assessment, revised strategies and tactics, and

a(n) _____ approach. experimental Blooms: Remember 1-55 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

SOURCE: Browsegrades.net

Level of Difficulty: 2 Medium

Short Answer Questions

38.

What are the central themes or driving forces that dominate a highly dynamic entrepreneurial

(p. 82) process?

An entrepreneurial process is opportunity-driven. It is driven by a lead entrepreneur and an entrepreneurial team. It is resource parsimonious and creative and depends on the fit and balance among the three driving forces: the team, the opportunity, and the resources. It is integrated, holistic, and sustainable.

Blooms: Remember Level of Difficulty: 1 Easy

39.

According to the Timmons Model, what are the three driving forces of an entrepreneurial

(p. 82) process?

According to the Timmons Model, the three driving forces of an entrepreneurial process are the team, the opportunity, and the resources. The shape, size, and depth of the opportunity establish the required shape, size, and depth of both the resources and the team.

Blooms: Remember Level of Difficulty: 1 Easy

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SOURCE: Browsegrades.net

40.

Write a brief note on the importance of timing in the entrepreneurial process.

(p. 87)

Decisiveness in recognizing and seizing an opportunity can make all the difference. An entrepreneur should not wait for the perfect time to take advantage of an opportunity: There is no perfect time. Most new businesses run out of money before they can find enough customers and the right teams for their great ideas.

Blooms: Remember Level of Difficulty: 1 Easy

Essay Questions

41.

Discuss the overall paradoxical conflict inherent in the entrepreneurial process.

(p. 78)

The world of entrepreneurship is not neat, tidy, linear, consistent, nor predictable and is fraught with paradoxes. To thrive in the entrepreneurial environment, one needs to be very adept at coping with ambiguity, chaos, and uncertainty, while having management skills that mitigate risk in the face of all this uncertainty. The classic paradox is high growth, highly profitable companies in rapidly growing markets frequently are cash-flow negative, requiring ongoing investment to fund this shortfall.

Blooms: Understand Level of Difficulty: 2 Medium

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SOURCE: Browsegrades.net

42.

Discuss the potential advantages and disadvantages of lifestyle ventures.

(p. 81)

For many aspiring entrepreneurs, issues of family roots and location take precedence over the time and effort required to develop a high-potential opportunity. Accessibility to a preferred way of life such as access to fishing, music, hunting, a rural setting, and the mountains can be more important than how large a business one has or the size of one's net worth. While lifestyle ventures can be tremendously rewarding, in some cases they lead to lucrative careers, more often they do not produce a sustainable level of income, the work is more difficult, and the hours are usually far longer than the entrepreneur anticipates.

Blooms: Remember Level of Difficulty: 2 Medium

Chapter 04 Clean Commerce and Sustainable Enterprise Movements are an Opportunity Sea Change

True / False Questions

1. Sustainability means that resource utilization should not deplete existing capital.

True

False

2. Sustainability means that resources should be used at a rate faster than the rate of replenishment.

True

False

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3. Sustainability concepts are incompatible with growth and profits.

True

False

4. An organization is required to establish weak ties to individuals and organizations that lie outside the traditional network of relationships to help see and analyze issues and opportunities.

True

False

5. Building weak ties is one of the facets of looking through a sustainability lens.

True

False

6. Systems thinking refers to the practice of tracking materials through their respective life cycles.

True

False

7. An E-factor measurement indicates how many weight units of output one gets per weight unit of input.

True

False

8. Applying green chemistry principles to pharmaceutical production processes has enabled pharmaceutical companies to dramatically increase their E-factors.

True

False

9. As a result of the communications revolution, end users now have the means and motivation to search out alternative products.

True

False

10. NatureWorks was the first company to deliver aesthetically appealing, ecologically friendly home cleaning products to mainstream retailers (as opposed to just natural products stores).

True

False

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11. Some of the most fertile clean commerce opportunities lie in the areas of greatest tension.

True

False

Multiple Choice Questions

12. Sustainability refers to:

A. the role new ventures play in supporting communities.

B. the generation of waste that exceeds the carrying capacity of the surrounding ecosystem.

C. the removal of weak ties with organizations that lie outside an entrepreneur's traditional network of relationships.

D. the principle of green chemistry that uses depleting feedstock instead of renewable feedstock.

13. Which of the following is a strategic facet of looking through a sustainability lens?

A. Adopting radical incrementalism B. Severing weak ties C. Increasing E-factor D. Thinking like a molecule 14. Which of the following is closely tied to systems thinking?

A. Gathering data about the fluidity of the market B. Understanding the interconnectedness in the world C. Implementing the concept of large-scale incrementalism D. Thinking small

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15. Which of the following is one of the 12 principles in green chemistry?

A. Using raw materials and feedstocks that are depleting rather than renewable B. Using catalysts, and not stoichiometric reagents C. Using chemical derivatives whenever possible D. Using solvents, separation agents, or other auxiliary chemicals rather than innocuous chemicals 16. Which of the following is closely tied to molecular thinking?

A. Adhering to traditional chemical processes B. Taking the larger perspective by looking at the entire eco-system C. Looking at the immediate environment D. Minimizing atom economy 17. Green chemistry is the utilization of principles that:

A. use chemical derivatives and additional reagents over innocuous chemicals.

B. use stoichiometric reagents instead of catalysts in chemical processes.

C. result in the maximization of atom economy in chemical products.

D. embrace the reduction and elimination of hazardous substances in chemical products.

18. In what mature industry did the entrepreneurial firm Method manage to change the rules?

A. Garden products B. Consumer packaged goods C. Home Furnishings D. Retailing

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19. In which of the following emerging markets has NatureWorks assumed a leadership role?

A. Biofuels B. Green cleaners C. Greener plastics D. Waste recycling 20. The E-factor relates to the _____ aspect of running a business.

A. manufacturing B. performance C. economic D. purchasing 21. Which industry is an early adopter of green chemistry principles in industrial processing?

A. The plastics industry B. The textile industry C. The pulp and paper industry D. The pharmaceutical industry 22. Which metric does the pharmaceutical industry use to measure the ratio of inputs to outputs in any given product?

A. EcoScale B. E-factor C. Effective mass yield D. Carbon footprint

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23. Which of the following countries is setting a high bar for international manufacturing standards?

A. China B. Japan C. Mexico D. Australia

Fill in the Blank Questions

24. _____ means that resources should not be used at a rate faster than the rate of replenishment. ________________________________________ 25. _____ are a means to gain access to fresh ideas, emergent perspectives, and new scientific insights. ________________________________________ 26. _____ feedstocks are often made from agricultural products or are the wastes of other processes. ________________________________________ 27. Chemical _____ use additional reagents and generate waste. ________________________________________ 28. Thinking like a _____ requires one to look at his or her immediate environment, or to think small, while not losing the perspective of the larger environment one is operating in. ________________________________________

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29. _____ is a mind-set that can be used to reengineer entire systems to discover ways of meeting market needs without being limited by traditional chemical choices or processes. ________________________________________ 30. Method keeps R&D inside, but the company outsources ____. ________________________________________ 31. _____ is a concept of sustainability in which a product's constituent materials (understood as assets, not waste) become inputs for new products or return safely into the earth at the end of the product's useful life. ________________________________________ 32. The idea of the _____ economy, included in green chemistry tools, is one in which manufacturers make as full use as possible of every input molecule in the final output product. ________________________________________ 33. At a macro level, green chemistry provides the means of shifting away from a petrochemicalbased economy to a _____ economy. ________________________________________ 34. The Waste Electrical and Electronic Equipment Directive (WEEE) places responsibility for the disposal of waste electrical and electronic equipment on ____. ________________________________________ 35. The _____ standards provide sustainable building rating systems under the U.S. Green Building Council. ________________________________________

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Short Answer Questions

36. How are businesses affected by the seismic shift toward clean commerce and sustainable enterprise movements?

37. Define sustainability.

38. What are the three strategic facets of looking through a sustainability lens?

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39. Briefly discuss the concept of systems thinking.

40. What is green chemistry?

41. Briefly discuss the concept of thinking like a molecule.

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42. What drives Method's capacity to remain on the competitive edge?

Essay Questions

43. What are the advantages of establishing weak ties?

44. Define green chemistry, and explain how it relates to molecular thinking.

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Chapter 04 Clean Commerce and Sustainable Enterprise Movements are an Opportunity Sea Change Answer Key

True / False Questions

1.

Sustainability means that resource utilization should not deplete existing capital.

(p. 97)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

2.

Sustainability means that resources should be used at a rate faster than the rate of

(p. 97) replenishment.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

3.

Sustainability concepts are incompatible with growth and profits.

(p. 97)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

4.

An organization is required to establish weak ties to individuals and organizations that lie

(p. 98) outside the traditional network of relationships to help see and analyze issues and

opportunities.

TRUE Accessibility: Keyboard Navigation 1-68 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

SOURCE: Browsegrades.net

Blooms: Remember Level of Difficulty: 1 Easy

5.

Building weak ties is one of the facets of looking through a sustainability lens.

(p. 98)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

6.

Systems thinking refers to the practice of tracking materials through their respective life

(p. 98) cycles.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

7.

An E-factor measurement indicates how many weight units of output one gets per weight unit

(p. 101) of input.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

8.

Applying green chemistry principles to pharmaceutical production processes has enabled

(p. 101) pharmaceutical companies to dramatically increase their E-factors.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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SOURCE: Browsegrades.net

9.

As a result of the communications revolution, end users now have the means and motivation

(p. 101) to search out alternative products.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

10.

NatureWorks was the first company to deliver aesthetically appealing, ecologically friendly

(p. 102) home cleaning products to mainstream retailers (as opposed to just natural products stores).

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

11.

Some of the most fertile clean commerce opportunities lie in the areas of greatest tension.

(p. 103)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Multiple Choice Questions

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SOURCE: Browsegrades.net

12.

Sustainability refers to:

(p. 97)

A. the role new ventures play in supporting communities.

B. the generation of waste that exceeds the carrying capacity of the surrounding ecosystem.

C. the removal of weak ties with organizations that lie outside an entrepreneur's traditional network of relationships.

D. the principle of green chemistry that uses depleting feedstock instead of renewable feedstock.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

13.

Which of the following is a strategic facet of looking through a sustainability lens?

(p. 98)

A. Adopting radical incrementalism B. Severing weak ties C. Increasing E-factor D. Thinking like a molecule Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

14.

Which of the following is closely tied to systems thinking?

(p. 98)

A. Gathering data about the fluidity of the market B. Understanding the interconnectedness in the world C. Implementing the concept of large-scale incrementalism D. Thinking small Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

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SOURCE: Browsegrades.net

15.

Which of the following is one of the 12 principles in green chemistry?

(p. 98)

A. Using raw materials and feedstocks that are depleting rather than renewable B. Using catalysts, and not stoichiometric reagents C. Using chemical derivatives whenever possible D. Using solvents, separation agents, or other auxiliary chemicals rather than innocuous chemicals Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

16.

Which of the following is closely tied to molecular thinking?

(p. 99)

A. Adhering to traditional chemical processes B. Taking the larger perspective by looking at the entire eco-system C. Looking at the immediate environment D. Minimizing atom economy Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

17.

Green chemistry is the utilization of principles that:

(p. 99)

A. use chemical derivatives and additional reagents over innocuous chemicals.

B. use stoichiometric reagents instead of catalysts in chemical processes.

C. result in the maximization of atom economy in chemical products.

D. embrace the reduction and elimination of hazardous substances in chemical products.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

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18.

In what mature industry did the entrepreneurial firm Method manage to change the rules?

(p. 99)

A. Garden products B. Consumer packaged goods C. Home Furnishings D. Retailing Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

19.

In which of the following emerging markets has NatureWorks assumed a leadership role?

(p. 100)

A. Biofuels B. Green cleaners C. Greener plastics D. Waste recycling Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

20.

The E-factor relates to the _____ aspect of running a business.

(p. 100)

A. manufacturing B. performance C. economic D. purchasing Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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21.

Which industry is an early adopter of green chemistry principles in industrial processing?

(p. 101)

A. The plastics industry B. The textile industry C. The pulp and paper industry D. The pharmaceutical industry Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

22.

Which metric does the pharmaceutical industry use to measure the ratio of inputs to outputs in

(p. 101) any given product?

A. EcoScale B. E-factor C. Effective mass yield D. Carbon footprint Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

23.

Which of the following countries is setting a high bar for international manufacturing

(p. 102) standards?

A. China B. Japan C. Mexico D. Australia Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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Fill in the Blank Questions

24.

_____ means that resources should not be used at a rate faster than the rate of

(p. 97) replenishment.

Sustainability Blooms: Remember Level of Difficulty: 1 Easy

25.

_____ are a means to gain access to fresh ideas, emergent perspectives, and new scientific

(p. 98) insights.

Weak ties Blooms: Remember Level of Difficulty: 1 Easy

26.

_____ feedstocks are often made from agricultural products or are the wastes of other

(p. 98) processes.

Renewable Blooms: Remember Level of Difficulty: 1 Easy

27.

Chemical _____ use additional reagents and generate waste.

(p. 98)

derivatives Blooms: Remember Level of Difficulty: 1 Easy

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28.

Thinking like a _____ requires one to look at his or her immediate environment, or to think

(p. 99) small, while not losing the perspective of the larger environment one is operating in.

molecule Blooms: Remember Level of Difficulty: 1 Easy

29.

_____ is a mind-set that can be used to reengineer entire systems to discover ways of meeting

(p. 99) market needs without being limited by traditional chemical choices or processes.

Thinking like a molecule Blooms: Remember Level of Difficulty: 1 Easy

30.

Method keeps R&D inside, but the company outsources ____.

(p. 99)

manufacturing Blooms: Remember Level of Difficulty: 1 Easy

31.

_____ is a concept of sustainability in which a product's constituent materials (understood as

(p. 100) assets, not waste) become inputs for new products or return safely into the earth at the end of

the product's useful life.

Cradle to cradle Blooms: Remember Level of Difficulty: 2 Medium

32.

The idea of the _____ economy, included in green chemistry tools, is one in which

(p. 100) manufacturers make as full use as possible of every input molecule in the final output product.

atom Blooms: Remember Level of Difficulty: 1 Easy

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33.

At a macro level, green chemistry provides the means of shifting away from a petrochemical-

(p. 101) based economy to a _____ economy.

biobased Blooms: Remember Level of Difficulty: 1 Easy

34.

The Waste Electrical and Electronic Equipment Directive (WEEE) places responsibility for the

(p. 102) disposal of waste electrical and electronic equipment on ____.

manufacturers Blooms: Remember Level of Difficulty: 1 Easy

35.

The _____ standards provide sustainable building rating systems under the U.S. Green

(p. 102) Building Council.

LEED (Leadership in Energy and Environmental Design) Blooms: Remember Level of Difficulty: 1 Easy

Short Answer Questions

36.

How are businesses affected by the seismic shift toward clean commerce and sustainable

(p. 97) enterprise movements?

Businesses now face increased global regulatory pressure, demand for heightened transparency, taxes on carbon emissions, and growing public concern about the environment and health. It's hard to find an industry or manufacturer that isn't affected by these trends.

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Level of Difficulty: 1 Easy

37.

Define sustainability.

(p. 97)

Sustainability means that resource utilization should not deplete existing (natural) capital. It means that resources should not be used at a rate faster than the rate of replenishment, and waste generation should not exceed the carrying capacity of the surrounding ecosystem.

Blooms: Remember Level of Difficulty: 1 Easy

38.

What are the three strategic facets of looking through a sustainability lens?

(p. 98)

The three strategic facets of looking through a sustainability lens are weak ties, systems thinking, and thinking like a molecule. Reviewing each of these facets of the sustainability lens will illuminate new tactics.

Blooms: Remember Level of Difficulty: 1 Easy

39.

Briefly discuss the concept of systems thinking.

(p. 98)

A sustainability lens requires systems thinking. Companies generally design their strategy while implicitly assuming narrowly defined system boundaries: the firm, the market, or the industry. The reality is that all work in a complex and interconnected world and those who grasp this and seek to leverage this understanding can discover new and previously unappreciated and lucrative areas in which to act.

Blooms: Remember Level of Difficulty: 1 Easy

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40.

What is green chemistry?

(p. 99)

Green chemistry is the utilization of principles that embrace the reduction and elimination of hazardous substances in the design, manufacture, and application of chemical products.

These principles can be applied to organic chemistry, inorganic chemistry, biochemistry, analytical chemistry with the focus being on minimizing the risks and maximizing the efficiency of any chemical reaction.

Blooms: Remember Level of Difficulty: 1 Easy

41.

Briefly discuss the concept of thinking like a molecule.

(p. 99)

The concept of thinking like a molecule requires one to look at his or her immediate environment, or to think small, while not losing the perspective of the larger environment he or she is operating in. Thinking like a molecule is a mind-set that can be used to reengineer entire systems to discover ways of meeting market needs without being limited by traditional chemical choices or processes.

Blooms: Remember Level of Difficulty: 2 Medium

42.

What drives Method's capacity to remain on the competitive edge?

(p. 99)

Co-development of innovations with suppliers drives Method's ability to remain on the competitive edge. Most early suppliers were small firms that wanted to be innovative and to learn new processes and designs. Many of these have scaled up successfully with Method's tremendous growth, continuing to provide creative input.

Blooms: Remember Level of Difficulty: 2 Medium

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Essay Questions

43.

What are the advantages of establishing weak ties?

(p. 98)

Through weak ties one can gain access to fresh ideas, emergent perspectives, and new scientific data that make what used to be peripheral issues now salient to new venture success. Since one will need new partners to help see and analyze issues and opportunities, weak ties are important. This requires that one establishes weak ties to individuals and organizations previously off his or her radar screen. They are called weak not because they lack substance or will let one down, but because they lie outside one's traditional network of relationships.

Blooms: Understand Level of Difficulty: 3 Hard

44.

Define green chemistry, and explain how it relates to molecular thinking.

(p. 99)

Green chemistry is the utilization of a set of principles that embrace the reduction and elimination of hazardous substances in the design, manufacture, and application of chemical products. Thinking like a molecule is a mind-set that can be used to reengineer entire systems to discover ways of meeting market needs without being limited by traditional chemical choices or processes.

Blooms: Understand Level of Difficulty: 2 Medium

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Opportunity Recognition

True / False Questions

1. The key to succeeding is failing slowly.

True

False

2. Successful entrepreneurs realize that knowing what to do is more important than knowing what not to do.

True

False

3. According to the capital markets food chain for entrepreneurial ventures, the enterprise value of a company in the R&D stage venture is typically under $1 million.

True

False

4. A real business opportunity is one in which the customers have a low sense of urgency and are unwilling to pay for a solution.

True

False

5. A strong management team recognizes the window of opportunity and develops competitive advantage to give a business additional leverage to exploit the market opportunity.

True

False

6. The vast majority of radical innovations since World War II have come from new and small firms.

True

False

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7. According to Moore's law, the computing power of a chip decreases every 18 months.

True

False

8. The importance of an idea is often underrated, and the need for products or services that can be sold in enough quantity to real customers is overemphasized.

True

False

9. According to the Nobel laureate late Herbert Simon, the recognition of patterns is a rational process that is simply logical.

True

False

10. The primary reason that first-time entrepreneurs run out of cash at a faster rate than they bring in customers and profitable sales is that they have not focused on the right opportunity.

True

False

11. A fragmented or emerging industry is one in which there are no information or knowledge gaps and one where competition is not profitable.

True

False

12. Firms with lower customer acquisition costs allow room for increased profitability.

True

False

13. High asset-intensive, high-margin businesses generate the highest profits and sustainable growth.

True

False

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14. To gain market entry with high value-added products or services in a growing market, it is best to underprice.

True

False

15. Data available about market characteristics, competitors, and the like are frequently inversely related to the real potential of an opportunity.

True

False

Multiple Choice Questions

16. The ability to build a business beyond a sole proprietor business to one that can grow with the right resources and people while building equity for you and your investors is known as ____.

A. leveraging B. strategic differentiation C. scalability D. break-even analysis 17. According to research, what is the primary reason companies lose customers?

A. Product quality issues B. Competitive offers C. Customer service issues D. Changing needs

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18. What opportunity is most likely to be created when proprietary or contractual advantage is the root of change?

A. Breakeven B. Liquidity exit C. Distributorship D. Free cash flow 19. The development of the value chain and channels of distribution has led to the opportunity creation in ____.

A. financial services B. telecommunications C. tax and SEC laws D. superstores 20. Moore's Law and Metcalf's Law are most closely associated with:

A. technology sea change.

B. irrational exuberance.

C. value chain disruption.

D. venture investor criteria.

21. Which of the following relates to effective opportunity recognition?

A. Doing it first B. Doing it better C. Cross-association D. Asymmetry building

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22. Which of the following functions is performed by the right brain?

A. Logical B. Intuitive C. Rational D. Analytical 23. When evaluating venture opportunities, which industry has the highest potential?

A. A highly concentrated industry B. A mature industry C. An industry with fragmented competition D. An industry with perfect market competition 24. Which of the following opportunities has the lowest potential?

A. An opportunity that targets customers who belong to a niche market B. An opportunity that targets customers who are reachable C. An opportunity that targets customers who are receptive to the product or service in fast growth markets D. An opportunity that targets customers who are loyal to existing brands in slow growth markets 25. Which of the following is true of market structures?

A. A fragmented industry is devoid of asymmetries.

B. An emerging market often contains vacuums.

C. Industries that are highly concentrated and perfectly competitive are typically more likely to succeed.

D. Markets where information or knowledge gaps exist are most likely to fail.

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26. What annual growth rate is indicative of a thriving and expansive industry—one that creates niches for new entrants?

A. 5 to 10 percent B. 10 to 20 percent C. 30 to 50 percent D. 10 to 25 percent 27. Attractive opportunities are ones that have potential for a moderate-to-strong degree of control over ____.

A. barriers to entry B. exit mechanism C. channels of distribution D. strategic differentiation 28. High value for a company can be created by the potential to be a market leader and to capture at least _____ percent share of the market.

A. 10 B. 20 C. 5 D. 15 29. Attractive opportunities have the potential to yield a return on investment of _____ percent or more per year.

A. 25 B. 20 C. 15 D. 10

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30. Ventures are considered attractive if they have low to moderate:

A. control over distribution.

B. control over prices.

C. sales growth.

D. capital requirements.

31. Earnings before interest but after taxes (EBIAT) is driven by sales, profitability, and ____.

A. liquidity B. cash flow C. depreciation D. asset intensity 32. With regard to the capital markets, what is most critical in initial public offerings?

A. Audited documentation B. Timing C. Market adoption D. The underwriter 33. Having a favorable window of opportunity is most closely related to:

A. barriers to entry.

B. exit mechanism.

C. channels of distribution.

D. strategic differentiation.

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34. Which of the following has research shown to be the most important determinant of competitive success?

A. Customer service B. Product differentiation C. Flexibility D. Payback to the customer

Fill in the Blank Questions

35. _____ is defined as the period of revenue growth in the life cycle of target industry when the slope of the revenue growth is increasing. ________________________________________ 36. In the United States, the economy is dominated by _____ businesses. ________________________________________ 37. _____ law states that computer chips double productivity every 18 months. ________________________________________ 38. Finding a good _____ is the first of many steps in the process of converting an entrepreneur's creativity into an opportunity. ________________________________________

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39. According to the late Herbert Simon, Nobel laureate, the _____ is a creative process which involves the creative linking, or cross-association, of two or more in-depth "chunks" of experience, know-how, and contacts. ________________________________________ 40. ________ is the process of linking knowledge in one field or marketplace with quite different technical, business, or market know-how from others. ________________________________________ 41. According to studies, the _____ side of the brain performs rational, logical functions. ________________________________________ 42. Spontaneous, facilitated collaboration with no criticisms is a creative group process referred to as ____. ________________________________________ 43. Of utmost importance with new venture creation is the fit of the _____ and the management team with the opportunity. ________________________________________ 44. Venture opportunities that frequently target expensive-to-reach customers have _____ potential. ________________________________________ 45. Superior opportunities solve a significant problem, remove a serious pain-point, or meet a significant want or need for which someone is willing to pay a(n) ____. ________________________________________

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46. When evaluating venture opportunities in the medical and life sciences today, a minimum market size of _____ in sales is attractive. ________________________________________ 47. For an entrepreneur to estimate and communicate sustainable value to potential stakeholders, an opportunity should have a minimum market size of _______. ________________________________________ 48. Price-cutting and other competitive strategies in highly concentrated markets can present a significant ________ for new entrants. ________________________________________ 49. The goal for a firm is to avoid declining revenue conditions and become the _____ provider. ________________________________________ 50. The positive attributes of an opportunity diminish when the time to breakeven and achieve positive cash flow exceeds _____ years. ________________________________________ 51. Ventures that generate after-tax profits of less than ________ percent are quite fragile. ________________________________________ 52. _____ is defined as earnings before interest but after taxes (EBIAT) plus amortization (A) and depreciation (D) less spontaneous working capital requirements (WC) less capital expenditures (CAPex) or FCF = EBIAT + [A + D] - [+ or - WC] - CAPex. ________________________________________

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53. The context in which the sale or acquisition of a company occurs is largely driven by the _____ at that particular time. ________________________________________

Short Answer Questions

54. In general, when do business plans become obsolete?

55. What are the five attributes of real business opportunities?

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56. What minimum level of gross margin is characteristic of a superior opportunity?

57. Briefly discuss cost structure as a criterion in evaluating a high-potential venture opportunity.

58. Briefly discuss profits after tax as a criterion in evaluating venture opportunities.

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59. Briefly discuss the harvest issue of exit mechanism and strategy in evaluating venture opportunities.

60. In the medical and life sciences, what is the minimum market size in sales opportunity seekers should be looking for?

61. Briefly discuss the risk/reward tolerance as a personal criterion in evaluating venture opportunities.

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62. At a 20 percent gross margin, for every $1 increase in fixed costs (e.g., insurance, salaries, rent, and utilities), by how many dollars do sales need to increase just to stay even?

