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

Under which feature does a venture capital investment typically differ from a conventional bank term loan?

Venture capital typically involves an equity-like stake in a high-risk, high-growth, often unlisted business, with returns coming from eventual exit rather than fixed interest or instalments. Banks, in contrast, lend against collateral with fixed repayment, so the first option is the correct distinction.

  1. AThe investor usually takes equity-like participation in a high-risk, high-growth business without fixed repaymentCorrect
  2. BThe investor demands full collateral and fixed instalments
  3. CThe investment is made only in listed blue-chip companies
  4. DThe investor never takes part in monitoring the business

Explanation

Venture capital is risk capital provided to young, high-growth firms, usually as equity or quasi-equity, with returns from exit rather than fixed repayments. Bank loans rely on collateral and instalments. VC investors often monitor and advise the investee.

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