1. Many successful entrepreneurs and private investors say it is just as bad to start out with too much money as it is too little. Why is this so?
Option 1. Forte Ventures (page 417) (2.5 points for each question)
1. What are the economics of the venture capital business? What will the cumulative payouts and distributions to the LPs and the GPs be over nine years? What is the present value of this using a 10% discount rate? Use the following assumptions:
a. The fund has a ten-year life, with committed capital (the total amount of funds that the investors have promised to provide) of $200 million.
b. The funds are invested in four equal installments, at the beginning of the first four years of the fund.
c. The management fee is 2.0% of committed capital for the first five years, payable in advance at the beginning of the year. The fee is 2.0% of capital outstanding thereafter.
d. Each of the annual investments is held for 5 years and then sold / distributed. Assume that the investments earn the same annual gross rate of return.
Consider how the analysis changes using different annual gross rates of return – e.g., 5%, 15%, 25%, 35% and 45%.
2. Why are private equity partnership (PEP) incentives structured the way they are? Why are the incentives so similar across different PEPs (i.e. with a 20% carry)? How do these incentives compare to those for pension fund managers? CEOs?
3. Evaluate the situation facing the Forte founders in April 2001, and the PPM prepared to convince institutional investors to invest. What is your evaluation of the strategy Forte is seeking to pursue? Does it make sense?
4. As a limited partner, would you invest? What is your evaluation of the team? As a potential LP, what due diligence questions do you have?
Option 2 (2 points for each question)
1. Many successful entrepreneurs and private investors say it is just as bad to start out with too much money as it is too little. Why is this so?
2. Do you believe franchising is your option to start a business? Why or why not?
3. Why is entrepreneurial finance simultaneously both the least and most important part of entrepreneurial process? Explain the paradox.
4. List three prevalent methods used in valuing a company and their strengths and weaknesses, given their underlying assumptions.
5. List the top three sources of funding for a start-up and explain strengths and weaknesses of each.