Essay Questions

63. If an idea is not an opportunity, what is an opportunity?

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Chapter 05 Opportunity Recognition Answer Key

True / False Questions

1.

The key to succeeding is failing slowly.

(p. 113)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

2.

Successful entrepreneurs realize that knowing what to do is more important than knowing

(p. 113) what not to do.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

3.

According to the capital markets food chain for entrepreneurial ventures, the enterprise value

(p. 114) of a company in the R&D stage venture is typically under $1 million.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

4.

A real business opportunity is one in which the customers have a low sense of urgency and

(p. 114) are unwilling to pay for a solution.

FALSE Accessibility: Keyboard Navigation Blooms: Remember

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Level of Difficulty: 1 Easy

5.

A strong management team recognizes the window of opportunity and develops competitive

(p. 114) advantage to give a business additional leverage to exploit the market opportunity.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

6.

The vast majority of radical innovations since World War II have come from new and small

(p. 114) firms.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

7.

According to Moore's law, the computing power of a chip decreases every 18 months.

(p. 115)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

8.

The importance of an idea is often underrated, and the need for products or services that can

(p. 115) be sold in enough quantity to real customers is overemphasized.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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9.

According to the Nobel laureate late Herbert Simon, the recognition of patterns is a rational

(p. 116) process that is simply logical.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

10.

The primary reason that first-time entrepreneurs run out of cash at a faster rate than they bring

(p. 121) in customers and profitable sales is that they have not focused on the right opportunity.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

11.

A fragmented or emerging industry is one in which there are no information or knowledge gaps

(p. 123) and one where competition is not profitable.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

12.

Firms with lower customer acquisition costs allow room for increased profitability.

(p. 123)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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13.

High asset-intensive, high-margin businesses generate the highest profits and sustainable

(p. 124) growth.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

14.

To gain market entry with high value-added products or services in a growing market, it is best

(p. 126) to underprice.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

15.

Data available about market characteristics, competitors, and the like are frequently inversely

(p. 128) related to the real potential of an opportunity.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Multiple Choice Questions

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16.

The ability to build a business beyond a sole proprietor business to one that can grow with the

(p. 113) right resources and people while building equity for you and your investors is known as ____.

A. leveraging B. strategic differentiation C. scalability D. break-even analysis Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

17.

According to research, what is the primary reason companies lose customers?

(p. 115)

A. Product quality issues B. Competitive offers C. Customer service issues D. Changing needs Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

18.

What opportunity is most likely to be created when proprietary or contractual advantage is the

(p. 115) root of change?

A. Breakeven B. Liquidity exit C. Distributorship D. Free cash flow Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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19.

The development of the value chain and channels of distribution has led to the opportunity

(p. 115) creation in ____.

A. financial services B. telecommunications C. tax and SEC laws D. superstores Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

20.

Moore's Law and Metcalf's Law are most closely associated with:

(p. 116)

A. technology sea change.

B. irrational exuberance.

C. value chain disruption.

D. venture investor criteria.

Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

21.

Which of the following relates to effective opportunity recognition?

(p. 116)

A. Doing it first B. Doing it better C. Cross-association D. Asymmetry building Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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22.

Which of the following functions is performed by the right brain?

(p. 117)

A. Logical B. Intuitive C. Rational D. Analytical Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

23.

When evaluating venture opportunities, which industry has the highest potential?

(p. 120)

A. A highly concentrated industry B. A mature industry C. An industry with fragmented competition D. An industry with perfect market competition Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

24.

Which of the following opportunities has the lowest potential?

(p. 122)

A. An opportunity that targets customers who belong to a niche market B. An opportunity that targets customers who are reachable C. An opportunity that targets customers who are receptive to the product or service in fast growth markets D. An opportunity that targets customers who are loyal to existing brands in slow growth markets Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

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25.

Which of the following is true of market structures?

(p. 123)

A. A fragmented industry is devoid of asymmetries.

B. An emerging market often contains vacuums.

C. Industries that are highly concentrated and perfectly competitive are typically more likely to succeed.

D. Markets where information or knowledge gaps exist are most likely to fail.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

26.

What annual growth rate is indicative of a thriving and expansive industry—one that creates

(p. 123) niches for new entrants?

A. 5 to 10 percent B. 10 to 20 percent C. 30 to 50 percent D. 10 to 25 percent Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

27.

Attractive opportunities are ones that have potential for a moderate-to-strong degree of control

(p. 125) over ____.

A. barriers to entry B. exit mechanism C. channels of distribution D. strategic differentiation Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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28.

High value for a company can be created by the potential to be a market leader and to capture

(p. 123) at least _____ percent share of the market.

A. 10 B. 20 C. 5 D. 15 Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

29.

Attractive opportunities have the potential to yield a return on investment of _____ percent or

(p. 123) more per year.

A. 25 B. 20 C. 15 D. 10 Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

30.

Ventures are considered attractive if they have low to moderate:

(p. 124)

A. control over distribution.

B. control over prices.

C. sales growth.

D. capital requirements.

Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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31.

Earnings before interest but after taxes (EBIAT) is driven by sales, profitability, and ____.

(p. 124)

A. liquidity B. cash flow C. depreciation D. asset intensity Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

32.

With regard to the capital markets, what is most critical in initial public offerings?

(p. 125)

A. Audited documentation B. Timing C. Market adoption D. The underwriter Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

33.

Having a favorable window of opportunity is most closely related to:

(p. 125)

A. barriers to entry.

B. exit mechanism.

C. channels of distribution.

D. strategic differentiation.

Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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34.

Which of the following has research shown to be the most important determinant of

(p. 115) competitive success?

A. Customer service B. Product differentiation C. Flexibility D. Payback to the customer Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Fill in the Blank Questions

35.

_____ is defined as the period of revenue growth in the life cycle of target industry when the

(p. 114) slope of the revenue growth is increasing.

Window of opportunity Blooms: Remember Level of Difficulty: 1 Easy

36.

In the United States, the economy is dominated by _____ businesses.

(p. 115)

service Blooms: Remember Level of Difficulty: 1 Easy

37.

_____ law states that computer chips double productivity every 18 months.

(p. 115)

Moore's Blooms: Remember Level of Difficulty: 1 Easy

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38.

Finding a good _____ is the first of many steps in the process of converting an entrepreneur's

(p. 115) creativity into an opportunity.

idea Blooms: Remember Level of Difficulty: 1 Easy

39.

According to the late Herbert Simon, Nobel laureate, the _____ is a creative process which

(p. 116) involves the creative linking, or cross-association, of two or more in-depth "chunks" of

experience, know-how, and contacts. recognition of patterns Blooms: Remember Level of Difficulty: 1 Easy

40.

________ is the process of linking knowledge in one field or marketplace with quite different

(p. 117) technical, business, or market know-how from others.

Pattern recognition Blooms: Remember Level of Difficulty: 1 Easy

41.

According to studies, the _____ side of the brain performs rational, logical functions.

(p. 117)

left Blooms: Remember Level of Difficulty: 1 Easy

42.

Spontaneous, facilitated collaboration with no criticisms is a creative group process referred to

(p. 117) as ____.

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43.

Of utmost importance with new venture creation is the fit of the _____ and the management

(p. 118) team with the opportunity.

lead entrepreneur Blooms: Remember Level of Difficulty: 1 Easy

44.

Venture opportunities that frequently target expensive-to-reach customers have _____

(p. 122) potential.

lower Blooms: Remember Level of Difficulty: 1 Easy

45.

Superior opportunities solve a significant problem, remove a serious pain-point, or meet a

(p. 122) significant want or need for which someone is willing to pay a(n) ____.

premium Blooms: Remember Level of Difficulty: 1 Easy

46.

When evaluating venture opportunities in the medical and life sciences today, a minimum

(p. 123) market size of _____ in sales is attractive.

$100 million Blooms: Remember Level of Difficulty: 1 Easy

47.

For an entrepreneur to estimate and communicate sustainable value to potential stakeholders,

(p. 123) an opportunity should have a minimum market size of _______.

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48.

Price-cutting and other competitive strategies in highly concentrated markets can present a

(p. 123) significant ________ for new entrants.

barrier to entry Blooms: Remember Level of Difficulty: 2 Medium

49.

The goal for a firm is to avoid declining revenue conditions and become the _____ provider.

(p. 123)

low-cost Blooms: Remember Level of Difficulty: 1 Easy

50.

The positive attributes of an opportunity diminish when the time to breakeven and achieve

(p. 123) positive cash flow exceeds _____ years.

three Blooms: Remember Level of Difficulty: 1 Easy

51.

Ventures that generate after-tax profits of less than ________ percent are quite fragile.

(p. 123)

five Blooms: Remember Level of Difficulty: 1 Easy

52.

_____ is defined as earnings before interest but after taxes (EBIAT) plus amortization (A) and

(p. 124) depreciation (D) less spontaneous working capital requirements (WC) less capital

expenditures (CAPex) or FCF = EBIAT + [A + D] - [+ or - WC] - CAPex. Unleveraged free cash flow Blooms: Remember Level of Difficulty: 1 Easy

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53.

The context in which the sale or acquisition of a company occurs is largely driven by the _____

(p. 125) at that particular time.

capital markets Blooms: Remember Level of Difficulty: 1 Easy

Short Answer Questions

54.

In general, when do business plans become obsolete?

(p. 113)

Business plans become obsolete the minute they are finished or before they are sent to the printer.

Blooms: Remember Level of Difficulty: 1 Easy

55.

What are the five attributes of real business opportunities?

(p. 113)

Real business opportunities have the following attributes: They create or add significant value to a customer or end user; they address a true market problem with some form of competitive advantage; the need for the product or service is pervasive, the customer has a high sense of urgency, and is willing to pay for a solution; they have robust market, growth, margin, and profitability characteristics that can be proven; and the founders and management team have collective domain experience that matches the opportunity.

Blooms: Remember Level of Difficulty: 1 Easy

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56.

What minimum level of gross margin is characteristic of a superior opportunity?

(p. 135)

A gross margin exceeding 40 percent is a characteristic of an opportunity with the highest potential.

Blooms: Remember Level of Difficulty: 1 Easy

57.

Briefly discuss cost structure as a criterion in evaluating a high-potential venture opportunity.

(p. 123)

The goal for a firm is to become the low-cost provider and avoid declining revenue conditions.

Attractive opportunities exist in industries where economies of scale work to the advantage of the new venture. Firms with lower customer acquisition costs also allow room for increased profitability.

Blooms: Remember Level of Difficulty: 1 Easy

58.

Briefly discuss profits after tax as a criterion in evaluating venture opportunities.

(p. 123)

High and durable gross margins usually translate into strong and durable after-tax profits.

Attractive opportunities have potential for durable profits of 10 to 20 percent, and those with after-tax profits of less than 5 percent are quite fragile.

Blooms: Remember Level of Difficulty: 1 Easy

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59.

Briefly discuss the harvest issue of exit mechanism and strategy in evaluating venture

(p. 125) opportunities.

Businesses that are eventually sold—privately or to the public—or acquired usually are started and grown with a harvest objective in mind. Attractive companies that realize capital gains from the sale of their businesses have or envision a harvest or exit mechanism. Planning is critical because, as is often said, it is much harder to get out of a business than to get into it.

Giving some serious thought to the options and likelihood that the company can eventually be harvested is an important aspect of the entrepreneurial process.

Blooms: Remember Level of Difficulty: 1 Easy

60.

In the medical and life sciences, what is the minimum market size in sales opportunity seekers

(p. 123) should be looking for?

$500 million

Blooms: Remember Level of Difficulty: 2 Medium

61.

Briefly discuss the risk/reward tolerance as a personal criterion in evaluating venture

(p. 126) opportunities.

Successful entrepreneurs take only calculated risks and avoid risks they do not need to take.

The real issue is fit, recognizing that risk is part of a start-up and the right balance needs to be struck.

Blooms: Remember Level of Difficulty: 1 Easy

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62.

At a 20 percent gross margin, for every $1 increase in fixed costs (e.g., insurance, salaries,

(p. 124) rent, and utilities), by how many dollars do sales need to increase just to stay even?

At a 20 percent gross margin, for every $1 increase in fixed costs, sales need to increase by five dollars just to stay even.

Blooms: Remember Level of Difficulty: 1 Easy

Essay Questions

63.

If an idea is not an opportunity, what is an opportunity?

(p. 113114)

Opportunities create or add significant value to a customer or end-user. They do so by solving a significant problem, removing a serious pain-point, or meeting a significant want or need for which someone is willing to pay a premium. Superior opportunities have robust market, margin, and moneymaking characteristics that will allow the entrepreneur to estimate and communicate sustainable value to potential stakeholders. They are a good fit with the founders and the management team at the time and in the marketplace—and they exhibit an attractive risk-reward balance.

Blooms: Understand Level of Difficulty: 2 Medium

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True / False Questions

1. By definition, any form of entrepreneurship is called social enterprising.

True

False

2. The primary difference between traditional ventures and social purpose ventures is the primary market impact.

True

False

3. Social purpose ventures are founded to solve a social problem through an economically viable entity.

True

False

4. There are probably more hybrid models of social entrepreneurship than social ventures and enterprising nonprofits combined.

True

False

5. Corporate social responsibility (CSR), which emphasizes doing good and serving communities while still making a profit, provides good examples of hybrid models of social entrepreneurship.

True

False

6. Unlike traditional startups, social ventures do not typically use bootstrapping as a means of resource acquisition.

True

False

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7. Solutions to wicked problems are not right or wrong.

True

False

8. A social entrepreneur must accept that a wicked problem is never fully solved, and the solution is not likely to meet all expectations.

True

False

9. Venture philanthropy provides value-added funding for nonprofit organizations to increase their potential for developing revenue streams.

True

False

10. Muhammad Yunus revolutionized the banking industry in the late 1970s by offering microloans to the poorest of the poor with heavy collateral.

True

False

Multiple Choice Questions

11. What is true of enterprising nonprofits pursuing earned-income activities?

A. They have very few employees when compared to other types of nonprofits.

B. They incorporate outside investment in the form of philanthropy.

C. They believe they are less entrepreneurial when compared to other types of nonprofits.

D. They typically do not wait for complete financing before starting a business.

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12. Which of the following is a method of resource acquisition in social entrepreneurship?

A. Interpolating B. Bootstrapping C. Accelerated vesting D. Featherbedding 13. According to the Timmons Model of the entrepreneurial process, the brain trust aspect of the team is especially important because:

A. collaboration across boundaries is paramount in social entrepreneurship.

B. it replaces the bootstrapping method of resource acquisition in social entrepreneurship.

C. capital markets do not exist for social entrepreneurs.

D. available funds are decreasing in the not-for-profit sectors.

14. Which of the following is a characteristic of wicked problems?

A. They have well-defined and stable problem statements.

B. They come with a limited set of alternative solutions.

C. Every problem is unique and novel.

D. The solution to these problems can be easily tried and abandoned.

15. In the early 1970s, the notion of wicked problems emerged out of the complexity of resolving issues related to ____.

A. price inflation B. oil shortages C. urban and governmental planning D. declining gross domestic product (GDP)

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16. Why is access to capital an increasing challenge for social entrepreneurs?

A. Because capital markets do not exist for not-for-profit sectors B. Because nonprofits are not sustainable and scalable C. Because of competition from other social ventures D. Because of using bootstrapping as a method of resource acquisition 17. _____ is a type of social venture capital whose purpose is typically economic development and job creation in impoverished areas.

A. Focused fund B. Community fund C. VC with a conscience D. Philanthropy fund 18. Social venture capitals seek to invest in for-profit ventures not only for financial return but also for social and environmental returns that are referred to as ____.

A. social venture commitments B. enterprising nonprofits C. triple bottom line D. double top line 19. The Grameen Bank in Bangladesh offers:

A. microloans.

B. focused loans.

C. collateralized loans.

D. amortized loans.

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Fill in the Blank Questions

20. _____ is derived from entrepreneurial activities that seek to address problems related to people and problems related to the planet—regardless of profit orientation. ________________________________________ 21. Enterprising nonprofits may incorporate outside investment, in the form of ____, to scale the organization for increased social impact. ________________________________________ 22. The primary difference between traditional entrepreneurship and social entrepreneurship is the ____. ________________________________________ 23. The Fourth Sector Project seeks to recognize a new model of social entrepreneurship known as the _____ model. ________________________________________ 24. According to the Timmons Model of the entrepreneurial process, the _____ aspect of a team refers to the external stakeholders. ________________________________________ 25. Unlike tame problems, wicked problems do not have a predetermined ____, so a social entrepreneur is forced to make rational choices based on a rigorous evaluation of trade-offs. ________________________________________

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26. A venture that invests in early-stage companies operating in the education and health care areas of social concern and explicitly promotes the environmental and social focus of its funds is an example of a(n) _____ fund, a type of social venture capital. ________________________________________ 27. _____ is a type of social venture capital that stipulates that a certain percentage of funds will be invested in socially responsible businesses related to a venture's target investment area. ________________________________________ 28. _____ provides value-added funding for nonprofit organizations to increase their potential for social impact. ________________________________________ 29. Venture philanthropists have a close, hands-on relationship with social entrepreneurs and the ventures they support, driving innovative and scalable models of social change. This refers to the _____ characteristic of venture philanthropy. ________________________________________

Short Answer Questions

30. What is the result of social entrepreneurship?

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31. How do social and enterprising nonprofits differ from hybrid models?

32. Why are corporate social responsibility (CSR) practices not considered examples of hybrid models of social entrepreneurship?

33. What are a few pressing social problems that could provide opportunity spaces for social entrepreneurs?

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34. Briefly discuss any two accepted principles of venture philanthropy from the European Venture Philanthropy Association (EPVA).

Essay Questions

35. What are the two types of enterprising nonprofits and how do they differ?

36. Using the Grameen Bank in Bangladesh as an example, explain how microloans work.

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Chapter 06 Opportunities for Social Entrepreneurship Answer Key

True / False Questions

1.

By definition, any form of entrepreneurship is called social enterprising.

(p. 144)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

2.

The primary difference between traditional ventures and social purpose ventures is the

(p. 151) primary market impact.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

3.

Social purpose ventures are founded to solve a social problem through an economically viable

(p. 143) entity.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

4.

There are probably more hybrid models of social entrepreneurship than social ventures and

(p. 146) enterprising nonprofits combined.

TRUE Accessibility: Keyboard Navigation Blooms: Remember

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Level of Difficulty: 1 Easy

5.

Corporate social responsibility (CSR), which emphasizes doing good and serving communities

(p. 146) while still making a profit, provides good examples of hybrid models of social

entrepreneurship.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

6.

Unlike traditional startups, social ventures do not typically use bootstrapping as a means of

(p. 147) resource acquisition.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

7.

Solutions to wicked problems are not right or wrong.

(p. 147)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

8.

A social entrepreneur must accept that a wicked problem is never fully solved, and the solution

(p. 148) is not likely to meet all expectations.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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9.

Venture philanthropy provides value-added funding for nonprofit organizations to increase

(p. 149) their potential for developing revenue streams.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

10.

Muhammad Yunus revolutionized the banking industry in the late 1970s by offering microloans

(p. 150) to the poorest of the poor with heavy collateral.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Multiple Choice Questions

11.

What is true of enterprising nonprofits pursuing earned-income activities?

(p. 145)

A. They have very few employees when compared to other types of nonprofits.

B. They incorporate outside investment in the form of philanthropy.

C. They believe they are less entrepreneurial when compared to other types of nonprofits.

D. They typically do not wait for complete financing before starting a business.

Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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12.

Which of the following is a method of resource acquisition in social entrepreneurship?

(p. 147)

A. Interpolating B. Bootstrapping C. Accelerated vesting D. Featherbedding Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

13.

According to the Timmons Model of the entrepreneurial process, the brain trust aspect of the

(p. 147) team is especially important because:

A. collaboration across boundaries is paramount in social entrepreneurship.

B. it replaces the bootstrapping method of resource acquisition in social entrepreneurship.

C. capital markets do not exist for social entrepreneurs.

D. available funds are decreasing in the not-for-profit sectors.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

14.

Which of the following is a characteristic of wicked problems?

(p. 147)

A. They have well-defined and stable problem statements.

B. They come with a limited set of alternative solutions.

C. Every problem is unique and novel.

D. The solution to these problems can be easily tried and abandoned.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

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15.

In the early 1970s, the notion of wicked problems emerged out of the complexity of resolving

(p. 147) issues related to ____.

A. price inflation B. oil shortages C. urban and governmental planning D. declining gross domestic product (GDP) Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

16.

Why is access to capital an increasing challenge for social entrepreneurs?

(p. 148)

A. Because capital markets do not exist for not-for-profit sectors B. Because nonprofits are not sustainable and scalable C. Because of competition from other social ventures D. Because of using bootstrapping as a method of resource acquisition Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

17.

_____ is a type of social venture capital whose purpose is typically economic development and

(p. 149) job creation in impoverished areas.

A. Focused fund B. Community fund C. VC with a conscience D. Philanthropy fund Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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18.

Social venture capitals seek to invest in for-profit ventures not only for financial return but also

(p. 148) for social and environmental returns that are referred to as ____.

A. social venture commitments B. enterprising nonprofits C. triple bottom line D. double top line Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

19.

The Grameen Bank in Bangladesh offers:

(p. 150)

A. microloans.

B. focused loans.

C. collateralized loans.

D. amortized loans.

Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Fill in the Blank Questions

20.

_____ is derived from entrepreneurial activities that seek to address problems related to

(p. 143) people and problems related to the planet—regardless of profit orientation.

Social value Blooms: Remember Level of Difficulty: 1 Easy

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21.

Enterprising nonprofits may incorporate outside investment, in the form of ____, to scale the

(p. 145) organization for increased social impact.

philanthropy Blooms: Remember Level of Difficulty: 1 Easy

22.

The primary difference between traditional entrepreneurship and social entrepreneurship is the

(p. 151) ____.

intended mission Blooms: Remember Level of Difficulty: 1 Easy

23.

The Fourth Sector Project seeks to recognize a new model of social entrepreneurship known

(p. 146) as the _____ model.

for-benefit Blooms: Remember Level of Difficulty: 1 Easy

24.

According to the Timmons Model of the entrepreneurial process, the _____ aspect of a team

(p. 147) refers to the external stakeholders.

brain trust Blooms: Remember Level of Difficulty: 1 Easy

25.

Unlike tame problems, wicked problems do not have a predetermined ____, so a social

(p. 148) entrepreneur is forced to make rational choices based on a rigorous evaluation of trade-offs.

stopping rule Blooms: Remember Level of Difficulty: 1 Easy

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26.

A venture that invests in early-stage companies operating in the education and health care

(p. 149) areas of social concern and explicitly promotes the environmental and social focus of its funds

is an example of a(n) _____ fund, a type of social venture capital. focused Blooms: Remember Level of Difficulty: 1 Easy

27.

_____ is a type of social venture capital that stipulates that a certain percentage of funds will

(p. 149) be invested in socially responsible businesses related to a venture's target investment area.

VC with a conscience Blooms: Remember Level of Difficulty: 1 Easy

28.

_____ provides value-added funding for nonprofit organizations to increase their potential for

(p. 149) social impact.

Venture philanthropy Blooms: Remember Level of Difficulty: 1 Easy

29.

Venture philanthropists have a close, hands-on relationship with social entrepreneurs and the

(p. 149) ventures they support, driving innovative and scalable models of social change. This refers to

the _____ characteristic of venture philanthropy. high engagement Blooms: Remember Level of Difficulty: 1 Easy

Short Answer Questions

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30.

What is the result of social entrepreneurship?

(p. 143)

Social value is derived from social entrepreneurial activities that seek to address problems related to people and the planet, regardless of profit orientation. In other words, social entrepreneurship seeks creative and valuable solutions to such issues as education, poverty, health care, global warming, water shortages, and energy.

Blooms: Remember Level of Difficulty: 1 Easy

31.

How do social and enterprising nonprofits differ from hybrid models?

(p. 151)

The primary mission of both social ventures and enterprising nonprofits is social regardless of market impact. The hybrid model equally emphasizes social and economic goals.

Blooms: Remember Level of Difficulty: 2 Medium

32.

Why are corporate social responsibility (CSR) practices not considered examples of hybrid

(p. 146) models of social entrepreneurship?

Corporate social responsibility (CSR) emphasizes helping and serving communities while still making a profit. Corporations with CSR practices impact the communities in which they operate and other stakeholders in many ways, but it is not the core component of their business models.

Blooms: Remember Level of Difficulty: 1 Easy

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33.

What are a few pressing social problems that could provide opportunity spaces for social

(p. 148) entrepreneurs?

The goals that represent the UN's view of the most pressing social problems could provide opportunity spaces for social entrepreneurs. These goals are: eradicate extreme poverty and hunger, achieve universal primary education, promote gender equality, reduce child mortality, improve maternal health, combat diseases, ensure environmental sustainability, and develop a global partnership for development.

Blooms: Remember Level of Difficulty: 1 Easy

34.

Briefly discuss any two accepted principles of venture philanthropy from the European Venture

(p. 149) Philanthropy Association (EPVA).

Venture philanthropists provide substantial and sustained financial support to a limited number of organizations. Support typically lasts at least three to five years, with an objective of helping the organization to become financially self-sustaining by the end of the funding period. This is termed multiyear support. As in venture capital, venture philanthropists take an investment approach to determine the most appropriate financing for each organization. Depending on their own missions and the ventures they choose to support, venture philanthropists can operate across the spectrum of investment returns. This is termed tailored financing.

Blooms: Remember Level of Difficulty: 1 Easy

Essay Questions

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35.

What are the two types of enterprising nonprofits and how do they differ?

(p. 145)

The first type utilizes earned-income activities, a form of venturing, to generate all or a portion of total revenue. These enterprising nonprofits apply the principles of entrepreneurship to generate revenue to sustain their mission-driven organizations. The second type has a focus on growth and economic sustainability. Such an enterprising nonprofit may incorporate outside investment, in the form of venture philanthropy, to scale the organization for increased social impact.

