Chapter 1: The Entrepreneurial Process

True/False

1. Entrepreneurship is the process of planning, organizing, operating, and assuming

the risk of a business venture.
Ans: True Page: 3

2. The word entreprendre refers to the individuals who “undertook” the risk of new
enterprise.
Ans: True Page: 4

3. Fortunately, entrepreneurs do not communicate with external “stakeholders” such

as investors and bankers.
Ans: False Page: 4

4. Aspiring entrepreneurs hope for the chance to be their own bosses and have made
the leap from their current employment into the uncertainty of a start-up.
Ans: False Page: 6

5. Technology entrepreneurs are individuals with innovative solutions to

society’s most social problems.
Ans: False Page: 6

6. Many companies fail because the founders do not confront their management
limitations.
Ans: True Page: 8

7. Fortunately, the skills needed to run a small company are not different from those
required to run a larger firm.
Ans: False Page: 9

8. If an entrepreneur has limited experience and limited internal resources, outside

help is not necessary.
Ans: False Page: 10

9. Looking at the historical trend, it is safe to say that most businesses start small
and grow to be a large corporation.
Ans: False Page: 16

10. The failure rate of new businesses is very high, about 80-90 percent within the
first two years.
Ans: False Page: 17
Short Answer / Fill in the Blank

11. _____________ have developed an enterprise that fits their individual

circumstances and style of life, and their basic intention is to earn an income for
themselves and their families.
Ans: Lifestyle entrepreneurs Page: 6

12. _______________ often seem to be possessed by their ideas, committing their

lives to changing the direction of their field.
Ans: Social entrepreneurs Page: 6

13. The first decision that an entrepreneur should make is whether personal lifestyle
and control are more important than ____________ and eventual wealth creation.
Ans: growth Page: 7

14. The basic objective of Stage ________________ of the entrepreneurial process is

to define the criteria that would make a business opportunity worthwhile.
Ans: 1 Page: 12

15. Setting goals and objectives, starting to write the plan, determining pricing, and
preparing a full business plan are part of Stage _______________ of the
entrepreneurial process.
Ans: 2 Page: 13

16. A full ____________ is a vital yet dynamic document for a company.

Ans: business plan Page: 14

17. Stage 5 of the entrepreneurial process is called ____________________.

Ans: Scaling and Harvesting the Venture Page: 13

18. A(n) _________________ is one that grows large enough to influence the
environment and, thus, becomes a pacesetter.
Ans: entrepreneurial firm Page: 16

19. Each year at least ____________ new businesses are started in the United States,
and of these, a small proportion turn out to be the fast-growth companies that
propel the economy forward.
Ans: 700,000 Page: 16

20. The failure rate of new companies is ________ percent within the first two years.
Ans: 24 Page: 17
Multiple Choice

21. Which of the following is not a characteristic of entrepreneurs:

a. Self-starters
b. Lethargic
c. Optimists
d. Perseverant
Ans: B Page: 5

22. An entrepreneur is driven mainly by:

a. The control of resources
b. Changing technology
c. The perception of opportunity
d. Planning systems
Ans: C Page: 5

23. Ray Smilor identified all of these entrepreneurs types except:

a. Growth entrepreneurs
b. Aspiring entrepreneurs
c. Lifestyle entrepreneurs
d. Technology entrepreneurs
Ans: D Page: 6

24. The type of entrepreneur that have the desire and the ability to grow as fast and as
large as possible is:
a. Growth entrepreneurs
b. Aspiring entrepreneurs
c. Lifestyle entrepreneurs
d. Technology entrepreneurs
Ans: A Page: 6

25. Individuals with innovative solutions to society’s most social problems are
classified as:
a. Lifestyle entrepreneurs
b. Aspiring entrepreneurs
c. Growth entrepreneurs
d. Social entrepreneurs
Ans: D Page: 6

26. Technology entrepreneurs have ideas triggered by developments in:

a. math and sociology
b. science and history
c. social studies and business
d. science and engineering
Ans: D Page: 6
27. Building ventures around new technology requires specialist knowledge in all of
the following except:
a. social science
b. language arts
c. economics
d. markets
Ans: B Page: 6

28. A spider-web provides an analogy to a small company because:

a. It is continually under attack from outside.
b. It has both radial and circumferential axes.
c. It has multiple points for support on the outside.
d. It is fragile.
Ans: D Page: 9

29. To relieve stress you should:

a. Work over the weekend if necessary
b. Plan non-work personal time
c. Work more intensely
d. Work less
Ans: B Page: 11

30. Which of the following is not a characteristic of relieving stress:

a. Get advice on time-management techniques
b. Try to live at least twenty minutes from work
c. Do not delegate
d. Build in some slack time
Ans: C Page: 12

31. In what stage of the entrepreneurial process do you evaluate the competition?
a. Stage 1
b. Stage 2
c. Stage 4
d. Stage 5
Ans: A Page: 13

32. In what stage of the entrepreneurial process would managing the finances take
place?
a. Stage 2
b. Stage 3
c. Stage 4
d. Stage 5
Ans: C Page: 13

33. Forming a strategic alliance and discussing options and alternatives are part of
what stage of the entrepreneurial process?
 a. Stage 2
b. Stage 3
c. Stage 4
d. Stage 5
Ans: D Page: 13

34. Which of the following is not a stage of the entrepreneurial process?

a. Developing the plan and setting up the company
b. Buying an existing company
c. Scaling and harvesting the venture
d. Conducting opportunity analysis
Ans: B Page: 13

35. All of the following are early-stage funding sources except:

a. family and friends
b. banks
c. government sources
d. IPO
Ans: D Page: 14

36. Stage 4 is:

a. Scaling and Harvesting the Venture
b. Determining the Resources Required and Implementing the Plan
c. Developing the Plan and Setting up the Company
d. Acquiring Financial Partners/Sources of Funding
Ans: B Page: 15

37. The stages of entrepreneurship includes all of the following except:

a. Conduct an opportunity analysis,
b. Develop the plan and set up the company,
c. Select an attorney
d. Scale and harvest the venture.

