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CA Intermediate · Financial Management and Strategic Management · Types of Financing

In the context of sources of finance, which of the following is a feature of a venture capital investment in a start-up company?

Venture capital typically involves the investor taking an equity stake in a young, high-growth company and often providing management guidance, with returns coming from an eventual exit. It is not a plain fixed-repayment loan, trade credit, or a fixed-dividend-only arrangement.

  1. AThe investor usually takes an equity stake and may take a role in guiding the businessCorrect
  2. BThe investor lends a fixed amount that must be repaid on a fixed schedule with no equity stake
  3. CThe investor buys goods from the company on credit for a short period
  4. DThe investor receives only a fixed dividend and has no exit plan

Explanation

Venture capital is risk capital provided mostly as equity (or quasi-equity) to high-growth businesses, and investors often take part in guiding management. The fixed repayment option describes a plain term loan, not venture capital. Trade credit and fixed-dividend-only options do not describe venture capital.

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