Blooms: Understand Level of Difficulty: 2 Medium

36.

Using the Grameen Bank in Bangladesh as an example, explain how microloans work.

(p. 150)

The Grameen Bank offers microloans with no collateral to the poorest of the poor in Bangladesh. Borrowers are organized into groups of five, but not all members can borrow at once. Two borrowers may receive a microloan at one time; but not until these two borrowers begin to pay back the principal plus interest can the other members become eligible for their own loans. The average interest rate is 16 percent, and the repayment rate is an unprecedented 98 percent, which is attributed to group pressure, empowerment, and motivation. The loans are tiny—typically enough to buy a goat, tools, or a small piece of machinery that can be used to produce new sources of income.

Blooms: Understand Level of Difficulty: 2 Medium

Chapter 07 The Business Plan

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True / False Questions

1. If a group of individuals are starting a venture that will not need startup capital, then it is appropriate to hold off on the business plan while they establish a base for sales.

True

False

2. Developing a business plan sets the mood for internal relationships and negotiations.

True

False

3. Business plans are seldom obsolete and last throughout the lifecycle of a project.

True

False

4. Getting a "no" from venture capitalists is easy, whereas getting a "yes" from venture capitalists is very hard.

True

False

5. When speaking with venture capitalists, the entrepreneurial team should be prepared to provide the complete details of ongoing talks with other venture capitalists.

True

False

6. In a business plan, the business concept should be described vaguely in the executive summary to attract more venture capitalists.

True

False

7. When presenting a business plan, one must never say "no" to an offer price from a venture capitalist.

True

False

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8. It is best to hire outsiders to prepare a business plan.

True

False

9. There is not much difference between developing a business plan and screening an opportunity.

True

False

10. The business plan is more of an end in itself than a work in progress.

True

False

11. The economics of a business model in a business plan doesn't matter, but the numbers matter enormously.

True

False

12. Preparing and presenting a business plan to prospective investors is one of the best ways for a team to learn about the venture strategy.

True

False

13. A business plan carefully articulates the market, business model, investment requirements, and returns from an opportunity but does not include the risks involved.

True

False

Multiple Choice Questions

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14. Creating a business plan:

A. is a great way to analyze an opportunity.

B. is a one-shot process.

C. is vital only when there is outside capital.

D. is the same as screening an opportunity.

15. A business plan is:

A. the start of a relationship with the investors.

B. never obsolete.

C. typically outsourced.

D. usually completed after raising outside capital.

16. Identify a characteristic of a business plan.

A. It is a one-shot process.

B. It is a work in progress.

C. It is an end in itself.

D. It is a rigid process that is the same across all industries.

17. When raising venture capital, which of the following is a guideline to be followed?

A. Meet with an associate or a junior member a number of times before meeting with a partner in that venture capital firm.

B. Be vague when describing other potential venture capitalists.

C. Prepare a business plan only after raising venture capital.

D. Outsource the business plan to attract more venture capitalists.

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18. Which of the following is true about writing a business plan?

A. It is the same as screening an opportunity.

B. It is best thought of as a one-shot process.

C. It is not a good idea to hire an outside professional to write the business plan.

D. It is best to outsource this activity to make the plan more attractive to potential investors.

19. Which of the following is the first step in writing an action plan?

A. Creating an overall schedule B. Creating an action calendar C. Segmenting information D. Meeting the venture capitalists 20. Alex, the founder of a new venture, is in the process of developing a business plan. He develops an overall plan for the project with details of draft deadlines. What is the next step he is likely to take?

A. Develop detailed résumés of the key people in his venture.

B. Develop the pro forma to be include in the plan.

C. Create an action calendar.

D. Create a more specific list of tasks.

Fill in the Blank Questions

21. When creating a(n) _____ for a business plan, the tasks on the do list need to be placed on a calendar and re-evaluated to be sure the overall schedule works, and everyone understands due dates. ________________________________________

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22. The _____ is a blueprint that helps those involved convert ideas into opportunities, articulate and manage risks and rewards, and set a realistic time schedule. ________________________________________

Short Answer Questions

23. Briefly discuss the nature of venture capitalists that one has to keep in mind when raising venture capital.

24. Who develops a business plan?

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25. Briefly discuss any two uses of a business plan.

Essay Questions

26. Briefly discuss the guidelines to be followed for writing an effective business plan.

27. Discuss the guidelines to be followed for effectively closing a venture deal.

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Chapter 07 The Business Plan Answer Key

True / False Questions

1.

If a group of individuals are starting a venture that will not need startup capital, then it is

(p. 163) appropriate to hold off on the business plan while they establish a base for sales.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

2.

Developing a business plan sets the mood for internal relationships and negotiations.

(p. 163)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

3.

Business plans are seldom obsolete and last throughout the lifecycle of a project.

(p. 163)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

4.

Getting a "no" from venture capitalists is easy, whereas getting a "yes" from venture capitalists

(p. 163) is very hard.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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5.

When speaking with venture capitalists, the entrepreneurial team should be prepared to

(p. 163) provide the complete details of ongoing talks with other venture capitalists.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

6.

In a business plan, the business concept should be described vaguely in the executive

(p. 164) summary to attract more venture capitalists.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

7.

When presenting a business plan, one must never say "no" to an offer price from a venture

(p. 164) capitalist.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

8.

It is best to hire outsiders to prepare a business plan.

(p. 164)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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9.

There is not much difference between developing a business plan and screening an

(p. 165) opportunity.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

10.

The business plan is more of an end in itself than a work in progress.

(p. 166)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

11.

The economics of a business model in a business plan doesn't matter, but the numbers matter

(p. 166) enormously.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

12.

Preparing and presenting a business plan to prospective investors is one of the best ways for

(p. 166) a team to learn about the venture strategy.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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13.

A business plan carefully articulates the market, business model, investment requirements,

(p. 163) and returns from an opportunity but does not include the risks involved.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Multiple Choice Questions

14.

Creating a business plan:

(p. 163)

A. is a great way to analyze an opportunity.

B. is a one-shot process.

C. is vital only when there is outside capital.

D. is the same as screening an opportunity.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

15.

A business plan is:

(p. 163)

A. the start of a relationship with the investors.

B. never obsolete.

C. typically outsourced.

D. usually completed after raising outside capital.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

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16.

Identify a characteristic of a business plan.

(p. 163)

A. It is a one-shot process.

B. It is a work in progress.

C. It is an end in itself.

D. It is a rigid process that is the same across all industries.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

17.

When raising venture capital, which of the following is a guideline to be followed?

(p. 163)

A. Meet with an associate or a junior member a number of times before meeting with a partner in that venture capital firm.

B. Be vague when describing other potential venture capitalists.

C. Prepare a business plan only after raising venture capital.

D. Outsource the business plan to attract more venture capitalists.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

18.

Which of the following is true about writing a business plan?

(p. 164)

A. It is the same as screening an opportunity.

B. It is best thought of as a one-shot process.

C. It is not a good idea to hire an outside professional to write the business plan.

D. It is best to outsource this activity to make the plan more attractive to potential investors.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

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19.

Which of the following is the first step in writing an action plan?

(p. 164)

A. Creating an overall schedule B. Creating an action calendar C. Segmenting information D. Meeting the venture capitalists Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

20.

Alex, the founder of a new venture, is in the process of developing a business plan. He

(p. 164) develops an overall plan for the project with details of draft deadlines. What is the next step he

is likely to take?

A. Develop detailed résumés of the key people in his venture.

B. Develop the pro forma to be include in the plan.

C. Create an action calendar.

D. Create a more specific list of tasks.

Accessibility: Keyboard Navigation Blooms: Apply Level of Difficulty: 3 Hard

Fill in the Blank Questions

21.

When creating a(n) _____ for a business plan, the tasks on the do list need to be placed on a

(p. 164) calendar and re-evaluated to be sure the overall schedule works, and everyone understands

due dates. action calendar Blooms: Remember Level of Difficulty: 1 Easy 1-143 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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22.

The _____ is a blueprint that helps those involved convert ideas into opportunities, articulate

(p. 166) and manage risks and rewards, and set a realistic time schedule.

business plan Blooms: Remember Level of Difficulty: 1 Easy

Short Answer Questions

23.

Briefly discuss the nature of venture capitalists that one has to keep in mind when raising

(p. 163) venture capital.

There are a lot of venture capitalists. Getting a no from venture capitalists is as hard as getting a yes. One should qualify his or her targets and force others to say no. One should be vague when describing other potential venture capitalists. One shouldn't meet with an associate or junior member twice without also meeting with a partner in that venture capital firm.

Blooms: Remember Level of Difficulty: 1 Easy

24.

Who develops a business plan?

(p. 164)

The founders of a venture develop a business plan. They should not hire outsiders to do the plan. Writing the business plan allows the founders to develop their venture at a detailed level.

No quality investor will spend time with a team that outsourced this critical exercise.

Blooms: Remember Level of Difficulty: 1 Easy

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25.

Briefly discuss any two uses of a business plan.

(p. 165)

A business plan can have two uses: (1) inducing a venture capitalist to invest more or less and (2) guiding the policies and actions of a firm over a number of years. Therefore, strategies and statements need to be well thought out, unambiguous, and capable of being supported.

Blooms: Remember Level of Difficulty: 1 Easy

Essay Questions

26.

Briefly discuss the guidelines to be followed for writing an effective business plan.

(p. 164)

Entrepreneurs should stress the business concept in the executive summary of business plan.

They should keep in mind that the numbers don't matter but the economics of the business do.

They should prepare several copies of published articles, contracts, market studies, purchase orders, and the like. They must prepare very detailed résumés and reference lists of key players in their venture. If they can't do the details, they should make sure to hire someone who can.

Blooms: Understand Level of Difficulty: 2 Medium

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27.

Discuss the guidelines to be followed for effectively closing a venture deal.

(p. 164)

The founders of a venture must make sure that the current investors are as desperate as the founders. They must create a market for their venture. They must never say no to an offer price. They must use a lawyer who is experienced at closing venture deals. They shouldn't stop selling until the money is in the bank. They must be honest and make it a challenge.

Blooms: Understand Level of Difficulty: 2 Medium

Chapter 08 The Entrepreneurial Leader and the Team

True / False Questions

1. Successful entrepreneurial leaders are quick to give credit and recognize good performance, and they always accept more than their share of the blame when things do not work out.

True

False

2. The startup stage of venture growth is usually referred to as the nascent stage.

True

False

3. The nascent stage can be as short as a few months or can last years.

True

False

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4. Research indicates that if an idea is not turned into a going concern within six months, the chances of a startup fall dramatically.

True

False

5. With failure rates exceeding 60 percent, the high-growth stage is the most perilous stage for new ventures.

True

False

6. In rapid-growth firms, power and control are delegated and leadership is shared.

True

False

7. According to the study of practicing entrepreneurs, entrepreneurial leaders need a sound foundation in "new management techniques" such as capital asset pricing models, beta coefficients, and linear programming.

True

False

8. While many outstanding advisors, such as lawyers and accountants, are of enormous benefit to entrepreneurs, they are not always businesspeople, and often cannot make the best business judgments for those they represent.

True

False

9. An ownership structure in which a key person commands 15 to 25 percent or more of the company's equity because of his or her technical contribution will help raise venture capital.

True

False

10. Key people who do not work out earn only the stock they are entitled to, and the rest is still available to the company to reward and motivate others.

True

False

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11. The fairness concept of equity and compensation implies that everyone should have equal ownership in an organization.

True

False

Multiple Choice Questions

12. It is most challenging and important for a founding entrepreneur or a chief executive officer to cope with change in:

A. leadership focus.

B. startup funding.

C. competitive responses.

D. private offering.

13. Which stage of venture growth follows the research and development stage?

A. The nascent stage B. The startup stage C. The high-growth stage D. The mature stage 14. Which of the following is true of the maturity stage of venture growth?

A. The investigation and due diligence for a business idea occurs during this stage.

B. This stage is by far the most perilous stage.

C. The ventures are no longer fighting for survival in this stage.

D. This stage is characterized by a continually increasing rate of growth.

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15. In which stage of venture growth do new ventures exhibit a failure rate exceeding 60 percent?

A. The nascent stage B. The startup stage C. The high-growth stage D. The mature stage 16. Which stage of venture growth offers one of the most difficult challenges as new layers of management are created to enable scale?

A. The nascent stage B. The startup stage C. The high-growth stage D. The mature stage 17. Unlike in mature and stable environments, managing for rapid growth of a venture involves a(n) _____ orientation.

A. planning B. growth C. leadership D. investor 18. Which stage of the entrepreneurial transition is characterized by counterintuitive decision making and structure?

A. The planning stage B. The doing stage C. The leading stage D. The leading managers stage

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19. Which stage of the entrepreneurial transition is characterized by an erosion of founders' creativity?

A. The planning stage B. The doing stage C. The leading stage D. The leading managers stage 20. Which stage of the entrepreneurial transition faces the probable crisis of confusion over ambiguous roles and responsibilities?

A. The planning stage B. The doing stage C. The leading stage D. The leading managers stage 21. At which stage of the entrepreneurial transition do conflicts among founders most often arise?

A. The planning stage B. The doing stage C. The leading stage D. The leading managers stage 22. In growing new ventures, managers appear unconcerned about ____.

A. team goals B. competence C. status D. task supervision

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23. What percentage of a fully diluted company do investors typically like to see set aside for attracting future talent and creating incentives and rewards for high performance?

A. 5 to10 percent B. 10 to 20 percent C. 20 to 30 percent D. 30 to 40 percent 24. Which of the following factors is frequently overvalued while developing a reward system for a venture, particularly the distribution of stock?

A. Bringing to the venture skills or contacts in such areas as marketing and technology B. Expending a great amount of time in preparing the business plan C. Bringing to the venture experience and track records D. Taking adequate responsibility

Fill in the Blank Questions

25. The key to success in high-potential ventures is directly related to the talent and quality of the lead entrepreneur and the ____. ________________________________________ 26. The research and development stage of venture growth is sometimes referred to as the _____ stage. ________________________________________

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27. The _____ stage of venture growth is characterized by a single aspiring entrepreneur, or small team, doing the investigation and due diligence for their business idea. ________________________________________ 28. The _____ stage of venture growth is by far the most perilous stage requiring the drive and talent of a lead entrepreneur. ________________________________________ 29. From the high-growth stage of venture growth, a company moves to the _____ stage. ________________________________________ 30. There exists in growing new ventures a common _____ system that is most evident in behavior and attitudes and is difficult to articulate and elusive to measure. ________________________________________ 31. In rapid-growth firms, power and control are _____ and leadership is ____. ________________________________________ 32. The ultimate goal of any venture capital-backed company is to realize a harvest at a price at least _____ to _____ times the original investment. ________________________________________ 33. A _____ schedule ties the release of stock to a time frame, usually of at least five and sometimes seven years or more, whereby the stock is restricted and earned by one's performance. ________________________________________

Short Answer Questions

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34. Briefly discuss the entrepreneurial culture in growing new ventures.

35. Briefly discuss the ways entrepreneurs acquire expertise and skills they do not currently possess but which are needed to build their business.

36. What are the five fundamental realities with nearly any new venture?

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37. Name the different types of contributions that should be considered when slicing up the equity pie.

Essay Questions

38. Discuss the concept of management in rapid-growth firms.

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39. What are some of the crises that growing ventures may face in the leading stage of entrepreneurial transition?

40. Discuss the impact of the Internet on virtual teams and collaboration.

41. Discuss the principles founders should keep in mind when they decide how to compensate themselves and the team, new talent, and the brain trust in their ventures.

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Chapter 08 The Entrepreneurial Leader and the Team Answer Key

True / False Questions

1.

Successful entrepreneurial leaders are quick to give credit and recognize good performance,

(p. 195) and they always accept more than their share of the blame when things do not work out.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

2.

The startup stage of venture growth is usually referred to as the nascent stage.

(p. 196)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

3.

The nascent stage can be as short as a few months or can last years.

(p. 196)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

4.

Research indicates that if an idea is not turned into a going concern within six months, the

(p. 196) chances of a startup fall dramatically.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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5.

With failure rates exceeding 60 percent, the high-growth stage is the most perilous stage for

(p. 196) new ventures.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

6.

In rapid-growth firms, power and control are delegated and leadership is shared.

(p. 197)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

7.

According to the study of practicing entrepreneurs, entrepreneurial leaders need a sound

(p. 198- foundation in "new management techniques" such as capital asset pricing models, beta 199)

coefficients, and linear programming.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

8.

While many outstanding advisors, such as lawyers and accountants, are of enormous benefit

(p. 201) to entrepreneurs, they are not always businesspeople, and often cannot make the best

business judgments for those they represent.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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9.

An ownership structure in which a key person commands 15 to 25 percent or more of the

(p. 202) company's equity because of his or her technical contribution will help raise venture capital.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

10.

Key people who do not work out earn only the stock they are entitled to, and the rest is still

(p. 202) available to the company to reward and motivate others.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

11.

The fairness concept of equity and compensation implies that everyone should have equal

(p. 202) ownership in an organization.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Multiple Choice Questions

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12.

It is most challenging and important for a founding entrepreneur or a chief executive officer to

(p. 196) cope with change in:

A. leadership focus.

B. startup funding.

C. competitive responses.

D. private offering.

Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

13.

Which stage of venture growth follows the research and development stage?

(p. 196)

A. The nascent stage B. The startup stage C. The high-growth stage D. The mature stage Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

14.

Which of the following is true of the maturity stage of venture growth?

(p. 197)

A. The investigation and due diligence for a business idea occurs during this stage.

B. This stage is by far the most perilous stage.

C. The ventures are no longer fighting for survival in this stage.

D. This stage is characterized by a continually increasing rate of growth.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

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15.

In which stage of venture growth do new ventures exhibit a failure rate exceeding 60 percent?

(p. 196)

A. The nascent stage B. The startup stage C. The high-growth stage D. The mature stage Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

16.

Which stage of venture growth offers one of the most difficult challenges as new layers of

(p. 196) management are created to enable scale?

A. The nascent stage B. The startup stage C. The high-growth stage D. The mature stage Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

17.

Unlike in mature and stable environments, managing for rapid growth of a venture involves

(p. 197) a(n) _____ orientation.

A. planning B. growth C. leadership D. investor Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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18.

Which stage of the entrepreneurial transition is characterized by counterintuitive decision

(p. 197) making and structure?

A. The planning stage B. The doing stage C. The leading stage D. The leading managers stage Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

19.

Which stage of the entrepreneurial transition is characterized by an erosion of founders'

(p. 197) creativity?

A. The planning stage B. The doing stage C. The leading stage D. The leading managers stage Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

20.

Which stage of the entrepreneurial transition faces the probable crisis of confusion over

(p. 197) ambiguous roles and responsibilities?

A. The planning stage B. The doing stage C. The leading stage D. The leading managers stage Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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21.

At which stage of the entrepreneurial transition do conflicts among founders most often arise?

(p. 197)

A. The planning stage B. The doing stage C. The leading stage D. The leading managers stage Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

22.

In growing new ventures, managers appear unconcerned about ____.

(p. 197)

A. team goals B. competence C. status D. task supervision Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

23.

What percentage of a fully diluted company do investors typically like to see set aside for

(p. 202) attracting future talent and creating incentives and rewards for high performance?

A. 5 to10 percent B. 10 to 20 percent C. 20 to 30 percent D. 30 to 40 percent Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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24.

Which of the following factors is frequently overvalued while developing a reward system for a

(p. 203) venture, particularly the distribution of stock?

A. Bringing to the venture skills or contacts in such areas as marketing and technology B. Expending a great amount of time in preparing the business plan C. Bringing to the venture experience and track records D. Taking adequate responsibility Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Fill in the Blank Questions

25.

The key to success in high-potential ventures is directly related to the talent and quality of the

(p. 195) lead entrepreneur and the ____.

founding team Blooms: Remember Level of Difficulty: 1 Easy

26.

The research and development stage of venture growth is sometimes referred to as the _____

(p. 196) stage.

nascent Blooms: Remember Level of Difficulty: 1 Easy

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27.

The _____ stage of venture growth is characterized by a single aspiring entrepreneur, or small

(p. 196) team, doing the investigation and due diligence for their business idea.

nascent Blooms: Remember Level of Difficulty: 1 Easy

28.

The _____ stage of venture growth is by far the most perilous stage requiring the drive and

(p. 196) talent of a lead entrepreneur.

startup Blooms: Remember Level of Difficulty: 1 Easy

29.

From the high-growth stage of venture growth, a company moves to the _____ stage.

(p. 197)

maturity Blooms: Remember Level of Difficulty: 1 Easy

30.

There exists in growing new ventures a common _____ system that is most evident in behavior

(p. 197) and attitudes and is difficult to articulate and elusive to measure.

value Blooms: Remember Level of Difficulty: 1 Easy

31.

In rapid-growth firms, power and control are _____ and leadership is ____.

(p. 197)

delegated; shared Blooms: Remember Level of Difficulty: 1 Easy

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32.

The ultimate goal of any venture capital-backed company is to realize a harvest at a price at

(p. 202) least _____ to _____ times the original investment.

five; ten Blooms: Remember Level of Difficulty: 1 Easy

33.

A _____ schedule ties the release of stock to a time frame, usually of at least five and

(p. 202) sometimes seven years or more, whereby the stock is restricted and earned by one's

performance. vesting Blooms: Remember Level of Difficulty: 1 Easy

Short Answer Questions

34.

Briefly discuss the entrepreneurial culture in growing new ventures.

(p. 197)

There exists in growing new ventures a common value system, which is difficult to articulate, is even more elusive to measure, and is evident in behavior and attitudes. There is a belief in and commitment to growth, achievement, improvement, and success, as well as the sense among members of a joint effort. Team goals, along with market trends, determine group priorities rather than individual pettiness. Managers appear unconcerned about status, power, and personal control. They are more concerned with overseeing tasks, goals, and roles rather than the current status of the organizational chart or interior design of the office. Likewise, they are more concerned about the evidence, competence, and logic of arguments affecting important decisions than the status or formal position of the argumentative individuals.

Blooms: Remember Level of Difficulty: 1 Easy

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35.

Briefly discuss the ways entrepreneurs acquire expertise and skills they do not currently

(p. 201) possess but which are needed to build their business.

Not all entrepreneurs will find they are greatly skilled in all areas; and if they are not, they will most likely need to acquire skills through apprenticeship, partners, or advisors. However, while many outstanding advisors, such as lawyers and accountants, are of enormous benefit to entrepreneurs, they are not always businesspeople, and often cannot make the best business judgments for those they represent.

Blooms: Remember Level of Difficulty: 1 Easy

36.

What are the five fundamental realities with nearly any new venture?

(p. 202)

The five fundamental realities with nearly any new venture are: cash is king, and there is never enough; one will be out of cash much sooner than he or she thinks; sales are what count most; talent is the key to success; and equity creation and realization determine the payoff.

Blooms: Remember Level of Difficulty: 1 Easy

37.

Name the different types of contributions that should be considered when slicing up the equity

(p. 203) pie.

The different types of contributions that should be considered when slicing up the equity pie are idea, business plan preparation, commitment, risk, skills, experience, track record, contacts, and responsibility.

Blooms: Remember Level of Difficulty: 1 Easy

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Essay Questions

38.

Discuss the concept of management in rapid-growth firms.

(p. 197)

In rapid-growth firms, power and control must increasingly be delegated. Everyone is committed to making the pie larger, and power and influence are derived not only from achieving one's own goals but also from contributing to the achievements of others as well.

The tenet that one's responsibility must equal one's authority is often counterproductive in a rapid-growth venture. Successful entrepreneurial leaders understand their interdependencies and have learned to incorporate mutual respect, openness, trust, and benefit into their leadership style. Fundamental to this progressive style is the awareness and practice of reciprocity for mutual gain.

Blooms: Understand Level of Difficulty: 2 Medium

39.

What are some of the crises that growing ventures may face in the leading stage of

(p. 197) entrepreneurial transition?

Growing ventures in the leading stage may face erosion of creativity of founders; confusion over ambiguous roles, responsibilities, and goals; desire for delegation versus autonomy and control; and need for organization and operating policies.

Blooms: Understand Level of Difficulty: 2 Medium

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40.

Discuss the impact of the Internet on virtual teams and collaboration.

(p. 201)

The ever-expanding number of devices designed to exploit Internet accessibility is having a profound impact on team building and collaboration. As a pervasive global network, the Internet provides a means for geographically dispersed parties to work from the same system, using the same information, in a real-time environment.

Using Web-based communications, organizations can now quickly and effectively keep value chain participants in the loop—from concept through design and delivery—without ever meeting in the same physical space. The Internet has become an effective tool for collaborative design, development, and data maintenance. Internet-based collaboration not only can nullify a development team's physical separation, enhance productivity, and shorten design cycles, but also opens up the talent base to include special application freelancers, as well as engineers under the employ of consultants, vendors, clients, and business partners.

Blooms: Understand Level of Difficulty: 2 Medium

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41.

Discuss the principles founders should keep in mind when they decide how to compensate

(p. 202- themselves and the team, new talent, and the brain trust in their ventures.

203)

The following principles guide founders when they think through how to compensate themselves and the team, new talent, and the brain trust in their ventures.

Principle 1: Share the wealth with the high performers who contribute to its creation. This implies wider than normal stock ownership and a healthy stock option or comparable performance unit pool. Investors typically like to see a future pool of 10 to 20 percent of the fully diluted company set aside for attracting future talent and creating incentives and rewards for high performance.

Principle 2: The fairness concept, treat other people as you would want to be treated. The equity and compensation should be a deal that is ­considered fair and reasonable. This principle does not imply that everyone should have equal ownership. This is where the brain trust can be valuable in helping to guide the numbers that represent the marketplace for talent in your area, whether it is marketing, financial, or technical.

Principle 3: Reward results, and especially those who create revenue, and attract and grow key talent. This principle also implies a vesting schedule, usually of at least five and sometimes seven years or more, whereby the stock is restricted and earned by one's performance. Key people who do not work out earn only the stock they are entitled to, and the rest is still available to the company to reward and motivate others.