Ans: C Page: 13

38. What percent of all U.S. businesses employ twenty or fewer people?
a. Approximately 98
b. Approximately 87
c. Approximately 65
d. Approximately 50
Ans: B Page: 16

39. The past ______ years have been years of tremendous growth for entrepreneurial
companies and for the individuals who make them thrive.
a. 50
b. 2
c. 15
 d. 7
Ans: C Page: 16

40. How many new businesses are started in the United States each year?
Approximately
a. 700,000
b. 1.5 million
c. 450,000
d. 100,000
Ans: A Page: 16

41. Most businesses do this:

a. Start big, stay big
b. Start small, become big
c. Start small, stay small
d. Start big, become small
Ans: C Page: 17

42. All of the following are reasons people become entrepreneurs except:
a. working with others
b. make your own decisions
c. flexibility
d. financial rewards
Ans: A Page: 17

43. The failure rate of new companies is this percent in the first ten years:
a. 40-50
b. 80-90
c. 70-80
d. 75-85
Ans: B Page: 17

44. Most business ventures that fail are:

a. More than five years old.
b. Less than ten years old.
c. Less than one year old.
d. More than ten years old.
Ans: B Page: 17

45. Most companies fail because of:

a. having too much money
b. focusing on a bad idea
c. confronting complex management decisions without experience
d. not having enough employees
Ans: C Page: 17
 Chapter 2: The Art of Innovation
True/False

1. The frameworks in which a sustainable, high-profit company is constructed are

called business models.
Ans: True Page: 23

2. Unfortunately, North America has one of the lowest percentages of people with
Internet access.
Ans: False Page: 24

3. Geographical location no longer provides any significant advantage for access to

major sources of capital.
Ans: True Page: 26

4. A product life cycle is the time that a product is able to command a high profit
margin in the market before it becomes obsolete or develops intense competition.
Ans: True Page: 26

5. Product development times have increased from 200 days three years ago to an
average of 225 days now.
Ans: False Page: 27

6. Fortunately, it is becoming easier for a company to build around a single product

idea without strong patent protection.
Ans: False Page: 27

7. The first step for any entrepreneur is to generate an idea for a new business.
Ans: True Page: 36

8. Asking the right questions and preparing the business plan are components of
phase 3 in the five phases to success.
Ans: True Page: 37

9. To eliminate receiving questionable data, you should train and monitor survey
recorders and telephone interviews to ensure consistent results.
Ans: True Page: 41

10. The final phase of the five step model of success is “Develop the Plan.”
Ans: False Page: 41
Short Answer / Fill in the Blank

11. Successful ____________ is the use of new technological knowledge, and/or new
market knowledge, employed within a business model that can deliver a new
product and/or service to customers who will purchase at a price that will provide
profits.
Ans: innovation Page: 28

12. The ___________ is often used to illustrate the difference in which the
performance achieved by new innovation is plotted against time.
Ans: S-curve Page: 29

13. Usually, improvements can be made with ____________ innovations, pushing the
original curve higher.
Ans: incremental Page: 29

14. The term _______________ is often used to describe innovations that disrupt the
status quo.
Ans: disruptive innovation Page: 30

15. Only about 10% of existing ___________ have actually been commercialized; the
remainder are still potential opportunities.
Ans: Patents Page: 36

16. Many new companies are built around a disruptive or ____________ technology.
Ans: breakthrough Page: 36

17. A window of opportunity is a __________________ during which opportunities

exist before something else happens to eliminate them.
Ans: time horizon Page: 38

18. ________________ are the value of benefits lost when one decision or idea
alternative is selected over another.
Ans: Opportunity costs Page: 39

19. A(n) _______________ charts the current and future components of the business
in about thirty to forty pages.
Ans: business plan Page: 41

20. Sufficient ___________ is required to sustain the company for a specific length of
time, possibly a one- or two-year period.
Ans: capital Page: 42
Multiple Choice

21. More than ___________ new web pages are being added daily to the Internet.
a. 18 million
b. 500,000
c. 50 million
d. 7 million
Ans: D Page: 24

22. ___________ funds are a very small part of total growth capital.
a. Technology
b. Trade
c. Venture capital
d. International
Ans: C Page: 26

23. A product life cycle is continually:

a. increasing
b. declining
c. increasing in a step ladder pattern
d. fluctuating
Ans: B Page: 26

24. Incremental innovation means that:

a. A start-up company grows slowly.
b. Improvements are made on existing products and services.
c. Innovation is only applied to the way that things are made.
d. It is the safest strategy for a start-up to follow.
Ans: B Page: 29

25. Radical or disruptive innovation means that:

a. Nothing from the past is retained.
b. It applies only to products.
c. It changes the rules of competition.
d. It is too risky for a start-up to follow.
Ans: C Page: 29

26. Which of the following is not on the list of some important innovations by U.S.
small firms in the last century:
a. GPA
b. Airplane
c. Zipper
d. Heat sensor
Ans: A Page: 31
27. All of the following are ways to build upon already existing material and still
provide a profit-driven concept except:
a. Market the product at a higher price.
b. Add value to an existing product or service.
c. Develop or redesign a new version of an existing product.
d. Develop ideas as an extension or redesign an existing service.
Ans: A Page: 36

28. There are more than ___________ patents issued in the United States.
a. 31 million
b. 17 million
c. 8 million
d. 60 million
Ans: C Page: 36
29. Only about ________ percent of existing patents have actually been
commercialized.
a. 20
b. 10
c. 2
d. 32
Ans: B Page: 36

30. Of the five phases of success, which one is where the opportunity would be
seized:
a. Phase 1
b. Phase 2
c. Phase 3
d. Phase 4
Ans: A Page: 37

31. Which of the following is not a technology factor:

a. Industry standards
b. Niche market applications
c. Infrastructure replacement
d. Technology generation
Ans: D Page: 38

32. Which of the following is not an economic factor?

a. Better service
b. Productivity gains
c. Market changes
d. Government and privacy issues
Ans: C Page: 38
33. Of the five phases of success, which one is Phase 2?
a. Develop the Plan
b. Manage the Business
c. Determine the Resources Needed
d. Investigate the Need through Market Research
Ans: D Page: 39

34. Of the five phases of success, Phase 3 is:

a. Develop the Plan
b. Manage the Business
c. Determine the Resources Needed
d. Investigate the Need through Market Research
Ans: A Page: 41

35. Which of the following area of research help answer the question: “Can the
product/service be patented or copyrighted?”
a. Sales
b. Proprietary
c. Niche/competition
d. Cost and manufacture
Ans: B Page: 39

36. To eliminate receiving questionable data, all of these pitfalls must be avoided
except:
a. Train and monitor survey recorders.
b. Make certain that the answers are accurate by maintaining an objective
method of questioning.
c. Ensure that all of the participants are asked the same questions.
d. Eliminate telephone interviews.
Ans: D Page: 41

37. All of the following are cost-cutting recommendations except:

a. Use search engines and web pages
b. Use social media methods to access potential customers
c. Test only one product at a time
d. Use the telephone instead of mail survey
Ans: C Page: 41

38. ______ is(are) the backbone of the business.

a. Employees
b. Business plan
c. Phases of Success
d. Data Base
Ans: B Page: 42

39. Of the five phases of success, which one is Phase 4?

 a. Determine the Resources Needed
b. Develop the Plan
c. Investigate the Need through Market Research
d. Seize the Opportunity
Ans: A Page: 42

40. Of the five phases of success, which one is Phase 5?

a. Seize the Opportunity
b. Develop the Plan
c. Investigate the Need through Market Research
d. Manage the Business
Ans: D Page: 43

41. Which of the following criteria is least important when evaluating an opportunity?
a. Size of the market
b. Competitors
c. Value provided to the targeted customers
d. Having the resources in place to execute on the plan
Ans: D Page: 44-45

42. Which of the following criteria would most lead you to question the viability of
an opportunity?
a. Gross margin on sales after three years is 25%.
b. Total available domestic market is$80MM.
c. The market is growing at 60% per annum.
d. You only have two customers willing to buy your product currently.
Ans: A Page: 44-45

43. The evaluation screening for patent protection includes all of the following
except:
a. Is the fee for a patent search and application affordable?
b. Is the service, product, or idea unique to get a head start on the
competition?
c. Is the field changing so slowly that the innovation will be valuable for at
least fifteen years?
d. Has an attorney discussed the options and recommended that a patent be
pursued?
Ans: C Page: 45

44. ________________costs are the value of benefits lost when one decision or idea
alternative is selected over another.
a. Opportunity
b. Research
c. Development
d. Marginal
Ans A Page 39
 45. Which of the following factors does not help the entrepreneur create opportunity
for the business?
a. Technology
b. Social
c. Economic
d. Demographic

Ans: B Page 38

Chapter 3: Ideas Into Business Models

True/False

1. A business model provides a framework in which entrepreneurs can examine their

business plans and explore alternative ways for their companies to function and
grow profitably while building barriers to ward off competitors.
Ans: True Page: 51

2. Because a small company may not have the resources or time to gain a share of a
new market before its products, services, or even business models have become
obsolete, partnering with large companies may accelerate a small company’s
growth.
Ans: True Page: 73

3. Capturing data on customer requirements and using it to create unique services or

products can be a powerful way of adding value and keeping out competitors.
Ans: True Page: 65

4. A business model based on information sharing can provide low barriers against
competitors because the costs involved in integrating incompatible data and
computer systems can be prohibitive.
Ans: False Page: 66

5. Unfortunately, licensing and franchising are not valuable components of a

business model.
Ans: False Page: 67

6. Interestingly, some companies base their business models entirely on licensing

and have no intention of producing or selling any product.
Ans: True Page: 68
 7. An entrepreneur should not seek to be a franchisee or build a business as a
franchisor without seeking competent legal advice.
Ans: True Page: 69

8. Due to the obvious benefits from partnerships between small innovative

companies, such as larger corporations’ resources, contacts, reputation, and other
things, rarely do the relationships become tense as cultural issues become
dominant.
Ans: False Page: 73

9. Building social networks into your business is a way of getting sales leads and new
ideas for products or services from your customers
Ans: True Page: 72

10. Large companies that have a complementary product or service sold alongside a
small company’s product for mutual benefit is an example of corporate
partnering.
Ans: True Page: 73

Short Answer / Fill in the Blank

11. A(n) ________ provides a framework in which entrepreneurs can examine their
business plans and explore alternative ways for their companies to function and
grow profitably while building barriers to ward off competitors.
Ans: business model Page: 51

12. _____________are the reasons the customer segment(s) will use your products or
services instead of a competitor.
Ans: Value propositions Page: 52

13. A ______________ is that version of a new product that allows a team to collect
the maximum amount of validated learning about customers with the least effort.
Ans: Minimum Viable Product Concept Page: 57

14. If you can enter the market and build your customer base before anyone else, you
achieve ____________ in which it becomes harder and harder for competitors to
get into the market and convince your customers to switch.
Ans: first-movers advantage Page: 66

15. Licensing and ________ refer to types of contracts between an issuing entity and
a receiving entity.
Ans: franchising Page: 67

16. A(n) _________ license provides just one licensee the rights stated in the
agreement.
Ans: exclusive Page: 68
 17. ____________ are paid as a percentage of net sales of products or services.
Ans: Running royalties Page: 68

18. ___________ may prevent a licensee from just sitting on the rights and not trying
to generate sales.
Ans: Minimums Page: 68

19. A(n) ____________ is a legal and commercial relationship between the owner of
a trademark, service mark, trade name, or advertising symbol and an individual or
group wishing to use that identification in a business.
Ans: franchise Page: 69

20. The _________ allows a franchisee to participate in building a business together

with other franchisees, under the rules stipulated by the franchisor and under
certain conditions spelled out in the agreement.
Ans: franchise agreement Page: 69

Multiple Choice

21. Which of the following factors are not important when designing a business
model?
a. Understanding customers’ values
b. Having Venture Capital Investment
c. Analyzing current and potential customers
d. Clearly identifying the markets that you will enter.
Ans: B Page: 52

22. __________ are those non-customer relationships necessary to execute the

business model.
a. Key activities
b. Revenue streams
c. Key partnerships
d. Key resources
Ans: C Page: 54

23. A_______________________ is the way a company applies knowledge to

capture value.
a. business model
b. value proposition
c. channel
d. revenue stream
 Ans: A Page: 51

24. It is recommended that the Business Model Canvas be used in _________

sessions.
a. Individual
b. Team
c. Small
d. Large
Ans: B Page: 52

25. Data lock-ins inhibiting a move to a competitor can be found in which of the
following?
a. E-mail services
b. Banking
c. Health care services
d. All of these.
Ans: D Page: 66

26. The authors recommend that a small company restrict the number of licenses it
issues to how many competitors?
a. Three or four
b. Five or six
c. Two or three
d. One or two
Ans: C Page: 68

27. Which of the following is the term used to describe the fee that may be paid to
initiate the contract?
a. Running royalties
b. Minimums
c. Up-front
d. Advances
Ans: C Page: 68

28. _________may prevent a license from just sitting on the rights and not trying to
generate sales.
a. Running royalties
b. Minimums
c. Up-front fees
d. Marketing
Ans: B Page: 68

29. Which of the following is the term for a legal and commercial relationship
between the owner of a trademark, service mark, trade name, or advertising
symbol and an individual or group wishing to use that identification in a business?
a. License agreement
 b. Franchise
c. Exclusive license
d. Running royalty
Ans: B Page: 69

30. Which is the best-known franchise organization?

a. Wendy’s
b. Arby’s
c. Chick-Fil-A
d. McDonald’s
Ans: D Page: 69

31. The federal government has issued regulations that require franchisors to prepare
an extensive disclosure document called _______.
a. UFCO
b. UFCC
c. UFOC
d. UFDC
Ans: C Page: 69

32. A franchise agreement need not have the following conditions stated:
a. Payments that must be made to the franchisor
b. The location where the franchisee may operate
c. Guidelines on using the franchisor’s brand
d. The expiration date of the patent that is being franchised
Ans: D Page: 69

33. For a franchise agreement, the typical length of agreement for initial period is
around:
a. 8 years
b. 9 years
c. 7 years
d. 10 years
Ans: C Page: 70

34. Limitations of franchise agreements include all of the following except:

a. Treatment of confidentiality
b. General legal requirements
c. Non-compete stipulation
d. Legal advice
Ans: D Page: 70