Principle 4: Sweat equity matters—a lot! The early stages of a company require very hard work and many sacrifices. Thus a good test for founders is the will of prospective team members to sacrifice; tempered by the realities of the competition one faces to attract talent.

Principle 5: Chemistry. The most brilliant talent, the most creative product or service, and the most well-developed and financed business plan on the planet will not succeed unless there is strong chemistry among the founding team that is then embedded into the company's culture.

The abilities to respect one another and to work well together are crucial.

Blooms: Understand Level of Difficulty: 2 Medium

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Ethical Decision Making and the Entrepreneur

True / False Questions

1. The vast majority of successful entrepreneurs believe that high ethical standards and integrity are exceptionally important to long-term success.

True

False

2. Statutes do not always have the effect they were intended to have.

True

False

3. In an attempt to connect with business managers in a way that reflects the real world, business ethicists talk of moderation, pragmatism, and minimalism.

True

False

4. The art of self-assessment is critical particularly during the maturity stage of a venture when the environment is chaotic and unpredictable.

True

False

5. The closer the stakeholders are to an individual, the less effect they will have on his or her decision making.

True

False

6. In Stage 1 of the Kohlberg construct of moral instincts and behaviors of an individual, the individual seeks advantage.

True

False

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7. In the context of personal ethical standards, taking a course in business ethics has been shown to have little effect on improving one's capacity for decision making and problem solving.

True

False

8. When making ethical decisions, always choose an approach you feel most comfortable with and stick to those principles.

True

False

9. Broken partnerships can often be traced to apparent differences in the personal ethics among the members of a management team.

True

False

10. For entrepreneurs, situations where one law directly conflicts with another rarely occur.

True

False

11. When doing business abroad, entrepreneurs must adhere to the international code of business ethics.

True

False

12. To make effective and ethical decisions, one must be able to identify the scope and effects of one's self-interest.

True

False

Multiple Choice Questions

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13. If the motivation for an individual is to win at any cost, fair play and ethics are most likely to:

A. have far less influence over one's decisions than they should.

B. be the most important influences in the decision-making processes.

C. be the only factors influencing the decision-making processes.

D. have equal influence over the decision process along with other motivators.

14. According to Kohlberg's construct of moral judgment, being moral in Stage 1 is synonymous with being ____.

A. obedient B. courageous C. virtuous D. honest 15. The orientation of the final stage in the Kohlberg construct of moral judgment is ____.

A. legitimate social contract B. instrumental relativism C. interpersonal concordance D. universal ethical principle 16. _____ is most likely to prevent someone from unknowingly making an ethical mistake when considering what to do in a situation with ethical overtones.

A. Using an approach that one is most comfortable with B. Adopting an approach similar to that of a competitor's C. Taking a multifaceted approach D. Employing a single standard approach

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17. According to the _____ approach, the aim of each person should be to perfect his or her inherent human nature, and if successful, become a person of virtue.

A. Totalitarian B. Aristotelian C. Utilitarian D. Deontology 18. _____ is one of the oldest approaches to ethics provided by Aristotle.

A. Placing one's duty to society over one's self-interest B. Choosing actions that will provide for the greatest good C. Focusing on the consequences of an action D. Emulating exemplary role models 19. Whose approach to ethics states that the aim of each person should be to perfect his or her inherent human nature, and if successful, become a person of virtue?

A. J. Stewart Mill B. Aristotle C. Carnegie D. Kant 20. Which approach to ethics holds that the ethical person will always choose actions that will provide for the greatest good (or least bad) for the greatest number of people?

A. Utilitarianism B. Aristotelian C. Kantism D. Deontology

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21. Which of the following is an issue associated with the utilitarian approach to ethics?

A. It can lead to poor decisions if a person chooses to emulate the wrong person.

B. It permits decisions that may hurt some stakeholders, as long as the majority benefits from the action.

C. It cannot work in tandem with other approaches to ethics.

D. It does not directly address the consequences of the actions—only the "court of opinion" holds the actions to have been virtuous.

22. Who is associated with deontology—one's duty to act?

A. J. Stewart Mill B. Aristotle C. Kohlberg D. Kant 23. Which of the following statements is true of the deontology approach to ethics?

A. It holds that an ethical person will always choose actions that will provide for the greatest good.

B. It is one of the oldest approaches to ethics provided by Aristotle.

C. It is pursued without concern for the outcomes of actions.

D. It requires individuals to emulate what people who are widely considered to be virtuous do in similar situations.

24. What is the most widely used approach to ethical decision making?

A. The Aristotelian approach B. The utilitarian approach C. The deontology approach D. The Machiavellian approach

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Fill in the Blank Questions

25. The _____ construct classifies moral judgment into six stages of development. ________________________________________ 26. According to the Kohlberg construct of moral instincts and behaviors, the orientation of _____ is toward pleasing others and winning approval. ________________________________________ 27. The _____ approach to ethics focuses on the outcomes or consequences of an action. ________________________________________ 28. Immanuel Kant's _____ approach is pursued without concern for the outcomes of actions but according to whether the action is something that an ethical person would do. ________________________________________ 29. ____, which is a narrowly defined ethical perspective that can lead to trouble, can be prevented by considering different approaches to the same issue. ________________________________________

Short Answer Questions

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30. Why is it important to study and think about ethical situations in business settings?

31. What are the issues associated with the Aristotelian approach to ethics?

32. How does the concept known as "the fog of war" relate to ethical behavior and the entrepreneurial experience?

Essay Questions

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33. Discuss why entrepreneurs who truly know themselves make the best ethical decisions.

34. How can one apply the different approaches to ethics in a decision-making process?

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Chapter 09 Ethical Decision Making and the Entrepreneur Answer Key

True / False Questions

1.

The vast majority of successful entrepreneurs believe that high ethical standards and integrity

(p. 229) are exceptionally important to long-term success.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

2.

Statutes do not always have the effect they were intended to have.

(p. 229)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

3.

In an attempt to connect with business managers in a way that reflects the real world,

(p. 230) business ethicists talk of moderation, pragmatism, and minimalism.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

4.

The art of self-assessment is critical particularly during the maturity stage of a venture when

(p. 231) the environment is chaotic and unpredictable.

FALSE Accessibility: Keyboard Navigation Blooms: Remember

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Level of Difficulty: 1 Easy

5.

The closer the stakeholders are to an individual, the less effect they will have on his or her

(p. 231) decision making.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

6.

In Stage 1 of the Kohlberg construct of moral instincts and behaviors of an individual, the

(p. 231) individual seeks advantage.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

7.

In the context of personal ethical standards, taking a course in business ethics has been

(p. 232) shown to have little effect on improving one's capacity for decision making and problem

solving.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

8.

When making ethical decisions, always choose an approach you feel most comfortable with

(p. 234) and stick to those principles.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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9.

Broken partnerships can often be traced to apparent differences in the personal ethics among

(p. 234) the members of a management team.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

10.

For entrepreneurs, situations where one law directly conflicts with another rarely occur.

(p. 235)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

11.

When doing business abroad, entrepreneurs must adhere to the international code of

(p. 235) business ethics.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

12.

To make effective and ethical decisions, one must be able to identify the scope and effects of

(p. 238) one's self-interest.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Multiple Choice Questions

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13.

If the motivation for an individual is to win at any cost, fair play and ethics are most likely to:

(p. 231)

A. have far less influence over one's decisions than they should.

B. be the most important influences in the decision-making processes.

C. be the only factors influencing the decision-making processes.

D. have equal influence over the decision process along with other motivators.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

14.

According to Kohlberg's construct of moral judgment, being moral in Stage 1 is synonymous

(p. 231) with being ____.

A. obedient B. courageous C. virtuous D. honest Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

15.

The orientation of the final stage in the Kohlberg construct of moral judgment is ____.

(p. 232)

A. legitimate social contract B. instrumental relativism C. interpersonal concordance D. universal ethical principle Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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16.

_____ is most likely to prevent someone from unknowingly making an ethical mistake when

(p. 232) considering what to do in a situation with ethical overtones.

A. Using an approach that one is most comfortable with B. Adopting an approach similar to that of a competitor's C. Taking a multifaceted approach D. Employing a single standard approach Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

17.

According to the _____ approach, the aim of each person should be to perfect his or her

(p. 232) inherent human nature, and if successful, become a person of virtue.

A. Totalitarian B. Aristotelian C. Utilitarian D. Deontology Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

18.

_____ is one of the oldest approaches to ethics provided by Aristotle.

(p. 232)

A. Placing one's duty to society over one's self-interest B. Choosing actions that will provide for the greatest good C. Focusing on the consequences of an action D. Emulating exemplary role models Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

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19.

Whose approach to ethics states that the aim of each person should be to perfect his or her

(p. 232) inherent human nature, and if successful, become a person of virtue?

A. J. Stewart Mill B. Aristotle C. Carnegie D. Kant Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

20.

Which approach to ethics holds that the ethical person will always choose actions that will

(p. 232) provide for the greatest good (or least bad) for the greatest number of people?

A. Utilitarianism B. Aristotelian C. Kantism D. Deontology Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

21.

Which of the following is an issue associated with the utilitarian approach to ethics?

(p. 232)

A. It can lead to poor decisions if a person chooses to emulate the wrong person.

B. It permits decisions that may hurt some stakeholders, as long as the majority benefits from the action.

C. It cannot work in tandem with other approaches to ethics.

D. It does not directly address the consequences of the actions—only the "court of opinion" holds the actions to have been virtuous.

Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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22.

Who is associated with deontology—one's duty to act?

(p. 232)

A. J. Stewart Mill B. Aristotle C. Kohlberg D. Kant Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

23.

Which of the following statements is true of the deontology approach to ethics?

(p. 232)

A. It holds that an ethical person will always choose actions that will provide for the greatest good.

B. It is one of the oldest approaches to ethics provided by Aristotle.

C. It is pursued without concern for the outcomes of actions.

D. It requires individuals to emulate what people who are widely considered to be virtuous do in similar situations.

Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

24.

What is the most widely used approach to ethical decision making?

(p. 233)

A. The Aristotelian approach B. The utilitarian approach C. The deontology approach D. The Machiavellian approach Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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Fill in the Blank Questions

25.

The _____ construct classifies moral judgment into six stages of development.

(p. 231)

Kohlberg Blooms: Remember Level of Difficulty: 1 Easy

26.

According to the Kohlberg construct of moral instincts and behaviors, the orientation of _____

(p. 231) is toward pleasing others and winning approval.

Stage 3 Blooms: Remember Level of Difficulty: 1 Easy

27.

The _____ approach to ethics focuses on the outcomes or consequences of an action.

(p. 232)

utilitarian Blooms: Remember Level of Difficulty: 1 Easy

28.

Immanuel Kant's _____ approach is pursued without concern for the outcomes of actions but

(p. 232) according to whether the action is something that an ethical person would do.

deontology Blooms: Remember Level of Difficulty: 1 Easy

29.

____, which is a narrowly defined ethical perspective that can lead to trouble, can be

(p. 233) prevented by considering different approaches to the same issue.

Ethical myopia Blooms: Remember

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Level of Difficulty: 1 Easy

Short Answer Questions

30.

Why is it important to study and think about ethical situations in business settings?

(p. 231)

The study of ethics seems to make students more aware of the pervasiveness of ethical situations in business settings. It helps bring perspective to ethical situations, and it has been shown to affect, to some degree, both beliefs and behavior.

Blooms: Remember Level of Difficulty: 1 Easy

31.

What are the issues associated with the Aristotelian approach to ethics?

(p. 232)

Two issues arising from the Aristotelian approach can lead an entrepreneur to make poor decisions. The first is choosing the wrong person to emulate. The second is that neither the actions actually taken nor the consequences of the actions are directly addressed—only that the "court of opinion" holds the actions to have been virtuous.

Blooms: Remember Level of Difficulty: 1 Easy

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32.

How does the concept known as "the fog of war" relate to ethical behavior and the

(p. 233) entrepreneurial experience?

In war, when bullets are flying and lives are at stake, critical decisions must be made on the fly—without the benefit of a perfect understanding of the whole picture. In the same way, the fog of the startup battle that a typical entrepreneur faces could include intense pressures from outside influences. In the midst of these pressures, making a decision that might have serious financial and ethical consequences could follow a person the rest of his or her life.

Blooms: Remember Level of Difficulty: 1 Easy

Essay Questions

33.

Discuss why entrepreneurs who truly know themselves make the best ethical decisions.

(p. 230231)

Entrepreneurs who truly know themselves and understand not only their own morals and values, but also those of the people they surround themselves with, make the best decisions.

This manifests itself in a number of ways. First, they can invite people of similar philosophies into their team and brain trust. Second, this produces teams that are honest about their own capabilities and shortcomings which instills trust and confidence. This is critical because of the environment in which their decisions will be made. Often in entrepreneurship, particularly in the launch and growth stages of a new venture, the environment is chaotic, unpredictable, and frequently unforgiving. To make good decisions one must identify and understand oneself and the scope and the effects of one's self-interest. Knowing one's biases and weaknesses offers an opportunity for personal development or to proactively compensate for them.

Blooms: Understand Level of Difficulty: 2 Medium

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34.

How can one apply the different approaches to ethics in a decision-making process?

(p. 233)

One way is to use the different approaches to ethics as decision-making screens to view the outcome and impact of any action that one might take. A good place to start would be the most widely used approach, utilitarianism. One must carefully enumerate the stakeholders, being sure to include everyone, not just the convenient ones or the ones making the most noise. When one has decided on an action, he or she must apply the Aristotelian approach by contemplating what a really ethical entrepreneur would do in that situation. One can ask people in one's network and brain trust to tell what they have done in similar situations. Finally, one must look at the action one is taking alone—separate from the consequences— and contemplate whether the action is pure.

Using these screens will not guarantee an ethical decision. Considering different approaches to the same issue will help prevent ethical myopia—a narrowly defined ethical perspective that can lead to trouble.

Blooms: Remember Level of Difficulty: 1 Easy

Chapter 10 Resource Requirements

True / False Questions

1. Entrepreneurs in high-potential startups should secure resources enough for the task at hand and a cushion against adversity.

True

False

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2. Whenever possible, effective entrepreneurs seek to control rather than own the resources they need.

True

False

3. One advantage of owning resources during the startup is that it puts the entrepreneur in a better position to commit and de-commit quickly.

True

False

4. Marshaling maximum resources is otherwise colloquially known as bootstrapping.

True

False

5. Extending accounts receivable is one of the primary sources of working capital for many startups and growing firms.

True

False

6. When seeking out advisors and specialists, entrepreneurs should involve them at an early stage and be skeptical of their credentials and advice.

True

False

7. Effective entrepreneurs set aside time for purely random activities—things done with no specific problem in mind.

True

False

8. Effective entrepreneurs are able to check network density, so as to avoid too many overlaps, while still attaining solidarity and cohesiveness.

True

False

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9. Intellectual honesty to an entrepreneur means realizing what he or she knows and what he or she needs to know.

True

False

10. In a study of boards, and specifically venture capitalists' contributions to them, entrepreneurs tended to value financial expertise over operating experience.

True

False

11. Directors of a company can be held personally liable for its actions and those of its officers.

True

False

12. Courts have held that even if a director of a company can prove that he or she acted in good faith, the director cannot be excused from liability.

True

False

13. A board of advisors is an especially good alternative to a board of directors because they are authorized to make legal decisions.

True

False

14. Since a board of advisors is designed to dispense advice rather than make decisions, its liability is limited.

True

False

15. During the chaotic startup phase of a venture, entrepreneurs should outsource the legal aspects of decisions and agreements to an expert attorney.

True

False

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16. The best place to start in selecting an attorney is with acquaintances of the lead entrepreneur, of members of the management team, or of directors.

True

False

17. When choosing a banker or lender, at the end of the day, having the very best bank will be more important than having an excellent banker.

True

False

18. Consultants should not be employed by a startup to compensate for a lower level of professional experience in the team.

True

False

19. When choosing a consultant, an entrepreneur should expect a short-term relationship as the consultant is a third party for the venture.

True

False

20. As is the case with legal and accounting professionals, it is easy to judge consultants solely on the basis of their fees.

True

False

Multiple Choice Questions

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21. The approach of seeking to control the resources needed rather than owning them results in:

A. less capital.

B. less flexibility.

C. increased risk.

D. increased sunk costs.

22. According to the strategic principles identified by Paola Dubini and Howard Aldrich, effective entrepreneurs are more likely than others to:

A. undertake actions to decrease their network density.

B. undertake actions to reduce network diversity.

C. avoid carrying out random activities.

D. discriminate between production and symbolic ties.

23. According to Art Spinner, in order to develop a productive relationship with one's board of directors, one should never set up a(n) ____.

A. compensation committee B. audit committee C. executive committee D. corporate social responsibility (CSR) committee 24. The ______ requires companies to file paperwork with the Securities and Exchange Commission faster, to create a more transparent means of collecting and posting financial data, and to test their procedures for posting accurate, timely information.

A. International Organizations Immunity Act B. Interest Equalization Act C. Sarbanes-Oxley Act D. Smoot-Howley Act

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25. Which of the following legal issues should be of least concern to an entrepreneur building a highgrowth venture?

A. Employee plans B. Federal and state regulations C. Mergers and acquisitions D. Tax shelters 26. If an entrepreneur of a higher-potential firm seeking venture capital has aspirations to go public, which of the following accounting firms is a good place to start for accounting expertise?

A. A small, local firm B. A regional firm C. A national firm D. A public firm

Fill in the Blank Questions

27. A financing strategy will probably encompass a combination of both _____ and _____ capital. ________________________________________ 28. One price of resource ownership is an inherent ____. ________________________________________ 29. Minimal financing is colloquially referred to as ____. ________________________________________

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30. Effective entrepreneurs are more likely than others to undertake actions toward increasing their network density and ____. ________________________________________ 31. If a new venture is organized as a corporation, it must have a board of directors elected by ____. ________________________________________ 32. The Sarbanes-Oxley Act (SOX) requires companies to file paperwork with the _____ Commission faster. ________________________________________ 33. When hiring consultants for a firm, the best referral system is ____. ________________________________________

Short Answer Questions

34. How can lack of money, employees, equipment and such actually work to the advantage of a startup entrepreneur or a bootstrapper?

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35. What are the two contradictory suggestions provided by Howard H. Stevenson and William H. Sahlman about using other people resources as an entrepreneur?

36. State the hypotheses concerning networks and entrepreneurial effectiveness.

37. Why are members of a board of advisors not exposed to personal liability like formal board directors?

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38. How can new venture entrepreneurs without law degrees save money on legal work?

39. What is the best referral system for locating consultants?

Essay Questions

40. Describe the use of other people's resources (OPR) as an approach for entrepreneurs.

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41. Discuss the three important factors that an entrepreneur must consider when selecting accountants.

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Chapter 10 Resource Requirements Answer Key

True / False Questions

1.

Entrepreneurs in high-potential startups should secure resources enough for the task at hand

(p. 247) and a cushion against adversity.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

2.

Whenever possible, effective entrepreneurs seek to control rather than own the resources they

(p. 247) need.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

3.

One advantage of owning resources during the startup is that it puts the entrepreneur in a

(p. 247) better position to commit and de-commit quickly.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

4.

Marshaling maximum resources is otherwise colloquially known as bootstrapping.

(p. 248)

FALSE Accessibility: Keyboard Navigation Blooms: Remember

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Level of Difficulty: 1 Easy

5.

Extending accounts receivable is one of the primary sources of working capital for many

(p. 248) startups and growing firms.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

6.

When seeking out advisors and specialists, entrepreneurs should involve them at an early

(p. 248) stage and be skeptical of their credentials and advice.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

7.

Effective entrepreneurs set aside time for purely random activities—things done with no

(p. 249) specific problem in mind.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

8.

Effective entrepreneurs are able to check network density, so as to avoid too many overlaps,

(p. 249) while still attaining solidarity and cohesiveness.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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9.

Intellectual honesty to an entrepreneur means realizing what he or she knows and what he or

(p. 249) she needs to know.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

10.

In a study of boards, and specifically venture capitalists' contributions to them, entrepreneurs

(p. 249) tended to value financial expertise over operating experience.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

11.

Directors of a company can be held personally liable for its actions and those of its officers.

(p. 250)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

12.

Courts have held that even if a director of a company can prove that he or she acted in good

(p. 250) faith, the director cannot be excused from liability.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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13.

A board of advisors is an especially good alternative to a board of directors because they are

(p. 250) authorized to make legal decisions.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

14.

Since a board of advisors is designed to dispense advice rather than make decisions, its

(p. 250) liability is limited.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

15.

During the chaotic startup phase of a venture, entrepreneurs should outsource the legal

(p. 250) aspects of decisions and agreements to an expert attorney.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

16.

The best place to start in selecting an attorney is with acquaintances of the lead entrepreneur,

(p. 251) of members of the management team, or of directors.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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17.

When choosing a banker or lender, at the end of the day, having the very best bank will be

(p. 251) more important than having an excellent banker.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

18.

Consultants should not be employed by a startup to compensate for a lower level of

(p. 252) professional experience in the team.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 2 Medium

19.

When choosing a consultant, an entrepreneur should expect a short-term relationship as the

(p. 253) consultant is a third party for the venture.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

20.

As is the case with legal and accounting professionals, it is easy to judge consultants solely on

(p. 253) the basis of their fees.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Multiple Choice Questions

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21.

The approach of seeking to control the resources needed rather than owning them results in:

(p. 247)

A. less capital.

B. less flexibility.

C. increased risk.

D. increased sunk costs.

Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

22.

According to the strategic principles identified by Paola Dubini and Howard Aldrich, effective

(p. 249) entrepreneurs are more likely than others to:

A. undertake actions to decrease their network density.

B. undertake actions to reduce network diversity.

C. avoid carrying out random activities.

D. discriminate between production and symbolic ties.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

23.

According to Art Spinner, in order to develop a productive relationship with one's board of

(p. 249) directors, one should never set up a(n) ____.

A. compensation committee B. audit committee C. executive committee D. corporate social responsibility (CSR) committee Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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SOURCE: Browsegrades.net

24.

The ______ requires companies to file paperwork with the Securities and Exchange

(p. 249- Commission faster, to create a more transparent means of collecting and posting financial 250)

data, and to test their procedures for posting accurate, timely information.

A. International Organizations Immunity Act B. Interest Equalization Act C. Sarbanes-Oxley Act D. Smoot-Howley Act Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

25.

Which of the following legal issues should be of least concern to an entrepreneur building a

(p. 251) high-growth venture?

A. Employee plans B. Federal and state regulations C. Mergers and acquisitions D. Tax shelters Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

26.

If an entrepreneur of a higher-potential firm seeking venture capital has aspirations to go

(p. 252) public, which of the following accounting firms is a good place to start for accounting

expertise?

A. A small, local firm B. A regional firm C. A national firm D. A public firm Accessibility: Keyboard Navigation Blooms: Remember 1-204 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Level of Difficulty: 1 Easy

Fill in the Blank Questions

27.

A financing strategy will probably encompass a combination of both _____ and _____ capital.

(p. 245)

debt; equity Blooms: Remember Level of Difficulty: 1 Easy

28.

One price of resource ownership is an inherent ____.

(p. 247)

inflexibility Blooms: Remember Level of Difficulty: 1 Easy

29.

Minimal financing is colloquially referred to as ____.

(p. 248)

bootstrapping Blooms: Remember Level of Difficulty: 1 Easy

30.

Effective entrepreneurs are more likely than others to undertake actions toward increasing

(p. 249) their network density and ____.

diversity Blooms: Remember Level of Difficulty: 1 Easy

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31.

If a new venture is organized as a corporation, it must have a board of directors elected by

(p. 248) ____.

shareholders Blooms: Remember Level of Difficulty: 1 Easy

32.

The Sarbanes-Oxley Act (SOX) requires companies to file paperwork with the _____

(p. 249- Commission faster.

250)

Securities and Exchange Blooms: Remember Level of Difficulty: 1 Easy

33.

When hiring consultants for a firm, the best referral system is ____.

(p. 253)

word of mouth Blooms: Remember Level of Difficulty: 1 Easy

Short Answer Questions

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34.

How can lack of money, employees, equipment and such actually work to the advantage of a

(p. 248) startup entrepreneur or a bootstrapper?

Minimal financing is colloquially referred to as bootstrapping or a lack of resource intensity.

According to Gianforte, lack of money, employees, and equipment—even lack of product—is actually a huge advantage because it forces the bootstrapper to concentrate on selling to bring cash into the business. Thus, to persevere, entrepreneurs ask at every step how they can accomplish a little more with a little less in order to pursue the opportunity.

Blooms: Remember Level of Difficulty: 1 Easy

35.

What are the two contradictory suggestions provided by Howard H. Stevenson and William H.

(p. 248) Sahlman about using other people resources as an entrepreneur?

Howard H. Stevenson and William H. Sahlman suggest that one has to do two seemingly contradictory things: seek out the best advisors—specialists if one has to—and involve them more thoroughly and at an earlier stage than one has in the past. At the same time, one should be more skeptical of their credentials and their advice.

Blooms: Remember Level of Difficulty: 1 Easy

36.

State the hypotheses concerning networks and entrepreneurial effectiveness.

(p. 249)

Effective entrepreneurs are more likely than others to systematically plan and monitor network activities. Effective entrepreneurs are more likely than others to undertake actions toward increasing their network density and diversity.

Blooms: Remember Level of Difficulty: 1 Easy

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37.

Why are members of a board of advisors not exposed to personal liability like formal board

(p. 250) directors?

A board of advisors is designed to dispense advice rather than make decisions.

Blooms: Remember Level of Difficulty: 1 Easy

38.

How can new venture entrepreneurs without law degrees save money on legal work?

(p. 250)

New venture entrepreneurs without law degrees can save money on legal work by using selfhelp legal guides and preprinted forms.

Blooms: Remember Level of Difficulty: 1 Easy

39.

What is the best referral system for locating consultants?