35. ____________________is the ability to capture data on customer requirements

and using it to create unique services or products can be a powerful way of
adding value and keeping out competitors.
a. Collaborative filtering
 b. Performance
c. First-movers advantage
d. Mining the long-tail
Ans: A Page: 65

36. If you can enter the market and build your data-base before anyone else, you
achieve
_______________in which it becomes harder and harder for competitors to get
into the market and convince your customers to switch.
a. non-compete stipulation.
b. first-movers advantage.
c. data mining.
d. mining the long tail
Ans: B Page: 66

37. A ________________________ is an approach to test a product's alignment with

customer needs and expectations and collect the maximum amount of validated
learning about customers with the least effort.
a. Revenue streams
b. tinyUpdates Business Model Canvas.
c. Minimum Viable Product
d. Customer segmentation
Ans: C Page: 57

38. ______________________________ are reasons the customer segment(s) will

use your products or services instead of those from a competitor.
a. Value propositions
b. Key partnerships
c. Channels
d. Communication
Ans: A. Page: 52

39. Social networks are:

a. Club members.
b. Not-for-profit organizations.
c. Missionaries.
d. On-line communities sharing common interests
Ans: D Page: 55

40. We live in a global economy where changes occur ____________.

a. slowly
b. primarily within borders of economy
c. rapidly
d. only with governmental intervention only
Ans: C Page: 72
 41. A large corporation can license rights to a small company’s _____________.
a. intellectual property
b. running royalties
c. business profits
d. networks
Ans: A Page: 67

42. Which of the following is not one of the three steps process to build a MVP?
a. Define the essential customer experience that the product needs to
create.
b. Decide on the best approach to illustrate the product’s ability to
solve the customer’s problem.
c. Develop a social network.
d. Determine what measurements or metrics will be needed to validate
the learning in this first MVP version.

Ans: C. Page: 58

Chapter 4: Customers, Markets, Competitors in a Digital World

True/False

1. Entrepreneurs usually engage in marketing research for two reasons: (1) to

identify the need and opportunity for the venture and (2) to understand marketing
and customer issues that relate to the product or service.
Ans: True Page: 79

2. Fortunately, market research is not a costly exercise for a startup company.

Ans: False Page: 79

3. Google also offers free software tools to monitor web site effectiveness called
Google Maps.
Ans: False Page: 82

4. Marketing objectives are likely to be based on sales revenues and market share.
Ans: True Page: 84

5. Digital marketing techniques can be used to test many aspects of the product or
service before committing the business fully to one path.
Ans: True Page: 85
 6. One-to-one marketing is rapidly becoming a competitive imperative.
Ans: True Page: 86

7. Marketing plans often place a great deal of emphasis on acquisition but not on
customer loyalty.
Ans: True Page: 87

8. Influencer identification is a key new focus of loyalty marketing because

influencers have large followings, an affinity for the product or topic and their
followers or readership demonstrate engagement or activation potential.
Ans: True Page: 88

9. The advantage of using sales agents is that they usually sell other competitors’
products or services as part of a complete line.
Ans: False Page: 98

10. After the trade show, the company should develop screening questions to identify
solid sales leads.
Ans: False Page: 98

Short Answer / Fill in the Blank

11. ________ describes mechanisms by which customers are triggered and motivated
to recommend a product or service to other potential customers.
Ans: Viral marketing Page: 99

12. A(n) ________ is a small segment of a large market ignored by other companies.
Ans: niche market Page: 85

13. Marketing tactics are developed for each target market, which is called ________.
Ans: strategic market segmentation Page: 86

14. _________ marketing required learning the profile or details about individual
customers to identify which are most valuable to the company.
Ans: One-to-one marketing Page: 86

15. _________ segmentation divides customers into cultural groups, value groups,
social sets, or other interesting categories that might be useful for classifying
customers.
Ans: Psychographic Page: 89

16. _________ is the process of establishing and maintaining a distinctive place in the
market for the start-up and/or its products offerings.
 Ans: Positioning Page: 84

17. __________ is the difference between variable cost of selling an extra unit of
service and the money received from the buyer of that service.
Ans: Contribution Page: 93

18. The ________ is a group of salespeople who work directly for the company and
are paid straight salary, salary plus bonus, or straight commission.
Ans: direct sales force Page: 97

19. _________ are good places to exhibit and sell products.

Ans: Trade shows Page: 98

20. ________focuses on content creation, used to generate rankings and social media
visibility, to establish a brand or business as an expert in its field with valuable,
useful content for potential customers of its products or services.
Ans: Inbound marketing Page: 97
Multiple Choice

22. Which type of marketing is a small segment of a large market ignored by other
companies?
a. Niche marketing
b. Mass marketing
c. Value marketing
d. Just-in-time marketing
Ans: A Page: 85

23. All of the following are key steps to becoming a one-to-one marketer except:
a. Link customers’ identities to their transactions
b. Calculate individual customer lifetime value
c. Mass market to customers using generic approach to satisfy all
d. Practice just-in-time marketing
Ans: C Page: 86

24. All of the following are factors that often underlie hidden profit potential except:
a. Profit from Price Premium
b. Profit from Reduced Operating Costs
c. Profit Derived from Decreased Purchases
d. Profit from Referrals to Other Customers
Ans: C Page: 87

25. Demographic segmentation divides a market by all of the following except:

a. age
b. income
c. gender
d. geography
Ans: D Page: 89

26. All of the following are ways that a market can be segmented except:
a. Viral segmentation
b. Geographic segmentation
c. Business demographics
d. Psychographic segmentation
Ans: A Page: 89

27. __________ segmentation is very important for retail businesses, restaurants, and
services addressing their local surroundings only.
a. Geographic segmentation
b. Business demographics
c. Ethnic segmentation
d. Viral segmentation
Ans: A Page: 89
28. Which type of segmentation is somewhat uncomfortable for people living in a
county with a history of ethnic-based discrimination?
a. Combination segmentation
b. Ethnic segmentation
c. Psychographic segmentation
d. Demographic segmentation
Ans: B Page: 89

29. In combination segmentation, which two types of segmentation are combined?

a. Ethnic and Psychographic segmentation
b. Demographic and Psychographic segmentation
c. Demographic and Geographic segmentation
d. Geographic and Viral segmentation
Ans: C Page: 89

30. Market segmentation by demographics includes:

a. Defining targeted customers by income level.
b. Defining targeted customers by value groups.
c. Defining targeted customers by business level.
d. Defining targeted customers by location.
Ans: A Page: 89

31. Market segmentation by geography includes:

a. Defining targeted customers by where they were born.
b. Defining targeted customers by where they went to school.
c. Defining targeted customers by the value group they belong to.
d. Defining targeted customers by where they live.
Ans: D Page: 89

32. To identify which businesses will provide the most competition, ask questions in
all areas of competition except which one of the following?
a. Product or service
b. Price
c. Financial
d. Personal
Ans: D Page: 91

33. _______ is the process of establishing and maintaining a distinctive place in the
market for the start-up and/or its product offerings.
a. Positioning
b. Viral marketing
c. Combination segmentation
d. Mass marketing
Ans: A Page: 84
34. What is the key to the process of controlling costs and showing a profit?
a. Pricing
b. Market analysis
c. Supply and demand
d. Sales strategy
Ans: A Page: 92

35. Demonstrating _________ is part of pricing a new strategy.

a. rationale
b. costs
c. value
d. contribution
Ans: C Page: 92

36. Which type of cost is the economic cost associated with service for an additional
customer?
a. Fixed
b. Variable
c. Semi-variable
d. Contribution
Ans: B Page: 93

37. Which type of cost represents expenses that rise or fall in stepwise fashion as the
business volume increases or decreases?
a. Fixed
b. Variable
c. Semivariable
d. Contribution
Ans: C Page: 93

38. Which type of cost is the difference between variable cost of selling an extra unit
or service and the money received from the buyer of that service?
a. Fixed
b. Variable
c. Semivariable
d. Contribution
Ans: D Page: 93

39. What type of pricing objective aims to maximize the surplus of income over
expenditures?
a. Revenue oriented
b. Operations oriented
c. Patronage oriented
d. Contribution oriented
Ans: A Page: 94
40. What type of pricing objective aims to attract customers, even at a loss, typical of
grand-opening sales?
a. Revenue oriented
b. Operations oriented
c. Patronage oriented
d. Viral oriented
Ans: C Page: 94

41. Which of the following works as a subcontractor to sell products or services?

a. Direct sales force
b. Sales Agents
c. Trade shows
d. Entrepreneurs
Ans: B Page: 98

42. All of the following are disadvantages of using sales agents except:
a. The entrepreneur has little control over the sales agents.
b. Sales agents usually sell other products or services as part of a complete
line.
c. Sales costs are not incurred until the product is sold.
d. Sales agents tend to push the easier-to-sell products or services.
Ans: C Page: 98

43. Which of the following is not an advantage of trade shows?

a. The competition cannot be quickly assessed.
b. The company can initiate a business relationship by inviting the customer
to a follow-up meeting.
c. It is an excellent opportunity to interact with many people in the industry
whom the entrepreneur might not have otherwise met.
d. The company can demonstrate the products and answer any questions
from prospective customers about the product or service.
Ans: A Page: 98

44. To determine the best type of advertising, entrepreneurs should consider all of the
following except:
a. Variables of targeted audience
b. Type of product
c. Cost
d. Entrepreneurial personality
Ans: D Page: 99

45. The best advocate for a company’s products or services is the:

a. New customer
b. Existing customer
c. Entrepreneur
 d. Sales Representative
Ans: B Page: 99

46. Which type of marketing describes mechanisms by which customers are triggered
and
motivated to recommend a product or service to other potential customers?
a. Viral marketing
b. Niche marketing
c. One-to-one marketing
d. Value marketing
Ans: A Page: 99

47. ________________ are not just those with large followings – they also need to
have an affinity for the product or topic, and their followers or readership must
demonstrate engagement or activation potential.
a. Sales agents
b. Digital channels
c. E-commerce companies
d. Influencers
Ans: D Page: 88

48. _______________is the part of a product range that consists of a multitude of

different products, each of which has a small demand, but taken as a whole may
have a significant market value.
a. Short tail
b. Long tail
c. Ad campaign
d. Market penetration
Ans: B. Page: 86

Chapter 5: Using the Crowd

True/False

1. In crowdsourcing, problems and needs are broadcast to a large and diverse audience
in the form of an “open call” for solutions.
Ans: True Page: 108

2. Crowdpleasing has emerged to broadly describe a fundamental set of tools that can
be used at various stages of creating and implementing new ideas along an
entrepreneur’s journey.
 Ans: False Page: 108

3. In crowdfunding, a need for cash is publicized broadly and contributors, in addition to

gaining personal satisfaction, may receive rewards, and share in the posting company.
Ans: True Page: 108

4. Members of the crowd usually identify themselves to remove stereotyping.

Ans: False Page: 109

5. A lack of experience and exposure to knowledge in another field are key ingredients
required for breakthrough thinking.
Ans: True Page: 109

6. Factors that reportedly influence whether or not crowds are willing to contribute their
knowledge relate to the extent to which they perceive the crowdsourcing initiative to be
fair and how much they are attached to the product or brand of the firm.
Ans: True Page: 111

7. Bricoleurs do not seek attribution for their work—the sheer excellence

of their output is sufficient.
Ans: True Page: 112

8. Studies comparing the quality of crowd-sourced ideas and those from within an
organizationi have found that on average ideas generated by external users of a product or
service score lower in novelty and customer benefit.
Ans: False Page: 114

9. Crowd wisdom is a term first coined by a French social sciences researcher, who
observed machinists creating complex and personal ornaments that they placed close to
their workplace.
Ans: False Page: 111

10. In the case of patents, trademarks, and copyrights, the “solver” can have found their
contribution from another source, as they are free to transfer the rights to the
challenger.
Ans: False Page: 116

Short Answer / Fill in the Blank

11. The practice of funding a project or venture by raising monetary contributions from a
large number of people, typically via the Internet is called _______________.
Ans: Crowdfunding Page: 115
12. The process of obtaining needed services, ideas, or content by soliciting contributions
from a large group of people, and especially from an online community, rather than from
traditional employees or suppliers is called _____________.
Ans: Crowdsourcing Page: 108

13. ____________ is a mechanism that leverages the community’s judgment to

organize, filter and rank content such as newspaper articles, music movies and even
ideas.
Ans: Crowd Voting Page: 113

14. ________________is a term that describes being motivated by the satisfaction of

exercising one’s skills to their utmost—a kind of “celebration of excellence.”
Ans: Bricolage Page: 111

15. ________________ is a principle attempts to harness many people’s knowledge in

order to solve problems or predict future outcomes.
Ans: Crowd wisdom Page: 113

16. __________________is the most common form as it avoids the regulatory and
organizational problems arising from equity-based funding , used for a wide range of
purposes such as film-making, music production and software development.
Ans: Reward-based crowdfunding Page: 122

17. _______________ benefits everyone in the community; crowdsourcing benefits just

the challengers.
Ans: Open collaboration Page: 114

18. Leveraging existing internal knowledge via licensing and other mechanisms, called
___________________, can be highly effective.
Ans: Inside-out approach Page: 110

19. ________________________________ is a type of participative online activity in

which an individual, an institution, a non-profit organization, or company proposes to a
group of individuals of varying knowledge, heterogeneity, and number, via a flexible
open call, the voluntary undertaking of a task.
Ans: Crowdsourcing Page: 108

20. The traditional model for new product or service development (NPD) uses internal
resources entirely in what is termed the _______________________.
Ans: closed model of innovation Page 110