(p. 253)

The best referral system for locating consultants is word of mouth.

Blooms: Remember Level of Difficulty: 1 Easy

Essay Questions

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40.

Describe the use of other people's resources (OPR) as an approach for entrepreneurs.

(p. 248)

Use of other people's resources, particularly in the startup and early growth stages of a venture, is an important approach for entrepreneurs. While ownership of these resources is not important, having the use of a resource and being able to control or influence the deployment of a resource are critical. Other people's resources can include money invested or lent by friends, relatives, business associates, or other investors. Other people's resources can include people, space, equipment, or other material loaned, provided inexpensively or free by customers or suppliers, or secured by bartering future services, opportunities, and the like.

In fact, using other people's resources can also be as simple as benefiting from free booklets and pamphlets, such as those published by accounting firms, or using low-cost educational programs or government-funded management assistance programs. Extending accounts payable is one of the primary sources of working capital for many startups and growing firms.

Blooms: Understand Level of Difficulty: 2 Medium

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41.

Discuss the three important factors that an entrepreneur must consider when selecting

(p. 252) accountants.

When selection accountants for a firm, the entrepreneur will need to address several factors: Service: Levels of service offered and the attention likely to be provided need to be evaluated.

Chances are, for most startups, both will be higher in a small firm than a large one. But if an entrepreneur of a higher-potential firm seeking venture capital or a strategic partner has aspirations to go public, a national firm is a good place to start.

Needs: Needs, both current and future, have to be weighed against the capabilities of the firm.

Larger firms are more equipped to handle highly complex or technical problems, while smaller firms may be preferable for general management advice and assistance because the principals are more likely to be involved in handling the account. In most instances, companies in the early stages of planning or that do not plan to go public do not require a top-tier accounting firm. However, one exception to this might be startups that are able to attract formal venture capital funds from day one.

Cost: Most major firms will offer very cost-competitive services to startups with significant growth and profit potential. That does not mean one will be talking to a partner. If a venture needs the attention of a partner in a larger firm, services of the larger firm are more expensive.

However, if the firm requires extensive technical knowledge, a larger firm may have more experience and be more efficient. Many early-growth phase companies are not able to afford to hire a leading national accounting firm, and therefore a small local firm is best.

Blooms: Understand Level of Difficulty: 2 Medium

Chapter 11 Franchising

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True / False Questions

1. Franchising is not considered a form of entrepreneurship.

True

False

2. At the most fundamental level, margin analysis is the defining quality of the opportunity recognition process.

True

False

3. Research to develop a demographic profile of the customer base does not include nonuser profiles.

True

False

4. Personality variables such as confidence, conservation, and independence are used to segment markets.

True

False

5. The capital outlay requirements to become a franchisee with a dominant national player are generally less than what it costs to join a regionally successful operation.

True

False

6. The service delivery system is the basis for a franchise venture's competitive advantage.

True

False

7. In a franchise system, continuous knowledge gathering and transfer are important both before launch and on an ongoing basis.

True

False

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8. In a franchise system, a franchisor's field support is a good indicator of the stability of the franchise and strength of the franchise partnership.

True

False

9. The best franchisors use their field support function as a diplomatic or pejorative exercise.

True

False

10. The value of a franchise is enhanced when the delivery of a product validates the marketing message.

True

False

11. In the context of franchise marketing, "best efforts" relate to the quality and diversity of the advertising and PR support.

True

False

12. Franchisors are bound to best-price requirements because of changing markets, competitors, and U.S. antitrust law.

True

False

13. A franchisor is under no obligation to disclose the remuneration gained from product purchases from designated suppliers.

True

False

14. Transaction analysis considers how customers purchase goods and services from franchise outlets.

True

False

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Multiple Choice Questions

15. Which of the following statements is true of franchising?

A. It does not apply to international markets.

B. It does not fit within the Timmons Model of entrepreneurship.

C. It is based on partnership effort.

D. It is a small-scale growth opportunity.

16. Which of the following is included in a demographic profile of target customers?

A. Income B. Phone number C. Email address D. Year of graduation 17. Which of the following is the most valuable asset in a franchise system?

A. Tying agreement B. Trade name C. Product specification list D. Transaction analysis 18. Which aspect of franchising is associated with an area of dominant influence (ADI)?

A. Finance B. Training C. Purchasing D. Marketing

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19. At the center of the Franchise Relationship Model (FRM) is the:

A. customer.

B. market.

C. contract.

D. financial structure.

Fill in the Blank Questions

20. The Timmons Model identifies the three components of opportunity as market demand, market size and structure, and ____. ________________________________________ 21. At the most fundamental level, the _____ is the defining quality of the opportunity recognition process. ________________________________________ 22. A demographic profile is a compilation of personal characteristics that enables a company to define the average ____. ________________________________________ 23. A _____ profile segments potential customers based on social class, lifestyle, and personality traits. ________________________________________

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24. When defining the target audience, _____ variables segment potential customers by their knowledge, attitude, and use of products in order to project usage of the product or service. ________________________________________ 25. The road map for marshaling resources for a franchise comes from establishing the ____. ________________________________________ 26. In franchising, a concept innovator is the potential ____. ________________________________________ 27. A(n) _____ list is a list published by a franchisor that clearly establishes the quality standards of raw materials or goods used in an operation. ________________________________________ 28. If adding suppliers to an approved list is impossible, this constitutes a de-facto _____ agreement. ________________________________________ 29. In the Franchise Relationship Model (FRM), franchisor functions are typically centered on ____. ________________________________________ 30. In the Franchise Relationship Model (FRM), the financial structure flows from pro forma analysis of customer demand and the cost associated with development and execution of the ____. ________________________________________ 31. In the Franchise Relationship Model (FRM), _____ issues concern delegating responsibility to a partner. ________________________________________

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Short Answer Questions

32. What are the three major profiles used to define the primary target audience?

33. Describe the ideal business format of a top-ranked franchise operation.

34. What license agreement binds a franchisee to the purchase of a specifically branded product?

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Essay Questions

35. Describe the Service Delivery System (SDS) component of a franchise offering.

36. Discuss the three different levels at which marketing programs are funded and implemented in a franchise offering.

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Chapter 11 Franchising Answer Key

True / False Questions

1.

Franchising is not considered a form of entrepreneurship.

(p. 266)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

2.

At the most fundamental level, margin analysis is the defining quality of the opportunity

(p. 258) recognition process.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

3.

Research to develop a demographic profile of the customer base does not include nonuser

(p. 259) profiles.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

4.

Personality variables such as confidence, conservation, and independence are used to

(p. 259) segment markets.

TRUE Accessibility: Keyboard Navigation Blooms: Remember

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Level of Difficulty: 1 Easy

5.

The capital outlay requirements to become a franchisee with a dominant national player are

(p. 261) generally less than what it costs to join a regionally successful operation.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

6.

The service delivery system is the basis for a franchise venture's competitive advantage.

(p. 261)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

7.

In a franchise system, continuous knowledge gathering and transfer are important both before

(p. 263) launch and on an ongoing basis.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

8.

In a franchise system, a franchisor's field support is a good indicator of the stability of the

(p. 263) franchise and strength of the franchise partnership.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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9.

The best franchisors use their field support function as a diplomatic or pejorative exercise.

(p. 264)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

10.

The value of a franchise is enhanced when the delivery of a product validates the marketing

(p. 264) message.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

11.

In the context of franchise marketing, "best efforts" relate to the quality and diversity of the

(p. 264) advertising and PR support.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

12.

Franchisors are bound to best-price requirements because of changing markets, competitors,

(p. 264) and U.S. antitrust law.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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13.

A franchisor is under no obligation to disclose the remuneration gained from product

(p. 265) purchases from designated suppliers.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

14.

Transaction analysis considers how customers purchase goods and services from franchise

(p. 266) outlets.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Multiple Choice Questions

15.

Which of the following statements is true of franchising?

(p. 257)

A. It does not apply to international markets.

B. It does not fit within the Timmons Model of entrepreneurship.

C. It is based on partnership effort.

D. It is a small-scale growth opportunity.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

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16.

Which of the following is included in a demographic profile of target customers?

(p. 259)

A. Income B. Phone number C. Email address D. Year of graduation Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

17.

Which of the following is the most valuable asset in a franchise system?

(p. 263)

A. Tying agreement B. Trade name C. Product specification list D. Transaction analysis Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

18.

Which aspect of franchising is associated with an area of dominant influence (ADI)?

(p. 264)

A. Finance B. Training C. Purchasing D. Marketing Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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19.

At the center of the Franchise Relationship Model (FRM) is the:

(p. 266)

A. customer.

B. market.

C. contract.

D. financial structure.

Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Fill in the Blank Questions

20.

The Timmons Model identifies the three components of opportunity as market demand, market

(p. 258) size and structure, and ____.

margin analysis Blooms: Remember Level of Difficulty: 1 Easy

21.

At the most fundamental level, the _____ is the defining quality of the opportunity recognition

(p. 258) process.

primary target audience (PTA) Blooms: Remember Level of Difficulty: 1 Easy

22.

A demographic profile is a compilation of personal characteristics that enables a company to

(p. 259) define the average ____.

customer Blooms: Remember

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Level of Difficulty: 1 Easy

23.

A _____ profile segments potential customers based on social class, lifestyle, and personality

(p. 259) traits.

psychographic Blooms: Remember Level of Difficulty: 1 Easy

24.

When defining the target audience, _____ variables segment potential customers by their

(p. 259) knowledge, attitude, and use of products in order to project usage of the product or service.

behavioral Blooms: Remember Level of Difficulty: 1 Easy

25.

The road map for marshaling resources for a franchise comes from establishing the ____.

(p. 260)

service delivery system (SDS) Blooms: Remember Level of Difficulty: 1 Easy

26.

In franchising, a concept innovator is the potential ____.

(p. 266)

franchisor Blooms: Remember Level of Difficulty: 1 Easy

27.

A(n) _____ list is a list published by a franchisor that clearly establishes the quality standards

(p. 265) of raw materials or goods used in an operation.

product specifications Blooms: Remember Level of Difficulty: 1 Easy

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28.

If adding suppliers to an approved list is impossible, this constitutes a de-facto _____

(p. 265) agreement.

tying Blooms: Remember Level of Difficulty: 1 Easy

29.

In the Franchise Relationship Model (FRM), franchisor functions are typically centered on

(p. 266) ____.

economies of scale Blooms: Remember Level of Difficulty: 1 Easy

30.

In the Franchise Relationship Model (FRM), the financial structure flows from pro forma

(p. 266) analysis of customer demand and the cost associated with development and execution of the

____. service delivery system (SDS) Blooms: Remember Level of Difficulty: 1 Easy

31.

In the Franchise Relationship Model (FRM), _____ issues concern delegating responsibility to

(p. 266) a partner.

agency Blooms: Remember Level of Difficulty: 1 Easy

Short Answer Questions

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32.

What are the three major profiles used to define the primary target audience?

(p. 259)

The three major profiles used to define the primary target audience are demographic, geographic, and psychographic.

Blooms: Remember Level of Difficulty: 1 Easy

33.

Describe the ideal business format of a top-ranked franchise operation.

(p. 261)

Dominant franchises have sophisticated training, a documented operations manual, and an identifiable feedback mechanism with franchisees.

Blooms: Remember Level of Difficulty: 1 Easy

34.

What license agreement binds a franchisee to the purchase of a specifically branded product?

(p. 265)

A tying agreement binds a franchisee to the purchase of a specifically branded product.

Blooms: Remember Level of Difficulty: 1 Easy

Essay Questions

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35.

Describe the Service Delivery System (SDS) component of a franchise offering.

(p. 260262)

The road map for marshaling resources for the franchise comes from establishing the service delivery system (SDS). The opportunity dictates that we perform certain tasks to meet consumer demand, and the assets put into place to meet these demands are the resources needed to launch the franchisee. In the franchise entrepreneurial alliance, the franchisor develops a method for delivering the product or service that fills customer demand and this service delivery system is well defined, documented, and proven. The ability of the organization to develop and transfer the service delivery system is the creation of the firm's competitive advantage. The SDS is the fundamental means by which customers will be served, and the fashion, often proprietary in design, in which the service delivery resources are arrayed to create competitive advantage in the marketplace. Highly successful and visible examples of business format innovations are the drive-through in fast-food restaurants and the bi-level facilities in quick oil change facilities. Because the SDS is truly the essence of the successful franchise, the detailed attention given to it should not be underestimated. For the concept innovator, the common phrase, "the devil is in the details," never takes on more meaning than when designing the SDS for the franchise.

Blooms: Understand Level of Difficulty: 2 Medium

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36.

Discuss the three different levels at which marketing programs are funded and implemented in

(p. 264) a franchise offering.

Generally marketing programs are funded and implemented at three different levels: national, regional, and local. A national advertising budget is typically controlled by the franchisor, and each franchisee contributes a percentage of top-line sales to the advertising fund. The franchisor then produces for use by the franchisees and, depending on the size of the fund, also buys media time or space on behalf of the franchisees. Because it is impossible to allocate these services equally between franchisees of different sizes across different markets, the license agreement will specify the use of "best efforts" to approximate equal treatment between franchisees. Although "best efforts" will invariably leave some franchisees with more advertising exposure and some with less, over time this situation should balance itself. This is one area of marketing that requires careful monitoring by both parties. Regional marketing, advertising, and promotion are structured on the basis of an area of dominant influence (ADI).

All the stores in a given ADI should contribute a percentage of their top-line sales to the ADI advertising cooperative. The cooperative's primary function is usually to buy media using franchisor-supplied or franchisor-approved advertising and to coordinate regional site promotions. If the franchise has a regional advertising cooperative requirement in the license agreement, it should also have standardized ADI cooperative bylaws, which will outline things like voting rights and expenditure parameters. The third and final scenario for marketing is typically dubbed local advertising or local store marketing. At this level, the franchisee is contractually obligated to make direct advertising expenditures. There is often a wide spectrum of permissible advertising expenditures, depending on the franchisor guidelines in the license agreement.

Blooms: Understand Level of Difficulty: 2 Medium

Chapter 12 Entrepreneurial Finance

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True / False Questions

1. According to the principles of entrepreneurial finance, cash sooner is preferred to cash later.

True

False

2. New and emerging companies are gluttons for capital, yet are usually not very debt worthy.

True

False

3. Strategies that optimize or maximize the amount of money to be raised decrease risk in new and emerging companies.

True

False

4. All underlying characteristics and assumptions used by popular financial theories and models do not hold up for startups, even up to an IPO. True

False

5. A fund-raising strategy commits a company to actions that may have an impact on future financing options.

True

False

6. An entrepreneur's bargaining power with various sources of equity and debt capital is influenced by the cash flow of the venture.

True

False

7. A new or existing business needs to obtain both equity and debt financing if it is to have a sound financial foundation.

True

False

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8. Short-term debt is most often used by a business for working capital and is repaid out of the proceeds of its sales.

True

False

9. An existing and expanding business will find it harder to raise equity capital from private or institutional sources.

True

False

10. Long-term borrowings are used for working capital or to finance the purchase of property or equipment.

True

False

11. Banks are typically willing to provide long-term debt to new ventures if the business has a substantial asset base of property and equipment.

True

False

12. An existing business seeking expansion capital or funds for temporary use has a much easier job obtaining both debt and equity.

True

False

13. Lack of financial know-how and unanticipated issues are often the entrepreneurs' Achilles' heels.

True

False

Multiple Choice Questions

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14. Increasing sales and healthy profitability ____.

A. lead to positive cash flow B. lead to negative cash flow C. lead to zero cash flow D. have no effect on the cash flow 15. Which critical issue faced by entrepreneurs is concerned with the constituencies for whom value must be created or added to achieve a positive cash flow?

A. Slicing the value pie B. Covering risk C. Creating value D. Ignoring the value pie 16. Short-term debt is incurred for what time frame?

A. Less than six months B. One year or less C. One to five years D. Depends on the deal structure 17. Mezzanine or bridge capital is available at the _____ stage of development.

A. R&D B. startup C. early growth D. exit

Fill in the Blank Questions

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18. The core concept in determining the external financing requirements of a venture is ____. ________________________________________ 19. The date a company runs out of money is called ____. ________________________________________ 20. Earnings before interest and taxes (EBIT) Less Tax exposure (tax rate times EBIT) Plus Depreciation, amortization, and other noncash charges Less Increase in operating working capital Less Capital expenditures.

This formula is used to calculate ____. ________________________________________ 21. Transactions cash balances Plus Accounts receivable Plus Inventory Plus Other operating current assets (e.g., prepaid expenses) Less Accounts payable Less Taxes payable Less Other operating current liabilities (e.g., accrued expenses) This formula is used to calculate ____. ________________________________________ 22. Short-term debt is incurred for _____ months or less. ________________________________________

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23. _____ borrowings are used to finance the purchase of property or equipment that serves as collateral for a loan. ________________________________________ 24. _____ is used to fill the nonbankable cash gaps where money cannot be borrowed, preserve ownership, and lower the risk of loan defaults. ________________________________________ 25. _____ is the art and science of quantifying value creation, slicing the value pie, and managing and covering financial risk. ________________________________________

Short Answer Questions

26. What are the three core principles of entrepreneurial finance?

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27. What are the three central issues in entrepreneurial finance?

28. What phenomenon is at the heart of the financing challenges faced by new and high revenue growth companies?

29. What are the three vital corollaries determining the external financing requirement of a venture?

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30. List the factors that can affect the availability of various financing options and their suitability and cost.

31. How is the increase in net total operating capital calculated?

32. What funding structure provides a sound financial foundation for growth without excessive dilution of an entrepreneur's equity?

Essay Questions

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33. Discuss the premise behind fund-raising strategies of a successful entrepreneur.

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Chapter 12 Entrepreneurial Finance Answer Key

True / False Questions

1.

According to the principles of entrepreneurial finance, cash sooner is preferred to cash later.

(p. 279)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

2.

New and emerging companies are gluttons for capital, yet are usually not very debt worthy.

(p. 281)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

3.

Strategies that optimize or maximize the amount of money to be raised decrease risk in new

(p. 282) and emerging companies.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

4.

All underlying characteristics and assumptions used by popular financial theories and models

(p. 282) do not hold up for startups, even up to an IPO.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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5.

A fund-raising strategy commits a company to actions that may have an impact on future

(p. 283) financing options.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

6.

An entrepreneur's bargaining power with various sources of equity and debt capital is

(p. 283) influenced by the cash flow of the venture.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

7.

A new or existing business needs to obtain both equity and debt financing if it is to have a

(p. 285) sound financial foundation.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

8.

Short-term debt is most often used by a business for working capital and is repaid out of the

(p. 285) proceeds of its sales.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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9.

An existing and expanding business will find it harder to raise equity capital from private or

(p. 285) institutional sources.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

10.

Long-term borrowings are used for working capital or to finance the purchase of property or

(p. 285) equipment.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

11.

Banks are typically willing to provide long-term debt to new ventures if the business has a

(p. 285) substantial asset base of property and equipment.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

12.

An existing business seeking expansion capital or funds for temporary use has a much easier

(p. 285) job obtaining both debt and equity.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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13.

Lack of financial know-how and unanticipated issues are often the entrepreneurs' Achilles'

(p. 287) heels.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Multiple Choice Questions

14.

Increasing sales and healthy profitability ____.

(p. 280)

A. lead to positive cash flow B. lead to negative cash flow C. lead to zero cash flow D. have no effect on the cash flow Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

15.

Which critical issue faced by entrepreneurs is concerned with the constituencies for whom

(p. 281) value must be created or added to achieve a positive cash flow?

A. Slicing the value pie B. Covering risk C. Creating value D. Ignoring the value pie Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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16.

Short-term debt is incurred for what time frame?

(p. 285)

A. Less than six months B. One year or less C. One to five years D. Depends on the deal structure Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

17.

Mezzanine or bridge capital is available at the _____ stage of development.

(p. 286)

A. R&D B. startup C. early growth D. exit Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Fill in the Blank Questions

18.

The core concept in determining the external financing requirements of a venture is ____.

(p. 283)

free cash flow Blooms: Remember Level of Difficulty: 1 Easy

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19.

The date a company runs out of money is called ____.

(p. 283)

fume date Blooms: Remember Level of Difficulty: 1 Easy

20.

Earnings before interest and taxes (EBIT)

(p. 284)

Less Tax exposure (tax rate times EBIT) Plus Depreciation, amortization, and other noncash charges Less Increase in operating working capital Less Capital expenditures.

This formula is used to calculate ____. cash flow Blooms: Remember Level of Difficulty: 1 Easy

21.

Transactions cash balances

(p. 284)

Plus Accounts receivable Plus Inventory Plus Other operating current assets (e.g., prepaid expenses) Less Accounts payable Less Taxes payable Less Other operating current liabilities (e.g., accrued expenses) This formula is used to calculate ____. operating working capital Blooms: Remember Level of Difficulty: 1 Easy

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22.

Short-term debt is incurred for _____ months or less.

(p. 285)

12 Blooms: Remember Level of Difficulty: 1 Easy

23.

_____ borrowings are used to finance the purchase of property or equipment that serves as

(p. 285) collateral for a loan.

Longer-term Blooms: Remember Level of Difficulty: 1 Easy

24.

_____ is used to fill the nonbankable cash gaps where money cannot be borrowed, preserve

(p. 285) ownership, and lower the risk of loan defaults.

Equity financing Blooms: Remember Level of Difficulty: 1 Easy

25.

_____ is the art and science of quantifying value creation, slicing the value pie, and managing

(p. 287) and covering financial risk.

Entrepreneurial finance Blooms: Remember Level of Difficulty: 1 Easy

Short Answer Questions

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26.

What are the three core principles of entrepreneurial finance?

(p. 279)

The three core principles of entrepreneurial finance are: (1) More cash is preferred to less cash (2) Cash sooner is preferred to cash later (3) Less risky cash is preferred to more risky cash

Blooms: Remember Level of Difficulty: 1 Easy

27.

What are the three central issues in entrepreneurial finance?

(p. 281)

Value creation, slicing the value pie, and covering risk are the three central issues in entrepreneurial finance.

Blooms: Remember Level of Difficulty: 1 Easy

28.

What phenomenon is at the heart of the financing challenges faced by new and high revenue

(p. 281) growth companies?

The phenomenon at the heart of the financing challenges faced by new and high revenue growth companies is that cash goes out for a long time before it starts to come in.

Blooms: Remember Level of Difficulty: 1 Easy

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29.

What are the three vital corollaries determining the external financing requirement of a

(p. 283) venture?

The three vital corollaries are the burn rate, fume date that the company runs out of money, and time to clear, or how long it takes to close financing and have the check clear.

Blooms: Remember Level of Difficulty: 1 Easy

30.

List the factors that can affect the availability of various financing options and their suitability

(p. 284- and cost.

285)

Factors that can affect the availability of various financing options and their suitability and cost include the following: • Accomplishments and performance to date • Investor's perceived risk • Industry and technology • Venture upside potential and anticipated exit timing • Venture anticipated growth rate • Venture age and stage of development • Investor's required rate of return or internal rate of return • Amount of capital required and prior valuations of the venture • Founders' goals regarding growth, control, liquidity, and harvesting • Relative bargaining positions • Investor's required terms and covenants • Investor's or lender's view of the quality of a business opportunity and the management team

Blooms: Understand Level of Difficulty: 2 Medium

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31.

How is the increase in net total operating capital calculated?

(p. 284)

Net total operating capital is defined as the increase in operating working capital plus the increase in new fixed assets (WC+FA).

Blooms: Remember Level of Difficulty: 1 Easy

32.

What funding structure provides a sound financial foundation for growth without excessive

(p. 285) dilution of an entrepreneur's equity?

Raising money using both debt and equity provides a sound financial foundation for growth without excessive dilution of an entrepreneur's equity.

Blooms: Remember Level of Difficulty: 1 Easy

Essay Questions

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33.

Discuss the premise behind fund-raising strategies of a successful entrepreneur.

(p. 283)

The premise behind fund-raising strategies of a successful entrepreneur is that successful entrepreneurs are aware of potentially punishing situations, and that they are careful to "sweat the details" and proceed with a certain degree of wariness as they evaluate, select, negotiate, and craft business relationships with potential funding sources. In doing so, they are more likely to find the right sources, at the right time, and on the right terms and conditions. They are also more likely to avoid potential mismatches, costly sidetracking for the wrong sources, and the disastrous marriage to these sources that might follow.

Blooms: Remember Level of Difficulty: 1 Easy

Chapter 13 Obtaining Venture and Growth Capital

True / False Questions

1. One of the toughest trade-offs for any young company is to balance the need for startup and growth capital with preservation of equity.

True

False

2. Creative bootstrapping strategies can preserve equity as long as it is done in an optimal way so the opportunity does not get away from the company.

True

False

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3. The single most important criterion for selecting an investor is the size of fund it can provide to an organization.

True

False

4. An equity investment requires that the management team firmly believe that investors can and will add value to the venture.

True

False

5. Angels or wealthy individuals are often sought because the evaluations they provide of potential investments are more thorough than formal investors.

True

False

6. A venture should look for capital only when it has a serious cash shortage.

True

False

7. The greatest source of seed and startup capital comes from organized venture capital groups.

True

False

8. A typical informal investor is not appropriate for funding high-technology inventors that have not developed a prototype.

True

False

9. Most venture capital funds are organized as partnerships, where the fund managers are the general partners and the investors are the limited partners.

True

False

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10. It is best to be vague about other investors one is considering for a venture while discussing with a potential venture capitalist.

True

False

11. Although corporate venture capitalists look for promising young companies on the verge of a spike in sales like traditional venture capitalists, corporations tend to be more risk-averse and specialized.

True

False

12. Mezzanine capital does not require regular interest payments.

True

False

13. With mezzanine financing, the principle amount may be converted into equity.

True

False

14. Companies preparing for initial public offerings (IPOs) are attractive to mezzanine investors.

True

False

15. If the goal of a company is to raise a specific amount of capital in a short time, it can opt for private placements.