Multiple Choice

21. Successfully accessing the wisdom of a crowd needs four conditions. Which one is
not a condition?
 a. Common experiences and opinions
b. Individuals must be independent and not influenced by others in the crowd
c. Must be an effective mechanism to aggregate the inputs
d. Individuals must be decentralized and immersed in different locations
cultures, experiences
Ans: A Page: 113

22. Some of the main factors driving crowd contributions include all but which of the
following?
a. An opportunity to build a reputation,
b. The chance of working on “a cool” project,
c. Opportunity to meet new people
d. Addiction to the platform community
Ans: C. Page: 111

23. Benefits of crowdfunding include all but which one of the following?
a. Promotion to a large audience/customers
b. Receiving market feedback/beta testing
c. Retention of operating control
d. Low valuation when selling shares
Ans: D. Page: 124

24. If it is necessary to protect your ideas before posting them on a crowdfunding site, it
is recommended to use the all of the following methods except for which one below?
a. Patent applications
b. Copyright and trademark protection
c. Creative Barcodes
d. Journal entries
Ans: D. Page: 125

25. Which of the following is a benefit of crowdfunding?

a. Inability to raise further funds from existing donors/investors or institutional
investors.
b. Low valuation when selling shares
c. Promotion to a large audience/customers
d. Heavy commitment to communication to a large crowd
Ans. C. Page: 124

26. ___________________is the hybrid model, designed to offer a one-stop platform to

take the young company through the different stages of cash needs, has risks associated
with starting on a route that incorporate equity participation from the crowd.
a. Follow-on funding
b. Equity based
 c. Credit or loan based
d. Donation based
Ans: A. Page: 124

27. ______________________________ enables broad groups of investors to fund

startup companies and small businesses in return for ownership participation in the form
of shares.
a. Hybrid funding
b. Equity based crowdfunding
c. Credit or loan based
d. Donation-based crowdfunding
Ans. B. Page: 123

28. ________________________is the most common form as it avoids the regulatory

and organizational problems arising from equity-based funding (see below). It has been
used for a wide range of purposes such as filmmaking, music production and software
development.
a. Donation based
b. Reward based
c. Hybrid funding
d. Equity based
Ans. B. Page: 122

29. ____________________________ can breach various securities laws, because

soliciting investments from the general public can be deemed illegal, unless the
opportunity has been filed with an appropriate securities regulatory authority.
a. Hybrid based funding
b. Equity investment
c. Credit or Loan based
d. Reward based
Ans: B. Page: 123

30. In ____________________________ , only the highest-value solutions are selected

either by the crowd using voting schemes or by the solution-seeking firm itself.
a. collaboration- based crowdsourcing
b. tournament-based crowdsourcing
c. open source development
d. ideation
Ans. B Page: 111

31. ____________________________is a task can be parceled into smaller, less

demanding sub-tasks that crowd members with limited capabilities can perform,
improving the likelihood of obtaining higher-value and/or lower-cost solutions.
a. Collaboration-based crowdsourcing
b. Tournament-based crowdsourcing
c. Open source development
 d. Ideation
Ans: A Page: 114

32. Which of the following is not a key ingredient required for breakthrough thinking?
a. Smartest people who attended similar universities with similar courses
b. Employees who are strongly influenced by the workplace culture and
expectations.
c. Lack of experience or exposure to knowledge in another field
d. Students who are currently enrolled in business courses
Ans: C. Page: 109

33. In crowdsourcing, problems and needs are broadcast to a large and diverse
audience in the form of a(n) _______________ for solutions.
a. open call for solutions
b. personal invitation
c. professional referral
d. personal reference
Ans: A. Page: 108

34. Members of the public submit solutions, which are then usually, but not always,
owned by the __________________
a. originating entity.
b. public
c. crowdfunders
d. crowd members
Ans: A. Page: 108

35. Personal reasons or contributing knowledge to crowdsourcing initiatives include all

but which one of the following?
a. Philosophy of Life
b. Altruism
c. Bricolage
d. Self-esteem
Ans: D Page: 111

36. In the model __________, the entrepreneurial firm sets a fundraising goal and
keeps the entire amount raised regardless of whether or not they meet their funding
target.
a. Keep-it-All (KIA)
b. All-or-Nothing' (AON)
c. Win Some/Lose Some (WS/LS)
d. Fund Sum/Gain Sum (FS/GS)
Ans: A Page: 122
37. The model _____________, the firm sets a fundraising goal and keeps nothing
unless the goal is achieved.
a. Win Some/Lose Some (WS/LS
b. All-or-Nothing (AON)
c. Keep-it-All (KIA)
d. Fund Sum/Gain Sum (FS/GS)
Ans: B. Page: 122

38. In all cases, have about _______% of funding already verbally committed within your
own network prior to starting the campaign, then prime the campaign and create
momentum in the early days.
a. 5 %
b. 10%
c. 25%
d. 50%
Ans: C Page: 125

39. Crowdfunding was an idea used by _______ who received financial backing from 176
backers in 1783.
a. Columbus
b. Benjamin Franklin
c. Mozart
d. Gabriel Fahrenheit
Ans: C. Page: 120

40. The process of ___________________occurs at the earlier stages on your journey –

the identification and refining of the central idea of your venture.
a. maturation
b. collaboration
c. incubation
d. idea generation, or ideation
Ans: D Page: 116

41. __________________________circumvents the traditional corporate establishment

to offer financing to individuals or groups that might otherwise be denied credit or
opportunity
a. Altruism
b. Crowdfunding
c. Crowd voting
d. Bricolage
Ans: B Page: 115
42. _________________________ has a range of options for accessing external
knowledge and leveraging internal competencies.
a. Open model
b. Closed model
c. Creative Barcodes
d. World Intellectual Property Organization
Ans. A Page: 110

Chapter 6: Writing the Winning Business Plan

True/False

1. The main purpose of writing a business plan is to test the viability of the business
idea and set a path for the entrepreneur to follow.
Ans: True Page: 131

2. A business plan allows for bank loans and investors to gain insight into the
business idea and determine the financial requirements.
Ans: True Page: 132

3. A business plan is a 45 to 60 page written document that describes where a

business is heading and how it hopes to achieve its goals and objectives.
Ans: False Page: 132

4. The single most important reason for preparing a business plan is to secure
capital.
Ans: True Page: 133

5. The biggest problem most business plans have is that they don’t include a clear
description of the market, competition, and customers.
Ans: True Page: 133

6. Writing a business plan guarantees that problems do not come up.

Ans: False Page: 134

7. Research finds that it will take at least three hundred hours of dedicated effort to
produce a good plan.
Ans: False Page: 137
 8. The marketing and sales strategy section of the business plan describes how the
business will implement the marketing plan to achieve expected sales
performance.
Ans: True Page: 140

9. To protect the human resource talent and competitive positioning, the

management team’s talents and skills should not be detailed in the management
team section of the business plan.
Ans: False Page: 142

10. Fortunately, the financial plan is the most flexible part of a business plan in terms
of format.
Ans: False Page: 142

Short Answer / Fill in the Blank

11. A(n) ________ serves as a blueprint for building a company.

Ans: business plan
Ans: Page: 132

12. An entrepreneur should use a(n) ________ business plan when he or she needs to
describe the business in detail to attract potential investors, strategic partners, or
buyers.
Ans: full Page: 136

13. A(n) _________ is a two-to-five page document that contains the most important
information about the business and its direction.
Ans: executive summary plan Page: 138

14. _______ pricing is when the business sells the products or services based on
demand or whatever the market will bear.
Ans: Demand Page: 140

15. ________ are individuals who buy products, often overseas, directly from the
distributor and sell them to retailers or end users.
Ans: Brokers Page: 141

16. The term _______ is used to describe when products and services are sold
through a web site or through Internet partner alliances.
Ans: Web E-commerce Page: 141

17. ________ most often reflects at least quarterly performance for the first year.
 Ans: Projected income statements Page: 142

18. The _______ should reflect the company’s financial position at its inception.
Ans: current balance sheet Page: 143

19. The funds required and uses section of the business plan should describe how
much _______ is required to finance the business, where these funds will be
spent, and when they will be needed.
Ans: money Page: 143

20. A business plan may fail because the _______ is unclear, not concise, and not
specifically targeted to the intended audience.
Ans: executive summary Page: 143

Multiple Choice

21. The main purpose of writing a business plan is to:

a. develop new applications
b. test the viability of the business idea and set a path for the entrepreneur to
follow.
c. avoid competition.
d. provide a historical perspective of the venture.
Ans: B Page: 131

22. Which of the following is not one of the ways that the business plan will
determine if the business has a chance of becoming successful?
a. Decrease the likelihood of the venture’s success.
b. Test the feasibility of the business concept.
c. Attract bank loans and investors.
d. Improve your business planning process to become more manageable and
effective.
Ans: A Page: 131

23. A business plan is a _____to _____page written document.

a. 45-50 pages
b. 15-20 pages
c. 60-80 pages
d. 2-4 pages
Ans: B Page: 132

24. Which of the following is not one of the three essential reasons to prepare a
business plan?
a. Entrepreneurs reap benefits from the planning activity itself.
b. The plan provides a basis for measuring actual performance against
expected performance.
 c. The plan acts as a vehicle for communicating to others what it is that the
business is trying to accomplish.
d. The plan is to attract competitors’ action.
Ans: D Page: 132

25. Which of the following is the first step in the process to write the business plan?
a. Draft the Outline
b. Review the Outline
c. Draft the Plan
d. Identify the Objectives
Ans: D Page: 135

26. Which of the following is the third step in the process to write the business plan?
a. Draft the Outline
b. Review the Outline
c. Draft the Plan
d. Identify the Objectives
Ans: B Page: 135

27. Detailed support for any assumptions and assertions made in the business plan
should be available in what stage of writing the business plan?
a. Draft the Outline
b. Review the Outline
c. Draft the Plan
d. Identify the Objectives
Ans: B Page: 135

28. Which of the following is the fourth step in the process to write the business plan?
a. Draft the Outline
b. Review the Outline
c. Draft the Plan
d. Have the Plan Reviewed and Updated
Ans: C Page: 135

29. Which of the following is not part of the executive summary?

a. Business Concept
b. Financial Features
c. Success Factors
d. Temporary Position
Ans: D Page: 136

30. An entrepreneur should use a(n) _____ when he or she needs to describe the
business in detail to attract potential investors, strategic partners, or buyers.
a. executive summary plan
 b. full business plan
c. action plan
d. target plan
Ans: B Page: 136

31. A document the management team uses to implement the plan is called the:
a. Executive summary plan
b. Full business plan
c. Action plan
d. Target plan
Ans: C Page: 136

32. The section of the plan that describes how you will tell potential customers that
you have a product or service that can satisfy their demand, to convince those
customers to buy from you, and to successfully compete with similar businesses is
the __________section.
a. Financial
b. Marketing
c. Executive Summary
d. Advertising, Public Relations and Promotion Strategies
Ans: D Page: 141

33. Which of the following is NOT a question answered in writing the business plan?
a. Target Customers
b. Competition
c. Risks and Market Constraints
d. Government’s Role
Ans: D Page: 137

34. The title page includes all the following except:

a. Name
b. Length of the Plan.
c. Address
d. Phone
Ans: B Page: 138

35. How long should the executive summary be?

a. One page
b. Four to six pages
c. Two to three pages
d. 8-10 pages
Ans: C Page: 138

36. Writing the overview of the company, industry, products, and services addresses
all of the following questions except:
 a. What is the business?
b. How much money will the business bring in?
c. What customers will it serve?
d. Where is it located, and where will it do business?
Ans: B Page: 138

37. Which marketing section should define how the business will use its marketing
tools?
a. Market Opportunity
b. Competition
c. Marketing Strategy
d. Sales Forecasts
Ans: C Page: 139

38. Which marketing section presents financial projections in the financial section of
a business plan?
a. Sales Forecasts
b. Market Research
c. Support Material
d. Competition
Ans: A Page: 139

39. Which type of pricing includes all costs, both fixed and variable, and a profit
percentage is added on?
a. Demand Pricing
b. Competitive Pricing
c. Markup Pricing
d. Cost-Plus Pricing
Ans: D Page: 140

40. Which type of pricing is where the company enters a market where there is an
established price and where it is difficult to differentiate one product from
another?
a. Value Pricing
b. Competitive Pricing
c. Markup Pricing
d. Cost-Plus Pricing
Ans: B Page: 140

41. In the operations section of the business plan, all of the following are included
except:
a. Maintenance and Support
b. Manufacturing
c. Marketing
 d. Product/Service Development
Ans: C Page: 141

42. Which section of the business plan should formulate a credible, comprehensive
set of projections reflecting the business’s anticipated financial performance?
a. Financial plan
b. Operations section
c. Marketing analysis section
d. Marketing and sales strategy section
Ans: A Page: 142

43. All of the following information should be presented in the financial plan except:
a. Project income statements
b. Projected cash flow statements
c. Competitor’s balance sheet
d. Set of assumptions
Ans: C Page: 142

44. Which section of the business plan describes how much money is required to
finance the business, where these funds will be spent, and when they will be
needed?
a. Operations section
b. Marketing analysis section
c. Funds required and uses
d. Management plan
Ans: C Page: 143

45. All of the following are typical exhibits except:

a. Market potential
b. Process flow
c. Detailed financials
d. Tax returns
Ans: D Page: 143

Chapter 7: Setting up the Company

True/False

1. Unfortunately, with the way the laws are written, the sole owner does not have the
right to make all the decisions for the business.
Ans: False Page: 154
 2. One of the most attractive features of sole proprietorships is how fast and simple
it is to begin operations.
Ans: True Page: 154