True

False

16. A private placement has an unlimited audience; hence, it requires more regulatory paperwork than a public offering.

True

False

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17. The more mature a company is when it makes a public offering, the higher the equity given up by the founders for the required capital.

True

False

18. Going public enables a firm to raise more capital with less dilution than occurs with private placements or venture capital through a higher valuation.

True

False

19. A private placement should not be offered after a company has already gone public.

True

False

20. Regulation D is the result of the first cooperative effort by the small business investment companies (SBICs) to develop customized exemptions from securities registration for small issuers.

True

False

21. An employee stock ownership plan (ESOP) is a tax-qualified retirement benefit plan that borrows money and uses the cash proceeds to buy a company's stock.

True

False

22. Employee stock ownership plans (ESOPs) are potential sources of funding used by existing companies that have low to moderate confidence in the stability of their future earnings and cash flow.

True

False

Multiple Choice Questions

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23. Salim, who runs a business, decides to invest in a high-technology inventor that has not developed a prototype yet. He requires about $60,000 and opts to seek an investor who adds more than money to this project. However, he realizes that the evaluation provided by this type of investor is not likely to be thorough. Which of the following does Salim consider as a potential investor for the new venture?

A. Contribution from close friends and family B. Fund from an angel investor C. Advance payment from customers D. Credit line from a bank 24. Farah is an engineer with an idea for a flexible solar energy material that would have a wide range of military and civilian applications. She estimates that she will need approximately $300,000 to develop a prototype. Friends and family could provide about $75,000. She contacts Natalie, an angel investor, for this purpose. In this case, which of the following is likely to be true?

A. Farah is likely to receive a report from Natalie that is more thorough than those by formal venture capitalists.

B. Natalie is likely to be a wealthy individual with expertise in the field.

C. Farah is unlikely to expect more than just financial support from Natalie.

D. Natalie is unlikely to be a private investor.

25. What is the size of funds provided by mainstream venture capitalists?

A. $25-$50 million under management B. $50-$100 million under management C. $250-$499 million under management D. Over $500 million under management

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26. Most organizations that are funded by venture capital investors are in the form of ____.

A. S-Corps B. partnerships C. corporations D. public companies 27. What is the average number of hours that a venture capitalist will spend conducting due diligence on a promising venture?

A. 25 B. 60 C. 120 D. 400 28. The subordinated-debt capital is generally unsecured, with a fixed coupon and maturity of ____.

A. 1-3 years B. 3-5 years C. 5-10 years D. 10-15 years 29. Which of the following industries would least likely attract mezzanine financing?

A. Retailing industry B. Broadcasting industry C. Educational industry D. Environmental services industry

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30. Which of the following is an advantage of an initial public offering (IPO)?

A. The legal costs of raising money via a public offering are lesser than that of other ways of raising money.

B. Management need not invest effort, time, and expense to comply with SEC regulations.

C. It creates options to acquire other companies with stock rather than cash.

D. Management becomes more interested in maintaining the price of a company's stock than in running the company.

Fill in the Blank Questions

31. The investigation that an investor undertakes for verification of facts, backgrounds, and reputations of key people, market estimates, technical capabilities of a product, and proprietary rights refers to _____ on the part of the investor. ________________________________________ 32. Capital that is between senior debt financing and common stock is called ______ financing. ________________________________________ 33. Subordinated debt often carries an equity _____ consisting of warrants, or a conversion feature into common stock. ________________________________________ 34. A(n) ______ raises capital through federally registered and underwritten sales of a company's shares. ________________________________________

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35. ESOP stands for ____. ________________________________________

Short Answer Questions

36. What are the three central issues that should be considered when beginning to think about obtaining investment capital?

37. Name three non-monetary capabilities a venture capitalist brings to an investment.

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38. What is the best way for an entrepreneur to learn about the reputation of a particular venture capital firm?

Essay Questions

39. Discuss how timing is a critical aspect of raising risk capital.

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40. Describe the stages in the venture capital fund investing process, including fund formation and adding value to investments.

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Chapter 13 Obtaining Venture and Growth Capital Answer Key

True / False Questions

1.

One of the toughest trade-offs for any young company is to balance the need for startup and

(p. 300) growth capital with preservation of equity.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

2.

Creative bootstrapping strategies can preserve equity as long as it is done in an optimal way

(p. 300) so the opportunity does not get away from the company.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

3.

The single most important criterion for selecting an investor is the size of fund it can provide to

(p. 301) an organization.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

4.

An equity investment requires that the management team firmly believe that investors can and

(p. 301) will add value to the venture.

TRUE Accessibility: Keyboard Navigation

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Blooms: Remember Level of Difficulty: 1 Easy

5.

Angels or wealthy individuals are often sought because the evaluations they provide of

(p. 301) potential investments are more thorough than formal investors.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

6.

A venture should look for capital only when it has a serious cash shortage.

(p. 301)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

7.

The greatest source of seed and startup capital comes from organized venture capital groups.

(p. 301)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

8.

A typical informal investor is not appropriate for funding high-technology inventors that have

(p. 301) not developed a prototype.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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9.

Most venture capital funds are organized as partnerships, where the fund managers are the

(p. 309) general partners and the investors are the limited partners.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

10.

It is best to be vague about other investors one is considering for a venture while discussing

(p. 310) with a potential venture capitalist.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

11.

Although corporate venture capitalists look for promising young companies on the verge of a

(p. 313) spike in sales like traditional venture capitalists, corporations tend to be more risk-averse and

specialized.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

12.

Mezzanine capital does not require regular interest payments.

(p. 313)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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13.

With mezzanine financing, the principle amount may be converted into equity.

(p. 313)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

14.

Companies preparing for initial public offerings (IPOs) are attractive to mezzanine investors.

(p. 313)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

15.

If the goal of a company is to raise a specific amount of capital in a short time, it can opt for

(p. 313) private placements.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

16.

A private placement has an unlimited audience; hence, it requires more regulatory paperwork

(p. 314) than a public offering.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

17.

The more mature a company is when it makes a public offering, the higher the equity given up

(p. 315) by the founders for the required capital.

FALSE Accessibility: Keyboard Navigation

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Blooms: Remember Level of Difficulty: 1 Easy

18.

Going public enables a firm to raise more capital with less dilution than occurs with private

(p. 315) placements or venture capital through a higher valuation.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

19.

A private placement should not be offered after a company has already gone public.

(p. 316)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

20.

Regulation D is the result of the first cooperative effort by the small business investment

(p. 316) companies (SBICs) to develop customized exemptions from securities registration for small

issuers.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

21.

An employee stock ownership plan (ESOP) is a tax-qualified retirement benefit plan that

(p. 317) borrows money and uses the cash proceeds to buy a company's stock.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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22.

Employee stock ownership plans (ESOPs) are potential sources of funding used by existing

(p. 317) companies that have low to moderate confidence in the stability of their future earnings and

cash flow.

FALSE Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 1 Easy

Multiple Choice Questions

23.

Salim, who runs a business, decides to invest in a high-technology inventor that has not

(p. 301) developed a prototype yet. He requires about $60,000 and opts to seek an investor who adds

more than money to this project. However, he realizes that the evaluation provided by this type of investor is not likely to be thorough. Which of the following does Salim consider as a potential investor for the new venture?

A. Contribution from close friends and family B. Fund from an angel investor C. Advance payment from customers D. Credit line from a bank Accessibility: Keyboard Navigation Blooms: Apply Level of Difficulty: 3 Hard

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SOURCE: Browsegrades.net

24.

Farah is an engineer with an idea for a flexible solar energy material that would have a wide

(p. 301) range of military and civilian applications. She estimates that she will need approximately

$300,000 to develop a prototype. Friends and family could provide about $75,000. She contacts Natalie, an angel investor, for this purpose. In this case, which of the following is likely to be true?

A. Farah is likely to receive a report from Natalie that is more thorough than those by formal venture capitalists.

B. Natalie is likely to be a wealthy individual with expertise in the field.

C. Farah is unlikely to expect more than just financial support from Natalie.

D. Natalie is unlikely to be a private investor.

Accessibility: Keyboard Navigation Blooms: Apply Level of Difficulty: 3 Hard

25.

What is the size of funds provided by mainstream venture capitalists?

(p. 306)

A. $25-$50 million under management B. $50-$100 million under management C. $250-$499 million under management D. Over $500 million under management Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

26.

Most organizations that are funded by venture capital investors are in the form of ____.

(p. 309)

A. S-Corps B. partnerships C. corporations D. public companies Accessibility: Keyboard Navigation Blooms: Remember 1-263 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Level of Difficulty: 1 Easy

27.

What is the average number of hours that a venture capitalist will spend conducting due

(p. 311) diligence on a promising venture?

A. 25 B. 60 C. 120 D. 400 Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

28.

The subordinated-debt capital is generally unsecured, with a fixed coupon and maturity of

(p. 313) ____.

A. 1-3 years B. 3-5 years C. 5-10 years D. 10-15 years Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

29.

Which of the following industries would least likely attract mezzanine financing?

(p. 313)

A. Retailing industry B. Broadcasting industry C. Educational industry D. Environmental services industry Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

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30.

Which of the following is an advantage of an initial public offering (IPO)?

(p. 316)

A. The legal costs of raising money via a public offering are lesser than that of other ways of raising money.

B. Management need not invest effort, time, and expense to comply with SEC regulations.

C. It creates options to acquire other companies with stock rather than cash.

D. Management becomes more interested in maintaining the price of a company's stock than in running the company.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

Fill in the Blank Questions

31.

The investigation that an investor undertakes for verification of facts, backgrounds, and

(p. 313) reputations of key people, market estimates, technical capabilities of a product, and

proprietary rights refers to _____ on the part of the investor. due diligence Blooms: Remember Level of Difficulty: 1 Easy

32.

Capital that is between senior debt financing and common stock is called ______ financing.

(p. 313)

mezzanine Blooms: Remember Level of Difficulty: 1 Easy

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33.

Subordinated debt often carries an equity _____ consisting of warrants, or a conversion feature

(p. 313) into common stock.

kicker Blooms: Remember Level of Difficulty: 1 Easy

34.

A(n) ______ raises capital through federally registered and underwritten sales of a company's

(p. 314) shares.

initial public offering/IPO Blooms: Remember Level of Difficulty: 1 Easy

35.

ESOP stands for ____.

(p. 316)

Employee Stock Ownership Plan Blooms: Remember Level of Difficulty: 1 Easy

Short Answer Questions

36.

What are the three central issues that should be considered when beginning to think about

(p. 300) obtaining investment capital?

(1) Does the venture need outside equity capital? (2) Do the founders want outside equity capital? (3) Who should invest?

Blooms: Remember Level of Difficulty: 1 Easy

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37.

Name three non-monetary capabilities a venture capitalist brings to an investment.

(p. 308)

Experience, networks, and industry contacts.

Blooms: Remember Level of Difficulty: 1 Easy

38.

What is the best way for an entrepreneur to learn about the reputation of a particular venture

(p. 310) capital firm?

The best source is the CEO or founder of prior investments.

Blooms: Remember Level of Difficulty: 1 Easy

Essay Questions

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39.

Discuss how timing is a critical aspect of raising risk capital.

(p. 301)

A venture should not wait to look for capital until it has a serious cash shortage. For a start-up, especially one with no experience or success in raising money, it is unwise to delay seeking capital because it is likely to take six months or more to raise money. In addition to the problems with cash flow, the lack of planning implicit in waiting until there is a cash shortage can undermine the credibility of the management team. When raising money, one needs either a credibly audacious plan or significant results while if a venture tries to obtain equity capital too early, the equity position of the founders may be unnecessarily diluted and the discipline instilled by financial leanness goes away.

Blooms: Understand Level of Difficulty: 2 Medium

40.

Describe the stages in the venture capital fund investing process, including fund formation and

(p. 303) adding value to investments.

The process begins with the conception of a target investment opportunity or class of opportunities, which leads to a written proposal or prospectus to raise a venture capital fund.

Once the money is raised, the value creation process moves from generating deals to crafting and executing harvest strategies. Throughout the investing process, venture capital firms seek to add value in several ways: identifying and evaluating business opportunities, including management, entry, or growth strategies; negotiating and closing the investment; tracking and coaching the company; providing technical and management assistance; and attracting additional capital, directors, management, suppliers, and other key stakeholders and resources and back to raising another fund.

Blooms: Understand Level of Difficulty: 2 Medium

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The Deal: Valuation, Structure, and Negotiation

True / False Questions

1. Valuations of private companies have standard methodologies to determine value.

True

False

2. The rate of return (ROR) required by the investor can affect the investor's required share of the ownership.

True

False

3. A cram-down round is an investment round where follow-on investors are compelled by favorable conditions to accept a higher valuation than they would prefer.

True

False

4. A cram-down round has no effect on founders' ownership as founders are normally protected against dilution.

True

False

5. In the venture capital valuation method, terminal value is found by multiplying net income and the P/E ratio.

True

False

6. Share price equals the price paid divided by the number of shares.

True

False

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7. The First Chicago evaluation method employs a higher discount rate and applies it to an expected cash flow.

True

False

8. Staged investment is a method used to manage risk.

True

False

9. Investors stage their capital commitments as a way to motivate the entrepreneurial team.

True

False

10. Investors do not discontinue funding to ventures that are economically viable.

True

False

11. Entrepreneurs should rely on expert legal and accounting advice to protect them during the dealmaking process.

True

False

12. Strategic circumference is never an intentional outcome.

True

False

13. The goals of users and suppliers of capital are often contradictory.

True

False

Multiple Choice Questions

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14. What is the typical expected holding period for a venture capital investment at the seed stage?

A. 3-5 years B. 4-7 years C. 5-10 years D. More than 10 years 15. What rate of return (ROR) will a venture capital investor seek from a first stage investment?

A. 30 percent annual ROR B. 30-40 percent annual ROR C. 40-60 percent annual ROR D. 60-80 percent annual ROR 16. What is the typical expected holding period for a second stage venture capital investment?

A. 3-5 years B. 4-7 years C. 5-10 years D. More than 10 years 17. Which of the following valuation methods is appropriate for investments in a company with negative cash flows at the time of the investment, but has the potential to generate significant earnings?

A. Venture capital method B. Fundamental method C. Experimental method D. The First Chicago method

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18. Staged capital commitments give strategic advantage to the:

A. investor.

B. entrepreneur.

C. underwriters.

D. advisors.

Fill in the Blank Questions

19. ROR stands for ____. ________________________________________ 20. A venture investment round that is priced less than the previous round is referred to as a _____ round. ________________________________________ 21. By _____ their capital contributions, venture capitalists maintain the right to abandon a project whose prospects look dim. ________________________________________ 22. _____ are defined as economic agreements between at least two parties. ________________________________________ 23. Investors can tender their shares of stock before an initial public offering using _____ provision. ________________________________________

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24. _____ financing is a strategy of last resort that wipes out all previously issued stocks when existing preferred shareholders will not commit additional funds. ________________________________________ 25. Under the _____ provision, if management does not find a buyer or cannot take the company public by a certain date, then the investors can proceed to find a buyer at terms they agree upon. ________________________________________

Short Answer Questions

26. In the case of a private company raising money, what is the most critical element of valuation?

27. Name the factors that influence an actual deal in reality.

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28. A venture capitalist is investing $5 million to acquire 200,000 shares. What is the price per share?

29. A company currently has 500,000 shares outstanding, which are owned by the current owners. If the venture capitalist requires a 28.5 percent ownership, what will be the total number of shares outstanding after the investment?

30. Explain how strategic circumference relates to fund raising.

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31. Explain how legal circumference relates to fund raising.

Essay Questions

32. Discuss the characteristics of successful deals.

33. In the context of venture capital investment, discuss the consequences of venturing into an unknown territory.

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Chapter 14 The Deal: Valuation, Structure, and Negotiation Answer Key

True / False Questions

1.

Valuations of private companies have standard methodologies to determine value.

(p. 335)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

2.

The rate of return (ROR) required by the investor can affect the investor's required share of

(p. 336) the ownership.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

3.

A cram-down round is an investment round where follow-on investors are compelled by

(p. 337- favorable conditions to accept a higher valuation than they would prefer.

338)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

4.

A cram-down round has no effect on founders' ownership as founders are normally protected

(p. 338) against dilution.

FALSE Accessibility: Keyboard Navigation Blooms: Remember

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Level of Difficulty: 1 Easy

5.

In the venture capital valuation method, terminal value is found by multiplying net income and

(p. 339) the P/E ratio.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 2 Medium

6.

Share price equals the price paid divided by the number of shares.

(p. 339)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

7.

The First Chicago evaluation method employs a higher discount rate and applies it to an

(p. 339) expected cash flow.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

8.

Staged investment is a method used to manage risk.

(p. 341)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

9.

Investors stage their capital commitments as a way to motivate the entrepreneurial team.

(p. 341)

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Blooms: Remember Level of Difficulty: 1 Easy

10.

Investors do not discontinue funding to ventures that are economically viable.

(p. 341)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

11.

Entrepreneurs should rely on expert legal and accounting advice to protect them during the

(p. 345) deal-making process.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

12.

Strategic circumference is never an intentional outcome.

(p. 344)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

13.

The goals of users and suppliers of capital are often contradictory.

(p. 345)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Multiple Choice Questions

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14.

What is the typical expected holding period for a venture capital investment at the seed

(p. 336) stage?

A. 3-5 years B. 4-7 years C. 5-10 years D. More than 10 years Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

15.

What rate of return (ROR) will a venture capital investor seek from a first stage investment?

(p. 336)

A. 30 percent annual ROR B. 30-40 percent annual ROR C. 40-60 percent annual ROR D. 60-80 percent annual ROR Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 2 Medium

16.

What is the typical expected holding period for a second stage venture capital investment?

(p. 336)

A. 3-5 years B. 4-7 years C. 5-10 years D. More than 10 years Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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17.

Which of the following valuation methods is appropriate for investments in a company with

(p. 338) negative cash flows at the time of the investment, but has the potential to generate significant

earnings?

A. Venture capital method B. Fundamental method C. Experimental method D. The First Chicago method Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

18.

Staged capital commitments give strategic advantage to the:

(p. 341)

A. investor.

B. entrepreneur.

C. underwriters.

D. advisors.

Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Fill in the Blank Questions

19.

ROR stands for ____.

(p. 335)

Rate of Return Blooms: Remember Level of Difficulty: 1 Easy

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20.

A venture investment round that is priced less than the previous round is referred to as a

(p. 337) _____ round.

cram-down Blooms: Remember Level of Difficulty: 2 Medium

21.

By _____ their capital contributions, venture capitalists maintain the right to abandon a project

(p. 341) whose prospects look dim.

staging Blooms: Remember Level of Difficulty: 1 Easy

22.

_____ are defined as economic agreements between at least two parties.

(p. 341)

Deals Blooms: Remember Level of Difficulty: 1 Easy

23.

Investors can tender their shares of stock before an initial public offering using _____

(p. 344) provision.

co-sale Blooms: Remember Level of Difficulty: 1 Easy

24.

_____ financing is a strategy of last resort that wipes out all previously issued stocks when

(p. 344) existing preferred shareholders will not commit additional funds.

Washout Blooms: Remember Level of Difficulty: 2 Medium

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25.

Under the _____ provision, if management does not find a buyer or cannot take the company

(p. 344) public by a certain date, then the investors can proceed to find a buyer at terms they agree

upon. forced buyout Blooms: Remember Level of Difficulty: 2 Medium

Short Answer Questions

26.

In the case of a private company raising money, what is the most critical element of

(p. 335) valuation?

Valuation for a private company has no established methodology. In the case of a private company raising money, the only valuation that matters is the price at which investors are willing to invest.

Blooms: Remember Level of Difficulty: 2 Medium

27.

Name the factors that influence an actual deal in reality.

(p. 337)

In reality, the factors that influence an actual deal struck are current market conditions, deal flow, and relative bargaining power.

Blooms: Remember Level of Difficulty: 2 Medium

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28.

A venture capitalist is investing $5 million to acquire 200,000 shares. What is the price per

(p. 337) share?

The price per share is $5,000,000/200,000 or $25 per share.

Blooms: Apply Level of Difficulty: 2 Medium

29.

A company currently has 500,000 shares outstanding, which are owned by the current

(p. 337) owners. If the venture capitalist requires a 28.5 percent ownership, what will be the total

number of shares outstanding after the investment?

500,000/0.715 = 700,000 shares

Blooms: Apply Level of Difficulty: 2 Medium

30.

Explain how strategic circumference relates to fund raising.

(p. 344)

Each fund-raising strategy sets in motion some actions and commitments by management that will eventually scribe a circumference around the company in terms of its current and future financing choices. These future choices will permit varying degrees of freedom as a result of the previous actions.

Blooms: Remember Level of Difficulty: 2 Medium

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31.

Explain how legal circumference relates to fund raising.

(p. 345)

Legal documentation spells out the terms, conditions, responsibilities, and rights of the parties to a transaction. Because different sources have different ways of structuring deals, and because these legal and contractual details come at the end of the fund-raising process, an entrepreneur may arrive at a point of no return, facing some onerous conditions and covenants that not only are difficult to live with but also create tight limitations and constraints—legal circumference—on future choices that are potentially harmful.

Blooms: Remember Level of Difficulty: 2 Medium

Essay Questions

32.

Discuss the characteristics of successful deals.

(p. 342)

They are simple. They are robust (they do not fall apart when there are minor deviations from projections). They are organic (they are not immutable). They take into account the incentives of each party to the deal under a variety of circumstances. They provide mechanisms for communications and interpretation. They are based primarily on trust rather than on legalese.

They are not patently unfair. They do not make it too difficult to raise additional capital. They match the needs of the user of capital with the needs of the supplier. They reveal information about each party. They allow for the arrival of new information before financing is required.

They do not preserve discontinuities (e.g., boundary conditions that will evoke dysfunctional behavior on the part of the agents or principals). They consider the fact that it takes time to raise money. They improve the chances of success for the venture.

Blooms: Remember Level of Difficulty: 3 Hard

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33.

In the context of venture capital investment, discuss the consequences of venturing into an

(p. 345) unknown territory.

Venturing into unknown territory is a problem. Entrepreneurs need to know the terrain in sufficient detail, particularly the requirements and alternatives of various equity sources. If they do not, they may make critical blunders and waste time. For example, a venture that is not a "mainstream venture capital deal" may be overvalued and directed to investors who are not a realistic match, rather than being realistically valued and directed to small and more specialized funds, private investors, or potential strategic partners.

Blooms: Remember Level of Difficulty: 2 Medium

Chapter 15 Obtaining Debt Capital

True / False Questions

1. Owners of creditworthy companies with excellent records for timely repayment of interest and principal do not have to provide personal guarantees.

True

False

2. Banks will lend to a startup if the lead entrepreneur has a track record and is well connected in the local area.

True

False

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3. To keep trade credit open, the full balance must be periodically paid off.

True

False

4. Commercial banks typically avoid existing businesses with long and substantial financial track records.

True

False

5. Unlike equity investors, banks place very little weight on the quality of the management team.

True

False

6. Line of credit funds are used for seasonal purposes like inventory buildup and receivable financing, frequently the largest and most financeable items on a venture's balance sheet.

True

False

7. Lines of credit must be secured by a pledge of inventory, receivables, equipment, or other acceptable assets.

True

False

8. When sellers who offer installment payment terms to purchasers of their equipment cannot themselves finance installment, they can sell and assign that installment contract to a bank or sales finance company.

True

False

9. Time-sales financing is a way for a seller to generate cash from long-term installment accounts receivable.

True

False

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10. Because of their greater risk taking and asset-based lending, finance companies usually place a larger reporting and monitoring burden on the borrowing firm to stay on top of the receivables and inventory serving as loan collateral.

True

False

11. To lessen the risks involved in term loans, a bank will require some restrictive covenants in loan agreements.

True

False

12. Plant improvement loans are secured only by a second mortgage on the part of the property that is being improved.

True

False

13. Term loans are also a substitute for a series of short-term loans made with the hope of renewal by the borrower.

True

False

14. Finance companies have reasonable prepayment penalties.

True

False

15. Commercial finance companies have less flexible lending arrangements than banks.

True

False

16. Finance companies install measures in their agreements that help insure that they will not be immediately replaced by banks when a borrower's credit profile improves.

True

False

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17. Factoring makes it possible for a loan to be increased as sales and receivables grow.

True

False

18. Trade creditors sometimes regard factoring as evidence of a company in financial difficulty.

True

False

19. A factor assumes the credit risk, does credit investigations and collections, and advances funds.

True

False

20. Factoring is a cheap method for turning receivables into cash.

True

False

21. Leasing credit criteria are very similar to the criteria used by commercial banks for equipment loans.

True

False

22. Leasing provides the flexibility of returning equipment after the lease period if it is no longer needed but not if that equipment has become technologically obsolete.

True

False

23. Effective entrepreneurs think of the process of obtaining a loan as a sales job.

True

False

24. Favorable lending decisions depend in large part on an entrepreneur's ability to sell and to develop a good relationship with the loan officer.

True

False

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25. The better the material entrepreneurs can supply to demonstrate their business credibility, the easier and faster it will be to obtain a positive lending decision.

True

False

26. To build credibility with bankers, entrepreneurs should borrow before they need to and then repay the loan.

True

False

27. Holding zero cash balances can prove extremely beneficial for closely held companies in the long run.

True

False

Multiple Choice Questions

28. Trade credit is reflected as _____ on a balance sheet.

A. accounts receivable B. accounts payable C. notes outstanding D. goodwill 29. The risk averse nature of commercial lending institutions is consistent with their _____.

A. management structure B. expertise C. profit margins D. legal responsibilities to depositors

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30. What is the primary source of debt capital for existing businesses?

A. Commercial banks B. Government programs C. Non-financial companies D. Brokerage firms 31. In time-sales finance, what do dealers do when they cannot themselves finance installments or conditional sales contracts on a purchased equipment?

A. They can stall the purchase until they find means for financing.

B. They sell it off in the market for a lower price.

C. They take loans to cover their financial purposes.

D. They sell and assign the installment contract to a bank.

32. Which of the following businesses frequently lend money to companies that do not have positive cash flow?

A. Commercial banks B. Commercial finance companies C. Leasing companies D. Factors 33. In tight economies, which of the following is most accepting of risk?

A. Leasing companies B. Factors C. Commercial finance companies D. Commercial banks

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34. In the case of inventories or equipment, what is the amount that could be realized from an auction or quick sale called?

A. Liquidation value B. Under value C. Eigen value D. Leverage value 35. What is the advantage of dealing with a commercial finance company?

A. Better rates B. No prepayment penalties C. Flexibility with lending arrangements D. Short commitment time frame 36. Identify a characteristic of factoring as a form of accounts receivable financing.

A. It is an inexpensive method of financing.

B. It quickly turns receivables into cash.

C. It ensures that there is no interest charged for money advanced.

D. It imposes on its users a credit agency fee.

37. What kind of leases does not appear in the balanace sheet?

A. Domestic leases B. Building leases C. Auto leases D. Operating leases

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38. For new and young businesses, lenders do not like to see total debt-to-equity ratios greater than _____.

A. 1 B. 1.1 C. 1.2 D. 1.5

Fill in the Blank Questions

39. Because banks may earn as little as one percent net profit on total assets, they are especially sensitive to the possibility of a _____. ________________________________________ 40. If a loan exceeds the limits of a local bank, part of the loan amount may be offered to _____ banks to diversify the risk profile. ________________________________________ 41. A(n) _____ is a loan specifying the maximum amount a bank will allow the borrower for a one-year period. ________________________________________ 42. For an established and financially sound company, interest rates are frequently quoted using a(n) _____ with an added premium. ________________________________________

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43. Under _____ financing, the bank purchases installment contracts at a discount from their full value and takes as security an assignment of the manufacturer/dealer's interest in the conditional sales contract. ________________________________________ 44. Time-sales financing is a way for a seller to obtain _____ from long-term installment accounts receivable. ________________________________________ 45. _____ is any machinery, equipment, or business property that is made the collateral of a loan. ________________________________________ 46. Loans made to finance improvements to business properties and plants are called _____ loans. ________________________________________ 47. Commercial finance companies lend against the _____ value of assets. ________________________________________ 48. Factoring is accomplished on a _____ value of the receivables pledged. ________________________________________ 49. In a standard factoring arrangement, the factor buys the client's receivables outright, without _____, as soon as the client creates them by shipment of goods to customers. ________________________________________ 50. Banks generally have close ties to venture capital firms and will refer entrepreneurs to such firms for possible _____. ________________________________________

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51. Following the restructuring of debt in a turnaround situation, forgiven debt becomes _____ for the entrepreneur who owns the company and who has personally had to guarantee the loans. ________________________________________

Short Answer Questions

52. Why do startups have a more difficult time borrowing money than existing businesses?

53. Identify the two most likely sources of debt financing for a startup company.

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54. What are the three distinguishing features of term loans?

55. Which characteristic of leasing is advantageous for high-technology and life sciences companies?

56. With regard to personal guarantees, what is meant by "joint and severable?"

Essay Questions

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57. According to Babson College Adjunct Professor Leslie Charm, what should an entrepreneur look for when seeking to develop a constructive banking relationship?

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Chapter 15 Obtaining Debt Capital Answer Key

True / False Questions

1.

Owners of creditworthy companies with excellent records for timely repayment of interest and

(p. 355) principal do not have to provide personal guarantees.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

2.

Banks will lend to a startup if the lead entrepreneur has a track record and is well connected in

(p. 356) the local area.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

3.

To keep trade credit open, the full balance must be periodically paid off.

(p. 357)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

4.

Commercial banks typically avoid existing businesses with long and substantial financial track

(p. 357) records.

FALSE Accessibility: Keyboard Navigation Blooms: Understand

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Level of Difficulty: 2 Medium

5.

Unlike equity investors, banks place very little weight on the quality of the management team.

(p. 363)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

6.

Line of credit funds are used for seasonal purposes like inventory buildup and receivable

(p. 358) financing, frequently the largest and most financeable items on a venture's balance sheet.

TRUE Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

7.

Lines of credit must be secured by a pledge of inventory, receivables, equipment, or other

(p. 358) acceptable assets.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

8.

When sellers who offer installment payment terms to purchasers of their equipment cannot

(p. 358) themselves finance installment, they can sell and assign that installment contract to a bank or

sales finance company.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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SOURCE: Browsegrades.net

9.

Time-sales financing is a way for a seller to generate cash from long-term installment

(p. 358) accounts receivable.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

10.

Because of their greater risk taking and asset-based lending, finance companies usually place

(p. 359) a larger reporting and monitoring burden on the borrowing firm to stay on top of the

receivables and inventory serving as loan collateral.

TRUE Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

11.

To lessen the risks involved in term loans, a bank will require some restrictive covenants in

(p. 358) loan agreements.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

12.

Plant improvement loans are secured only by a second mortgage on the part of the property

(p. 359) that is being improved.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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13.

Term loans are also a substitute for a series of short-term loans made with the hope of

(p. 358) renewal by the borrower.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

14.

Finance companies have reasonable prepayment penalties.

(p. 359)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

15.

Commercial finance companies have less flexible lending arrangements than banks.

(p. 359)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

16.

Finance companies install measures in their agreements that help insure that they will not be

(p. 359) immediately replaced by banks when a borrower's credit profile improves.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

17.

Factoring makes it possible for a loan to be increased as sales and receivables grow.

(p. 360)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy 1-300 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

SOURCE: Browsegrades.net

18.

Trade creditors sometimes regard factoring as evidence of a company in financial difficulty.

(p. 360)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

19.

A factor assumes the credit risk, does credit investigations and collections, and advances

(p. 360) funds.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

20.

Factoring is a cheap method for turning receivables into cash.

(p. 360)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

21.

Leasing credit criteria are very similar to the criteria used by commercial banks for equipment

(p. 360) loans.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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22.

Leasing provides the flexibility of returning equipment after the lease period if it is no longer

(p. 360) needed but not if that equipment has become technologically obsolete.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

23.

Effective entrepreneurs think of the process of obtaining a loan as a sales job.

(p. 362)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

24.

Favorable lending decisions depend in large part on an entrepreneur's ability to sell and to

(p. 365) develop a good relationship with the loan officer.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

25.

The better the material entrepreneurs can supply to demonstrate their business credibility, the

(p. 364) easier and faster it will be to obtain a positive lending decision.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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SOURCE: Browsegrades.net

26.

To build credibility with bankers, entrepreneurs should borrow before they need to and then

(p. 367) repay the loan.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

27.

Holding zero cash balances can prove extremely beneficial for closely held companies in the

(p. 368) long run.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Multiple Choice Questions

28.

Trade credit is reflected as _____ on a balance sheet.

(p. 356)

A. accounts receivable B. accounts payable C. notes outstanding D. goodwill Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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SOURCE: Browsegrades.net

29.

The risk averse nature of commercial lending institutions is consistent with their _____.

(p. 357)

A. management structure B. expertise C. profit margins D. legal responsibilities to depositors Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

30.

What is the primary source of debt capital for existing businesses?

(p. 357)

A. Commercial banks B. Government programs C. Non-financial companies D. Brokerage firms Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

31.

In time-sales finance, what do dealers do when they cannot themselves finance installments

(p. 358) or conditional sales contracts on a purchased equipment?

A. They can stall the purchase until they find means for financing.

B. They sell it off in the market for a lower price.

C. They take loans to cover their financial purposes.

D. They sell and assign the installment contract to a bank.

Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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SOURCE: Browsegrades.net

32.

Which of the following businesses frequently lend money to companies that do not have

(p. 359) positive cash flow?

A. Commercial banks B. Commercial finance companies C. Leasing companies D. Factors Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

33.

In tight economies, which of the following is most accepting of risk?

(p. 359)

A. Leasing companies B. Factors C. Commercial finance companies D. Commercial banks Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

34.

In the case of inventories or equipment, what is the amount that could be realized from an

(p. 359) auction or quick sale called?

A. Liquidation value B. Under value C. Eigen value D. Leverage value Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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SOURCE: Browsegrades.net

35.

What is the advantage of dealing with a commercial finance company?

(p. 359)

A. Better rates B. No prepayment penalties C. Flexibility with lending arrangements D. Short commitment time frame Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

36.

Identify a characteristic of factoring as a form of accounts receivable financing.

(p. 360)

A. It is an inexpensive method of financing.

B. It quickly turns receivables into cash.

C. It ensures that there is no interest charged for money advanced.

D. It imposes on its users a credit agency fee.

Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

37.

What kind of leases does not appear in the balanace sheet?

(p. 360)

A. Domestic leases B. Building leases C. Auto leases D. Operating leases Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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SOURCE: Browsegrades.net

38.

For new and young businesses, lenders do not like to see total debt-to-equity ratios greater

(p. 363) than _____.

A. 1 B. 1.1 C. 1.2 D. 1.5 Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Fill in the Blank Questions

39.

Because banks may earn as little as one percent net profit on total assets, they are especially

(p. 356) sensitive to the possibility of a _____.

loss Blooms: Remember Level of Difficulty: 1 Easy

40.

If a loan exceeds the limits of a local bank, part of the loan amount may be offered to _____

(p. 358) banks to diversify the risk profile.

correspondent Blooms: Remember Level of Difficulty: 1 Easy

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41.

A(n) _____ is a loan specifying the maximum amount a bank will allow the borrower for a one-

(p. 358) year period.

line of credit Blooms: Remember Level of Difficulty: 1 Easy

42.

For an established and financially sound company, interest rates are frequently quoted using

(p. 358) a(n) _____ with an added premium.

public interest rate metric Blooms: Remember Level of Difficulty: 1 Easy

43.

Under _____ financing, the bank purchases installment contracts at a discount from their full

(p. 358) value and takes as security an assignment of the manufacturer/dealer's interest in the

conditional sales contract. time-sales Blooms: Remember Level of Difficulty: 1 Easy

44.

Time-sales financing is a way for a seller to obtain _____ from long-term installment accounts

(p. 358) receivable.

short-term financing Blooms: Remember Level of Difficulty: 1 Easy

45.

_____ is any machinery, equipment, or business property that is made the collateral of a loan.

(p. 359)

Chattel Blooms: Remember Level of Difficulty: 1 Easy

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46.

Loans made to finance improvements to business properties and plants are called _____

(p. 359) loans.

plant improvement Blooms: Remember Level of Difficulty: 1 Easy

47.

Commercial finance companies lend against the _____ value of assets.

(p. 359)

liquidation Blooms: Remember Level of Difficulty: 1 Easy

48.

Factoring is accomplished on a _____ value of the receivables pledged.

(p. 360)

discounted Blooms: Remember Level of Difficulty: 1 Easy

49.

In a standard factoring arrangement, the factor buys the client's receivables outright, without

(p. 360) _____, as soon as the client creates them by shipment of goods to customers.

recourse Blooms: Remember Level of Difficulty: 1 Easy

50.

Banks generally have close ties to venture capital firms and will refer entrepreneurs to such

(p. 361) firms for possible _____.

equity financing Blooms: Remember Level of Difficulty: 1 Easy

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51.

Following the restructuring of debt in a turnaround situation, forgiven debt becomes _____ for

(p. 369) the entrepreneur who owns the company and who has personally had to guarantee the loans.

taxable income Blooms: Remember Level of Difficulty: 1 Easy

Short Answer Questions

52.

Why do startups have a more difficult time borrowing money than existing businesses?

(p. 356)

Startups have more difficulty borrowing money because they don't have assets or a track record of profitability or positive cash flow.

Blooms: Remember Level of Difficulty: 1 Easy

53.

Identify the two most likely sources of debt financing for a startup company.

(p. 356)

The two most likely sources of debt financing for a startup company are trade credit and private investors.

Blooms: Remember Level of Difficulty: 1 Easy

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54.

What are the three distinguishing features of term loans?

(p. 358)

Term loans have three distinguishing features: Banks make them for periods of up to five years; periodic repayment is required; and agreements are designed to fit the needs of the borrower, for example, payments that are smaller at the beginning of a loan and larger at the end.

Blooms: Remember Level of Difficulty: 1 Easy

55.

Which characteristic of leasing is advantageous for high-technology and life sciences

(p. 360) companies?

Leasing provides the flexibility of returning equipment after the lease period if it is no longer needed or if it has become technologically obsolete. This can be a particular advantage to high-technology and life sciences companies.

Blooms: Remember Level of Difficulty: 1 Easy

56.

With regard to personal guarantees, what is meant by "joint and severable?"

(p. 366)

Personal guarantees are often "joint and severable," which means that each guarantor is liable for the total amount of the guarantee.

Blooms: Remember Level of Difficulty: 1 Easy

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Essay Questions

57.

According to Babson College Adjunct Professor Leslie Charm, what should an entrepreneur

(p. 361) look for when seeking to develop a constructive banking relationship?

According to Babson College Adjunct Professor Leslie Charm, industry experience is critical and the entrepreneur should select a banker who understands the particular industry. He or she should have other clients in the same industry and, therefore, may serve as a valuable resource for networking. Bankers with industry experience are better able to make a quick and reasoned funding determination. The entrepreneur needs to have an understanding of how a particular bank works and determine whether that model is a fit with his or her venture. The bank selected should be big enough to service a venture's foreseeable loans but not so large as to be relatively indifferent to the business.

Blooms: Remember Level of Difficulty: 1 Easy

Chapter 16 Leading Rapid Growth, Crises, and Recovery

True / False Questions

1. Founders of high-potential ventures are frequently experienced in launching companies.

True

False

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2. The faster the rate of growth, the greater the potential for difficulty.

True

False

3. One challenge fast-growth firms face is that of an abundance of viable opportunities.

True

False

4. Most causes of failure are external and not in control of the company management.

True

False

5. Bankruptcy can provide only for the liquidation of the business; reorganization is not an option.

True

False

6. Bankruptcy law defines the priority of creditors' claims when a firm is liquidated.

True

False

7. The prospect of bankruptcy can provide a foundation for bargaining with creditors in a turnaround situation.

True

False

8. In the context of selling inventory to raise quick cash, the sale of raw materials inventory to competitors is generally considered the best route.

True

False

9. Organizational climate is created both by the expectations people bring to the organization and by the practices and attitudes of the key managers.

True

False

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Multiple Choice Questions

10. Which of the following can be the most disrupting event during a period of explosive growth?

A. Bringing in new senior management B. Closing a round of expansion funding C. Expanding of space or facilities D. Overcoming a challenge from a competitor 11. Which of the following is a primary cause of failure of a company?

A. Culture B. Management C. Regulatory changes D. Competitive pressure 12. What is the major protection for organizations against trouble caused by external forces?

A. Long-term strategies B. Cash budgets and projections C. Experienced advisors and directors D. Mergers and acquisitions 13. Which bankruptcy law gives a firm immediate protection from creditors?

A. Chapter 7 B. Chapter 11 C. Chapter 13 D. Chapter 6

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14. Except for the owners, which group has the lowest claim in a bankruptcy situation?

A. Commercial banks B. Investors C. Trade debt D. Leasing companies 15. Which of the following tasks involves the technique called subaccount analysis?

A. Reconstructing a business B. Determining the available cash C. Analyzing the differences in financial statements D. Determining where the money is going 16. What is the primary source of decreasing expenses in a troubled company?

A. Advertising B. Workforce reduction C. Underutilized assets D. Working capital 17. Identify the basic dimension of organizational climate that describes the extent to which an employee feels a sense of cohesion and team spirit.

A. Clarity B. Standard C. Esprit de corps D. Commitment

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18. Which approach to management requires managing and working with peers and subordinates outside the formal chains of command?

A. Systems approach B. Consensus approach C. Commune approach D. Operational approach 19. What was the core theme of Jack Stack's management approach at Springfield Remanufacturing Corporation?

A. Education B. Profit sharing C. Long-term goals D. Communication

Fill in the Blank Questions

20. _____ refers to the problem of starting a firm around an idea without strategically analyzing the firm's opportunities. ________________________________________ 21. Net liquid balance can be thought of as the "uncommitted cash" a firm has available to meet _____. ________________________________________ 22. In _____ bankruptcy, creditors force a troubled company into bankruptcy. ________________________________________

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23. _____ is the most liquid noncash asset. ________________________________________ 24. The best route to quick cash is _____. ________________________________________ 25. _____ is not as liquid as receivables but still can be liquidated to generate quick cash. ________________________________________ 26. In highly successful ventures, leadership is based on _____ rather than on authority. ________________________________________ 27. In the _____ approach, a manager is seen as willing to relinquish his or her priorities and power in the interests of an overall goal, and the appropriate people are included in setting cross-functional or cross-departmental goals and in making decisions. ________________________________________ 28. In the chain of greatness model, an entrepreneurial mind-set leads to _____. ________________________________________

Short Answer Questions

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29. In rapid growth situations where cash burn rates are racing ahead of collections, what measures need to be in place to avoid chaos and possible collapse?

30. What are the external forces that can cause trouble for a company?

31. A company focuses on growth without considering profitability. Instead of developing a strategy, the firm takes on low-margin business and adds capacity in an effort to grow. What is the likely result?

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32. Explain how a "big project" can get a company into trouble.

33. What is the formula for calculating a company's Net Liquid Balance (NLB)?

34. Identify four nonquantitative signals that would indicate the possibility of trouble.

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35. What three areas does a turnaround specialist diagnose?

36. What are the three most commonly found areas for potential cuts and improvements in a troubled company?

37. List the six basic dimensions of organizational climate.

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38. Describe how effective group communication is facilitated in successful entrepreneurial firms.

39. What are the elements of effective entrepreneurial leadership?

Essay Questions

40. Describe how there is a decline in the organizational morale at a troubled company.

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41. Explain how a turnaround plan with its long-term remedial actions can help a troubled company.

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Chapter 16 Leading Rapid Growth, Crises, and Recovery Answer Key

True / False Questions

1.

Founders of high-potential ventures are frequently experienced in launching companies.

(p. 396)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

2.

The faster the rate of growth, the greater the potential for difficulty.

(p. 397)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

3.

One challenge fast-growth firms face is that of an abundance of viable opportunities.

(p. 397)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

4.

Most causes of failure are external and not in control of the company management.

(p. 399)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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5.

Bankruptcy can provide only for the liquidation of the business; reorganization is not an

(p. 403) option.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

6.

Bankruptcy law defines the priority of creditors' claims when a firm is liquidated.

(p. 403)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

7.

The prospect of bankruptcy can provide a foundation for bargaining with creditors in a

(p. 403) turnaround situation.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

8.

In the context of selling inventory to raise quick cash, the sale of raw materials inventory to

(p. 405) competitors is generally considered the best route.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 2 Medium

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9.

Organizational climate is created both by the expectations people bring to the organization

(p. 407) and by the practices and attitudes of the key managers.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Multiple Choice Questions

10.

Which of the following can be the most disrupting event during a period of explosive growth?

(p. 400)

A. Bringing in new senior management B. Closing a round of expansion funding C. Expanding of space or facilities D. Overcoming a challenge from a competitor Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 2 Medium

11.

Which of the following is a primary cause of failure of a company?

(p. 400)

A. Culture B. Management C. Regulatory changes D. Competitive pressure Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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12.

What is the major protection for organizations against trouble caused by external forces?

(p. 401)

A. Long-term strategies B. Cash budgets and projections C. Experienced advisors and directors D. Mergers and acquisitions Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

13.

Which bankruptcy law gives a firm immediate protection from creditors?

(p. 403)

A. Chapter 7 B. Chapter 11 C. Chapter 13 D. Chapter 6 Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

14.

Except for the owners, which group has the lowest claim in a bankruptcy situation?

(p. 403)

A. Commercial banks B. Investors C. Trade debt D. Leasing companies Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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SOURCE: Browsegrades.net

15.

Which of the following tasks involves the technique called subaccount analysis?

(p. 404)

A. Reconstructing a business B. Determining the available cash C. Analyzing the differences in financial statements D. Determining where the money is going Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

16.

What is the primary source of decreasing expenses in a troubled company?

(p. 405)

A. Advertising B. Workforce reduction C. Underutilized assets D. Working capital Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

17.

Identify the basic dimension of organizational climate that describes the extent to which an

(p. 407) employee feels a sense of cohesion and team spirit.

A. Clarity B. Standard C. Esprit de corps D. Commitment Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

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SOURCE: Browsegrades.net

18.

Which approach to management requires managing and working with peers and subordinates

(p. 408) outside the formal chains of command?

A. Systems approach B. Consensus approach C. Commune approach D. Operational approach Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

19.

What was the core theme of Jack Stack's management approach at Springfield

(p. 409) Remanufacturing Corporation?

A. Education B. Profit sharing C. Long-term goals D. Communication Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 2 Medium

Fill in the Blank Questions

20.

_____ refers to the problem of starting a firm around an idea without strategically analyzing the

(p. 400) firm's opportunities.

Mousetrap myopia Blooms: Remember Level of Difficulty: 2 Medium

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21.

Net liquid balance can be thought of as the "uncommitted cash" a firm has available to meet

(p. 401) _____.

contingencies Blooms: Remember Level of Difficulty: 2 Medium

22.

In _____ bankruptcy, creditors force a troubled company into bankruptcy.

(p. 403)

involuntary Blooms: Remember Level of Difficulty: 1 Easy

23.

_____ is the most liquid noncash asset.

(p. 405)

Accounts receivable Blooms: Remember Level of Difficulty: 1 Easy

24.

The best route to quick cash is _____.

(p. 405)

discounting receivables Blooms: Remember Level of Difficulty: 2 Medium

25.

_____ is not as liquid as receivables but still can be liquidated to generate quick cash.

(p. 405)

Inventory Blooms: Remember Level of Difficulty: 1 Easy

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26.

In highly successful ventures, leadership is based on _____ rather than on authority.

(p. 408)

expertise Blooms: Remember Level of Difficulty: 2 Medium

27.

In the _____ approach, a manager is seen as willing to relinquish his or her priorities and

(p. 408) power in the interests of an overall goal, and the appropriate people are included in setting

cross-functional or cross-departmental goals and in making decisions. consensus Blooms: Remember Level of Difficulty: 1 Easy

28.

In the chain of greatness model, an entrepreneurial mind-set leads to _____.

(p. 410411)

widespread responsibility or accountability Blooms: Remember Level of Difficulty: 2 Medium

Short Answer Questions

29.

In rapid growth situations where cash burn rates are racing ahead of collections, what

(p. 399) measures need to be in place to avoid chaos and possible collapse?

The possible measures to be adopted to tackle the problem of misalignment of cash burn and collection rates are effective and integrated accounting, inventory, purchasing, shipping, and invoicing systems and controls.

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30.

What are the external forces that can cause trouble for a company?

(p. 400)

The most common reasons that cause trouble for a company are the external forces such as recession, interest rate changes, changes in government policy, inflation, the entry of new competition, and industry or product obsolescence.

Blooms: Remember Level of Difficulty: 1 Easy

31.

A company focuses on growth without considering profitability. Instead of developing a

(p. 400) strategy, the firm takes on low-margin business and adds capacity in an effort to grow. What is

the likely result?

This is a strategic issue of failure to understand the market niche. When a company adopts this approach, it will eventually run out of cash.

Blooms: Remember Level of Difficulty: 1 Easy

32.

Explain how a "big project" can get a company into trouble.

(p. 400401)

The company gears up for a "big project" without looking at the cash flow implications. Cash is expended by adding capacity and hiring personnel. When sales do not materialize, or take longer than expected to materialize, there is trouble.

Blooms: Remember Level of Difficulty: 2 Medium

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33.

What is the formula for calculating a company's Net Liquid Balance (NLB)?

(p. 402)

NLB = (Cash + Marketable securities) - (Notes Payable + Contractual obligations).

Blooms: Remember Level of Difficulty: 3 Hard

34.

Identify four nonquantitative signals that would indicate the possibility of trouble.

(p. 402)

The various nonquantitative signals are: inability to produce financial statements on time; changes in behavior of the lead entrepreneur (such as avoiding phone calls or coming in later than usual); change in management or advisors, such as directors, accountants, or other professional advisors; new competition; launching of a "big project"; lower research and development expenditures; special write-offs of assets and/or addition of "new" liabilities; and reduction of the firm's credit line.

Blooms: Remember Level of Difficulty: 2 Medium

35.

What three areas does a turnaround specialist diagnose?

(p. 404)

A turnaround specialist diagnoses three areas: the appropriate strategic posture of the business, the analysis of management, and the numbers.

Blooms: Remember Level of Difficulty: 2 Medium

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36.

What are the three most commonly found areas for potential cuts and improvements in a

(p. 405) troubled company?

The three most commonly found areas for potential cuts and improvements are working capital, payroll, and overcapacity and underutilized assets.

Blooms: Remember Level of Difficulty: 1 Easy

37.

List the six basic dimensions of organizational climate.

(p. 407)

Organizational climate can be described along six basic dimensions: clarity, standards, commitment, responsibility, recognition, and esprit de corps.

Blooms: Remember Level of Difficulty: 2 Medium

38.

Describe how effective group communication is facilitated in successful entrepreneurial firms.

(p. 408)

The most effective leaders share information and are willing to alter individual views. Listening and participation are facilitated by such methods as circular seating arrangements, few interruptions or side conversations, and calm discussion. Effective communication is a key ingredient for the success of an entrepreneurial firm.

Blooms: Remember Level of Difficulty: 1 Easy

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39.

What are the elements of effective entrepreneurial leadership?

(p. 408)

The key elements for effective entrepreneurial leadership are consensus building, communication, encouragement, trust, and development.

Blooms: Remember Level of Difficulty: 2 Medium

Essay Questions

40.

Describe how there is a decline in the organizational morale at a troubled company.

(p. 402)

Among those who notice trouble developing are the employees. They deal with customer returns, calls from creditors, and the like, and they wonder why management does not respond. They begin to lose confidence in management. Despite troubled times, the lead entrepreneur talks and behaves optimistically or hides in the office declining to communicate with employees, customers, or vendors. Employees hear of trouble from each other and from outsiders. They lose confidence in the formal communications of the company. Company turnover starts to increase. Morale erodes. It is obvious there is a problem and that it is not being dealt with. Employees wonder what will happen, whether they will be laid off, and whether the firm will go into bankruptcy. With their security threatened, employees lapse into survival mode.

Blooms: Understand Level of Difficulty: 2 Medium

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41.

Explain how a turnaround plan with its long-term remedial actions can help a troubled

(p. 405) company.

The turnaround plan not only defines remedial actions but, because it is a detailed set of projections, also provides a means to monitor and control turnaround activity. Because shortterm measures may not solve the cash crunch, a turnaround plan gives a firm enough credibility to buy time to put other remedial actions in place. The turnaround plan helps address organizational issues. The plan replaces uncertainty with a clearly defined set of actions and responsibilities. Since it signals to the organization that action is being taken, it helps get employees out of their survival mode. Finally, a turnaround plan can be an important source of bargaining power. By identifying problems and providing for remedial actions, the turnaround plan enables the firm's advisors to approach creditors and tell them in a very detailed fashion how and when they will be paid. The long-term remedial actions fall into three categories: systems and procedures, asset plays, and creative solutions.

Blooms: Understand Level of Difficulty: 2 Medium

Chapter 17 The Family as Entrepreneur

True / False Questions

1. Studies indicate that family-influenced companies consistently outperform nonfamily businesses on annual shareholder return, return on assets, and both annual revenue and income growth.

True

False

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2. Most of the small and midsized family-owned businesses in the U.S. are modest and typical mom-and-pop operations.

True

False

3. Families still dominate the U.S. economy and even more fully the economies of other countries worldwide.

True

False

4. Family influenced startups are new businesses where the family ownership vision and leadership influence impacts the strategic intent, decision making, and financial goals of the company.

True

False

5. Organizational formalization has been shown to constrain entrepreneurial behavior in family enterprises.

True

False

6. Research shows that most often family cash investments are given based on formal investment criteria rather than on altruistic family sentiments.

True

False

7. Most often formal family investment funds are created after a family has liquidated all or part of their family group.

True

False

8. Allocations from family investment funds are usually nonoperating investments in businesses and do not represent a significant portion of the family's total wealth.

True

False

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9. Business families who are interested in transgenerational entrepreneurship and wealth creation should ideally cultivate the more formal approach to entrepreneurship.

True

False

10. Enterprising families focus on maintaining their local advantage, safeguarding their brands, assets, and customers, or on honing their operational efficiencies.

True

False

11. Enterprising organizations pursue managerial methods that focus on maintaining the existing structure and on implementing incremental change.

True

False

12. Families often have a vague notion of "working together," and they assume that they will figure the details out over time.

True

False

13. The familiarity of a family can make it very easy to challenge assumptions and talk about differing views.

True

False

14. In family enterprising, "team" encompasses the family ownership group as well as the family and nonfamily entrepreneurial capabilities.

True

False

15. The goal of dialogue is to find solutions that are not constrained by the boundaries of either of the original positions.

True

False

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16. A transgenerational commitment requires families to perpetuate the "great leader" model in successive generations.

True

False

17. Families have the natural potential to build relationship capital better than other social groups.

True

False

18. Families have the natural potential to destroy relationship capital more ruthlessly than any other social group.

True

False

19. Formal governance structures and policies create significant ambiguity in families and thus constrain enterprising.

True

False

20. When entrepreneurial processes are institutionalized through governance structures and policies, this promotes growth and change activities.

True

False

Multiple Choice Questions

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21. Family corporate venturing primarily involves _____.

A. family holding companies or businesses that have formal new venture creation and/or acquisition strategies, plans, departments, or capabilities B. startup money from family member or business with a formal written agreement for marketbased ROI and or repayment C. stand-alone professional private equity or venture capital fund controlled by family and/or using family-generated capital D. an entrepreneur with no legacy assets/existing business, but who formally launches a new business with family and/or intending to involve family 22. Family corporate renewal occurs where the family's entrepreneurial activity is focused on _____.

A. creating new streams of value within the family business B. strategic alliances C. creating a sense of shared urgency in the organization D. family holding companies 23. Identify a characteristic of the financial mind-set for enterprising.

A. Allocating disproportionate resources to new business opportunities B. Adopting an "undo the competitor" market posture typically C. Assuming that a percentage of the business will become obsolete D. Seeking new opportunities beyond the core (legacy) business 24. Identify a characteristic of the entrepreneurial methods for enterprising.

A. Allocating proportionate resources to existing business opportunities B. Being willing to sell and redeploy assets to seek higher returns C. Investing late to develop or adopt existing technology to new processes D. Having formal routines for gathering and disseminating market intelligence

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25. Which of the following is the first thing needed to build a successful enterprising family?

A. Financial expertise B. Communication C. Mentoring D. Long-term planning

Fill in the Blank Questions

26. As enterprise refers to economic activity, _____ is the action of generating new economic activity and building long-term value across generations. ________________________________________ 27. The family _____ category occurs when an existing family company or group starts new businesses. ________________________________________ 28. Families are often, and quite naturally, _____ who build numerous businesses under a family umbrella. ________________________________________ 29. Family _____ occurs where the family's entrepreneurial activity is focused on creating new streams of value within the business or group through innovation and transformational change activities. ________________________________________

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30. The Timmons Model shows us that at the heart of the entrepreneurial process is the _____. ________________________________________ 31. Enterprising families _____ the opportunity-seeking processes in the mind-set and methods of both their family ownership group and their business organizations. ________________________________________ 32. Family enterprising is the combination of a _____ ownership mind-set and entrepreneurial strategic methods. ________________________________________ 33. The mind-set continuum is primarily a measure of the _____ profile of the family ownersshareholders. ________________________________________ 34. The _____ assumes that enterprising organizations are taking bold, innovative, market-leading actions to seek a competitive advantage and generate new streams of value. ________________________________________ 35. Family leaders who strive to turn their families into a team based on the _____ philosophy overcome many of the negative caricatures often associated with family business leadership and empower the family and organization to be enterprising. ________________________________________ 36. The idiosyncratic bundle of resources and capabilities that can give an enterprising family an advantage in the entrepreneurial process is referred to as its _____. ________________________________________

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37. The job of families who desire to be enterprising is to determine how to generate and exploit their _____ familiness and to minimize or shed their _____ familiness. ________________________________________

Short Answer Questions

38. What is transgenerational entrepreneurship?

39. Define enterprising.

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40. What are the six dimensions for family enterprising?

41. List five attributes of relationship capital.

42. On what should an enterprising family's strategic thinking and planning be based?

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43. Which aspect of the Timmons Model is of particular significance in the context of family enterprising?

Essay Questions

44. Discuss why a financial mind-set is more effective than an operational mind-set.

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Chapter 17 The Family as Entrepreneur Answer Key

True / False Questions

1.

Studies indicate that family-influenced companies consistently outperform nonfamily

(p. 426) businesses on annual shareholder return, return on assets, and both annual revenue and

income growth.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

2.

Most of the small and midsized family-owned businesses in the U.S. are modest and typical

(p. 426) mom-and-pop operations.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

3.

Families still dominate the U.S. economy and even more fully the economies of other

(p. 427- countries worldwide.

428)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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4.

Family influenced startups are new businesses where the family ownership vision and

(p. 428) leadership influence impacts the strategic intent, decision making, and financial goals of the

company.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

5.

Organizational formalization has been shown to constrain entrepreneurial behavior in family

(p. 428) enterprises.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

6.

Research shows that most often family cash investments are given based on formal

(p. 428- investment criteria rather than on altruistic family sentiments.

429)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

7.

Most often formal family investment funds are created after a family has liquidated all or part of

(p. 429) their family group.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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8.

Allocations from family investment funds are usually nonoperating investments in businesses

(p. 429) and do not represent a significant portion of the family's total wealth.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

9.

Business families who are interested in transgenerational entrepreneurship and wealth

(p. 429) creation should ideally cultivate the more formal approach to entrepreneurship.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

10.

Enterprising families focus on maintaining their local advantage, safeguarding their brands,

(p. 430) assets, and customers, or on honing their operational efficiencies.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

11.

Enterprising organizations pursue managerial methods that focus on maintaining the existing

(p. 432) structure and on implementing incremental change.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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12.

Families often have a vague notion of "working together," and they assume that they will figure

(p. 433- the details out over time.

434)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

13.

The familiarity of a family can make it very easy to challenge assumptions and talk about

(p. 433) differing views.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

14.

In family enterprising, "team" encompasses the family ownership group as well as the family

(p. 434) and nonfamily entrepreneurial capabilities.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

15.

The goal of dialogue is to find solutions that are not constrained by the boundaries of either of

(p. 434) the original positions.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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16.

A transgenerational commitment requires families to perpetuate the "great leader" model in

(p. 435) successive generations.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

17.

Families have the natural potential to build relationship capital better than other social groups.

(p. 435)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

18.

Families have the natural potential to destroy relationship capital more ruthlessly than any

(p. 435) other social group.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

19.

Formal governance structures and policies create significant ambiguity in families and thus

(p. 436) constrain enterprising.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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20.

When entrepreneurial processes are institutionalized through governance structures and

(p. 436) policies, this promotes growth and change activities.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Multiple Choice Questions

21.

Family corporate venturing primarily involves _____.

(p. 429)

A. family holding companies or businesses that have formal new venture creation and/or acquisition strategies, plans, departments, or capabilities B. startup money from family member or business with a formal written agreement for marketbased ROI and or repayment C. stand-alone professional private equity or venture capital fund controlled by family and/or using family-generated capital D. an entrepreneur with no legacy assets/existing business, but who formally launches a new business with family and/or intending to involve family Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

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22.

Family corporate renewal occurs where the family's entrepreneurial activity is focused on

(p. 429) _____.

A. creating new streams of value within the family business B. strategic alliances C. creating a sense of shared urgency in the organization D. family holding companies Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

23.

Identify a characteristic of the financial mind-set for enterprising.

(p. 431)

A. Allocating disproportionate resources to new business opportunities B. Adopting an "undo the competitor" market posture typically C. Assuming that a percentage of the business will become obsolete D. Seeking new opportunities beyond the core (legacy) business Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

24.

Identify a characteristic of the entrepreneurial methods for enterprising.

(p. 432)

A. Allocating proportionate resources to existing business opportunities B. Being willing to sell and redeploy assets to seek higher returns C. Investing late to develop or adopt existing technology to new processes D. Having formal routines for gathering and disseminating market intelligence Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

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25.

Which of the following is the first thing needed to build a successful enterprising family?

(p. 433)

A. Financial expertise B. Communication C. Mentoring D. Long-term planning Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Fill in the Blank Questions

26.

As enterprise refers to economic activity, _____ is the action of generating new economic

(p. 425) activity and building long-term value across generations.

enterprising Blooms: Remember Level of Difficulty: 1 Easy

27.

The family _____ category occurs when an existing family company or group starts new

(p. 428) businesses.

corporate venturing Blooms: Remember Level of Difficulty: 1 Easy

28.

Families are often, and quite naturally, _____ who build numerous businesses under a family

(p. 428) umbrella.

portfolio entrepreneurs Blooms: Remember

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Level of Difficulty: 1 Easy

29.

Family _____ occurs where the family's entrepreneurial activity is focused on creating new

(p. 428) streams of value within the business or group through innovation and transformational change

activities. corporate renewal Blooms: Remember Level of Difficulty: 1 Easy

30.

The Timmons Model shows us that at the heart of the entrepreneurial process is the _____.

(p. 429430)

opportunity Blooms: Remember Level of Difficulty: 1 Easy

31.

Enterprising families _____ the opportunity-seeking processes in the mind-set and methods of

(p. 430) both their family ownership group and their business organizations.

institutionalize Blooms: Remember Level of Difficulty: 1 Easy

32.

Family enterprising is the combination of a _____ ownership mind-set and entrepreneurial

(p. 430) strategic methods.

financial Blooms: Remember Level of Difficulty: 1 Easy

33.

The mind-set continuum is primarily a measure of the _____ profile of the family owners-

(p. 431) shareholders.

financial risk Blooms: Remember 1-353 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Level of Difficulty: 1 Easy

34.

The _____ assumes that enterprising organizations are taking bold, innovative, market-leading

(p. 431) actions to seek a competitive advantage and generate new streams of value.

methods continuum Blooms: Remember Level of Difficulty: 1 Easy

35.

Family leaders who strive to turn their families into a team based on the _____ philosophy

(p. 435) overcome many of the negative caricatures often associated with family business leadership

and empower the family and organization to be enterprising. great group Blooms: Remember Level of Difficulty: 1 Easy

36.

The idiosyncratic bundle of resources and capabilities that can give an enterprising family an

(p. 437) advantage in the entrepreneurial process is referred to as its _____.

familiness Blooms: Remember Level of Difficulty: 1 Easy

37.

The job of families who desire to be enterprising is to determine how to generate and exploit

(p. 437- their _____ familiness and to minimize or shed their _____ familiness.

438)

distinctive; constrictive Blooms: Remember Level of Difficulty: 1 Easy

Short Answer Questions

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38.

What is transgenerational entrepreneurship?

(p. 425)

Families who are enterprising generate new economic activity and build long-term value across generations. This outcome is referred to as transgenerational entrepreneurship.

Blooms: Remember Level of Difficulty: 1 Easy

39.

Define enterprising.

(p. 430)

Enterprising is the proactive and continuous search for opportunistic growth.

Blooms: Remember Level of Difficulty: 1 Easy

40.

What are the six dimensions for family enterprising?

(p. 434)

Leadership, relationship, vision, strategy, governance, and performance are the six dimensions for family enterprising.

Blooms: Remember Level of Difficulty: 1 Easy

41.

List five attributes of relationship capital.

(p. 435)

Trust, loyalty, positive feelings, benefit of the doubt, goodwill, forgiveness, commitment, and altruistic motives are attributes of relationship capital.

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42.

On what should an enterprising family's strategic thinking and planning be based?

(p. 436)

A family's strategic thinking and planning should be based on determining how to exploit their unique family-based resources and capabilities to find advantages in enterprising.

Blooms: Remember Level of Difficulty: 1 Easy

43.

Which aspect of the Timmons Model is of particular significance in the context of family

(p. 437) enterprising?

The "resources" aspect of the Timmons Model is where enterprising can get exciting for families.

Blooms: Remember Level of Difficulty: 1 Easy

Essay Questions

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44.

Discuss why a financial mind-set is more effective than an operational mind-set.

(p. 431)

Family leaders who have an operational mind-set predominantly focus on management strategies, operational efficiencies, and the perpetuity of a particular business. A financial mind-set moves beyond the operational focus to an investor focus with a view toward the overall capital strategy of the family, creating new streams of value and finding a return on the totality of their assets. While the operational mind-set is a requirement for running an efficient business, the financial focus is a requirement for transgenerational entrepreneurship and wealth creation.

Blooms: Understand Level of Difficulty: 2 Medium

Chapter 18 The Harvest and Beyond

True / False Questions

1. Most successful entrepreneurs fail to recognize the difference between making money and spending money.

True

False

2. Having a harvest goal and crafting a strategy to achieve it are what separate successful entrepreneurs from the rest of the pack.

True

False

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3. Managing a business that is oriented to harvest is less stressful than managing a business that is not.

True

False

4. If begun early in the venture-building process, shaping a harvest strategy is a straightforward task.

True

False

5. A harvest strategy is more sensible if it allows for a time frame of 3 to 10 years.

True

False

6. If impatience is the enemy of an attractive harvest, then fear is its executioner.

True

False

7. Ignoring outside advice is one of the guidelines in shaping a harvest strategy.

True

False

8. Management buyouts (MBOs) typically require the seller to take a limited amount of cash up front and a note for the balance of the purchase price over several years.

True

False

9. When entrepreneurs sell their venture in a stock-for-stock exchange, the agreement typically includes protections against a sudden drop in the share price of the acquiring company.

True

False

10. A public offering increases public awareness of the company and contributes to the marketability of the products.

True

False

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Multiple Choice Questions

11. The workload demanded by a harvest-oriented venture versus one in a venture that cannot achieve a harvest is typically:

A. far more, thus justifying the time and energy.

B. no greater than building a venture without harvest prospects.

C. far less because of a larger management team.

D. about equal, but the stress levels are higher.

12. What is the most vital aspect of crafting a harvest strategy?

A. Capital B. Timing C. The offering D. Skills 13. In a management buyout, which of the following is a problem that the managers buying out the owners and running the company typically face?

A. Lack of capital B. Lack of expertise C. Issues with the legal structure D. Issues with employee retention

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14. Which of the following harvest options is most likely to produce the most cash for a founder at the time of sale?

A. IPO B. MBO C. Outright sale D. Strategic alliance 15. For many would-be entrepreneurs, _____ is the most attractive harvest option of all in terms of value.

A. merger B. acquisition C. public offering D. strategic alliance 16. Which harvest option can force a leadership team to focus on short-term profits and performance results?

A. Management buyout (MBO) B. Employee Stock Ownership Plan (ESOP) C. Initial Public Offering (IPO) D. Strategic Alliance 17. Which of the following is an advantage of being a public company?

A. Focus on short-term profits and performance results B. Access to long-term capital C. Guaranteed operating confidentiality D. Unsusceptibility to the risk of insider trading

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Fill in the Blank Questions

18. Successful entrepreneurs create _____ that results in capital gain. ________________________________________ 19. Harvesting at the right time, willingly, involves hitting one of the many _____ that entrepreneurs face. ________________________________________ 20. A _____ is to the entrepreneur what a cash cow is to a large corporation. ________________________________________ 21. _____ are harvest vehicles through which founders can realize some liquidity from their stock by sales to the plan and other employees. ________________________________________ 22. A _____ is one in which a founder can realize a gain from a business by selling it to existing partners or to other key managers in the business. ________________________________________ 23. In a _____, founders can attract capital, often in substantial amounts, from a large company interested in their technologies. ________________________________________ 24. _____ markets provide access to long-term capital while also meeting subsequent capital needs. ________________________________________

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Short Answer Questions

25. What are the three core aspects of shaping a harvest strategy?

26. "If impatience is the enemy of an attractive harvest, then greed is its executioner." What is being implied by this statement?

27. What is a critical issue associated with stock-for-stock exchange?

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28. Identify four avenues by which a company can realize a harvest from the value it has created.

29. What are the three anchors of entrepreneurial process that loom above the rest?

Essay Questions

30. Discuss why it is important to have a harvest goal in place from the beginning of a venture.

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31. What are the advantages of being a public company?

32. What are some of the disadvantages of being a public company?

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Chapter 18 The Harvest and Beyond Answer Key

True / False Questions

1.

Most successful entrepreneurs fail to recognize the difference between making money and

(p. 456) spending money.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

2.

Having a harvest goal and crafting a strategy to achieve it are what separate successful

(p. 457) entrepreneurs from the rest of the pack.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

3.

Managing a business that is oriented to harvest is less stressful than managing a business

(p. 457) that is not.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

4.

If begun early in the venture-building process, shaping a harvest strategy is a straightforward

(p. 457) task.

FALSE Accessibility: Keyboard Navigation

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Blooms: Remember Level of Difficulty: 1 Easy

5.

A harvest strategy is more sensible if it allows for a time frame of 3 to 10 years.

(p. 458)

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

6.

If impatience is the enemy of an attractive harvest, then fear is its executioner.

(p. 458)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

7.

Ignoring outside advice is one of the guidelines in shaping a harvest strategy.

(p. 458)

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

8.

Management buyouts (MBOs) typically require the seller to take a limited amount of cash up

(p. 458) front and a note for the balance of the purchase price over several years.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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9.

When entrepreneurs sell their venture in a stock-for-stock exchange, the agreement typically

(p. 459) includes protections against a sudden drop in the share price of the acquiring company.

FALSE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

10.

A public offering increases public awareness of the company and contributes to the

(p. 460) marketability of the products.

TRUE Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

Multiple Choice Questions

11.

The workload demanded by a harvest-oriented venture versus one in a venture that cannot

(p. 457) achieve a harvest is typically:

A. far more, thus justifying the time and energy.

B. no greater than building a venture without harvest prospects.

C. far less because of a larger management team.

D. about equal, but the stress levels are higher.

Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

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12.

What is the most vital aspect of crafting a harvest strategy?

(p. 457)

A. Capital B. Timing C. The offering D. Skills Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

13.

In a management buyout, which of the following is a problem that the managers buying out the

(p. 458) owners and running the company typically face?

A. Lack of capital B. Lack of expertise C. Issues with the legal structure D. Issues with employee retention Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

14.

Which of the following harvest options is most likely to produce the most cash for a founder at

(p. 459) the time of sale?

A. IPO B. MBO C. Outright sale D. Strategic alliance Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

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15.

For many would-be entrepreneurs, _____ is the most attractive harvest option of all in terms of

(p. 459) value.

A. merger B. acquisition C. public offering D. strategic alliance Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

16.

Which harvest option can force a leadership team to focus on short-term profits and

(p. 460) performance results?

A. Management buyout (MBO) B. Employee Stock Ownership Plan (ESOP) C. Initial Public Offering (IPO) D. Strategic Alliance Accessibility: Keyboard Navigation Blooms: Remember Level of Difficulty: 1 Easy

17.

Which of the following is an advantage of being a public company?

(p. 460)

A. Focus on short-term profits and performance results B. Access to long-term capital C. Guaranteed operating confidentiality D. Unsusceptibility to the risk of insider trading Accessibility: Keyboard Navigation Blooms: Understand Level of Difficulty: 2 Medium

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Fill in the Blank Questions

18.

Successful entrepreneurs create _____ that results in capital gain.

(p. 457)

value Blooms: Remember Level of Difficulty: 1 Easy

19.

Harvesting at the right time, willingly, involves hitting one of the many _____ that entrepreneurs

(p. 457) face.

strategic windows Blooms: Remember Level of Difficulty: 1 Easy

20.

A _____ is to the entrepreneur what a cash cow is to a large corporation.

(p. 458)

capital cow Blooms: Remember Level of Difficulty: 1 Easy

21.

_____ are harvest vehicles through which founders can realize some liquidity from their stock

(p. 458) by sales to the plan and other employees.

Employee Stock Ownership Plans (ESOP) Blooms: Remember Level of Difficulty: 1 Easy

22.

A _____ is one in which a founder can realize a gain from a business by selling it to existing

(p. 458) partners or to other key managers in the business.

management buyout (MBO) Blooms: Remember

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Level of Difficulty: 1 Easy

23.

In a _____, founders can attract capital, often in substantial amounts, from a large company

(p. 459) interested in their technologies.

strategic alliance Blooms: Remember Level of Difficulty: 1 Easy

24.

_____ markets provide access to long-term capital while also meeting subsequent capital

(p. 460) needs.

Public equity Blooms: Remember Level of Difficulty: 1 Easy

Short Answer Questions

25.

What are the three core aspects of shaping a harvest strategy?

(p. 458)

Patience, realistic valuation, and outside advice are the three core aspects of shaping a harvest strategy.

Blooms: Remember Level of Difficulty: 1 Easy

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26.

"If impatience is the enemy of an attractive harvest, then greed is its executioner." What is

(p. 458) being implied by this statement?

This sentence refers to the aspect of setting a realistic valuation for a company.

Blooms: Remember Level of Difficulty: 1 Easy

27.

What is a critical issue associated with stock-for-stock exchange?

(p. 459)

In a stock-for-stock exchange, the problem is the volatility and unpredictability of the stock price of the purchasing company.

Blooms: Remember Level of Difficulty: 1 Easy

28.

Identify four avenues by which a company can realize a harvest from the value it has created.

(p. 458)

The avenues by which a company can realize a harvest from the value it has created are capital cow; ESOP (employee stock ownership plan); management buyout; merger, acquisition, and strategic alliance; outright sale; and a public offering.

Blooms: Remember Level of Difficulty: 1 Easy

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29.

What are the three anchors of entrepreneurial process that loom above the rest?

(p. 457458)

Of all the anchors one can think of in the entrepreneurial process, three loom above all the rest: 1. A passion for achieving goals 2. A relentless competitive spirit and desire to win 3. A high standard of personal ethics and integrity

Blooms: Remember Level of Difficulty: 1 Easy

Essay Questions

30.

Discuss why it is important to have a harvest goal in place from the beginning of a venture.

(p. 457)

Setting a harvest goal achieves many purposes, not the least of which is helping an entrepreneur get after-tax cash out of an enterprise and enhancing substantially his or her net worth. Such a goal also can create high standards and a serious commitment to excellence over the course of developing the business. It can provide, in addition, a motivating force and a strategic focus that does not sacrifice customers, employees, and value-added products and services just to maximize quarterly earnings.

Blooms: Remember Level of Difficulty: 1 Easy

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31.

What are the advantages of being a public company?

(p. 460)

There are several advantages to going public, many of which relate to the ability of the company to fund its rapid growth. Public equity markets provide access to long-term capital while also meeting subsequent capital needs. Companies may use the proceeds of an IPO to expand the business in the existing market or to move into a related market. The founders and initial investors might seek liquidity, but SEC restrictions limiting the timing and the amount of stock that the officers, directors, and insiders can dispose of in the public market are increasingly severe. As a result, it can take several years after an IPO before a liquid gain is possible. Additionally, as Jim Hindman (of Jiffy Lube) believed, a public offering not only increases public awareness of the company but also contributes to the marketability of the products, including franchises.

Blooms: Understand Level of Difficulty: 2 Medium

32.

What are some of the disadvantages of being a public company?

(p. 460)

Concern about the share price can place the focus on short-term profits and performance rather than on continuing to build long-term value. Due to disclosure requirements, public companies lose some of their operating confidentiality, not to mention having to support the ongoing costs of public disclosure, audits, and tax filings. With public shareholders, the management of the company has to be careful about the flow of information because of the risk of insider trading.

Blooms: Understand Level of Difficulty: 2 Medium

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