3. In choosing a form of ownership, entrepreneurs must remember that there is no

single “best” form.
Ans: True Page: 153

4. The greatest advantage of a sole proprietorship is unlimited personal liability.

Ans: False Page: 154

5. When a corporation is founded, it does not have to accept the regulations and
restrictions of the state in which it is incorporated and of each state in which it
does business.
Ans: False Page: 156

6. When a corporation is established, its equity is divided among a number of shares

of stock that are issued to the investors in proportion to their investment in the
corporation.
Ans: True Page: 157

7. The CEO selects the board and the CEO has the power to remove board members.
Ans: False Page: 157

8. The ownership of a corporation lies in the stockholders and is evidenced by stock

certificates issued to the shareholder.
Ans: True Page: 157

9. The total number of issued shares outstanding in a company is most often shown
in the annual report.
Ans: True Page: 160

10. A disadvantage of a limited liability company is that the owners do not assume
liabilities for debt.
Ans: False Page: 166

Short Answer / Fill in the Blank

11. A(n) ________ is a form of business in which a single owner does business
himself or herself and requires only a business license to open.
Ans: sole proprietorship Page: 154

12. The __________ is the most common form of business ownership.

Ans: C-corporation Page: 156
13. _________ value is an archaic concept that is still applied to stocks.
Ans: Par Page: 159

14. Annual _________ are usually based on the number of shares of authorized stock
and on whether the stock has a par value.
Ans: taxes Page: 159

15. ____________ are the stock that a company sells to investors to generate capital.
Ans: Issued shares Page: 159

16. The _____________ is a corporation that elects under federal and state tax laws to
be taxed like a partnership.
Ans: S-corporation Page: 162

17. A(n) _________ is usually defined as an association of two or more people

carrying on as co-owners of a business for profit.
Ans: partnership Page: 164

18. A(n) ________ partnership must have at least one general partner so at least one
person or entity’s personal assets must be at stake.
Ans: limited Page: 164

19. A(n) ________ is a blend of some of the best characteristics of corporations,

partnerships, and sole proprietorships.
Ans: limited liability company Page:166

20. A limited liability company is formed by filing a(n) _______________ form with
a secretary of state and signing an LLO Operating Agreement.
Ans: Article of Organization Page: 166

Multiple Choice

21. All of the following are advantages of a sole proprietorship except:

a. Profit Incentive
b. Easy to Discontinue
c. Total Decision-Making Authority
d. Unlimited Personal Liability
Ans: D Page: 154

22. All of the following are disadvantages of sole proprietorship except:

a. Limited Skills
b. Limited Access to Capital
c. No Special Legal Restrictions
d. Lack of Continuity for the Business
Ans: C Page: 155-156
23. Which of the following is the greatest disadvantage of sole proprietorship?
a. Limited Skills
b. Unlimited Personal Liability
c. Limited Access to Capital
d. Lack of Continuity for the Business
Ans: B Page: 155

24. A _______ is a separate legal entity apart from its owners and may engage in
business, issue contracts, sue and be sued, and pay taxes.
a. stockholder
b. corporation
c. sole proprietorship
d. partnership
Ans: B Page: 156

25. A “C” corporation need not have:

a. stockholders
b. a board of directors
c. external investors.
d. officers.
Ans: C Page: 156

26. Who has the ultimate power and control of every corporation?
a. Officers
b. Board of directors
c. Stockholders
d. Sole proprietors
Ans: C Page: 157

27. Who establishes the general policies of the company, and to a greater or lesser
extent depending on the particular corporation, can become involves in various
details of the operating procedures?
a. Employees
b. Board of directors
c. Stockholders
d. Government
Ans: B Page: 157

28. The functions of each officer are defined by:

a. Board of directors
b. Stockholders
c. Officers themselves
d. Government
Ans: A Page: 157
29. Who is in charge of day-to-day operations under the directives of the board of
directors?
a. Stockholders
b. The President
c. An Attorney
d. Employees
Ans: B Page: 157

30. If you are not a resident of Delaware, you must have an agent who is in the state
empowered to accept service in the event the corporation is sued. What is the next
step after selecting a local agent?
a. Select the corporate name
b. Prepare the Certificate of Incorporation
c. Hire employees
d. Get a building
Ans: A Page: 158

31. Which type of stock is the most common/usual?

a. Preferred Stock
b. Par Value
c. No-Par-Value Stock
d. Private Stock
Ans: C Page: 159

32. All of the following are advantages of a C-corporation except:

a. Limited Liability of the Stockholders
b. Ability to Attract Capital
c. Skills, Expertise, Knowledge
d. Directors held Accountable
Ans: D Page: 160-161

33. All of the following are disadvantage of a C-corporation except:

a. Double Taxation
b. Cost and Time Involved in the Incorporation Process
c. Transferable Ownership
d. High Administration Compliance Costs
Ans: C Page: 161-162

34. To become an S-corporation, all of the following must occur except:

a. Only two classes of stock are allowed.
b. Shareholders cannot be nonresident aliens.
c. The company must be a domestic company.
d. Only individuals and certain trusts may own stock.
Ans: A Page: 162
35. What is the maximum number of shareholders there can be in an S-corporation?
a. 200
b. 150
c. 100
d. 80
Ans: C Page: 162

36. All of the following are disadvantages of S-corporations except:

a. Investors cannot receive preferred shares.
b. Qualification requirements necessitate administrative and cost burdens.
c. Not eligible for qualified employee stock options.
d. Owners pay all taxes.
Ans: D Page: 162-163

37. What type of partnership has unlimited liability?

a. Limited
b. General
c. Complementary
d. Personal
Ans: B Page: 164

38. All of the following are advantages of a partnership except:

a. Division of Profits
b. Larger Pool of Capital
c. Capital Accumulation
d. Easy to Establish
Ans: C Page: 164

39. All of the following are disadvantages of a partnership except:

a. Potential for Personality and Authority Conflicts
b. Unlimited Liability
c. Restrictions of Elimination for the General Partnership
d. Division of Profits
Ans: D Page: 165

40. All of the following are advantages of a limited liability company except:
a. They may offer different classes of membership.
b. There are no restrictions on the number and types of owners.
c. Owners do not assume liabilities for debt.
d. Transferring ownership is restricted.
Ans: D Page: 166

41. In the first 30 days, a suggested business start-up checklist includes all but which
one of the following?
 a. Do a name search in location state to determine if the name is available on
Clerks Commission web site.
b. Select an accountant
c. Obtain an Employer Identification Number (EIS) from IRS
d. Pay corporate franchise tax or annual state fees
Ans: D Page: 168-169

42. In the first 30 days of your new company you should:

a. Register your Internet domain name.
b. Select a lawyer.
c. File your first tax return.
d. Join the local entrepreneurs’ network.
Ans: B Page: 168

43. When should you contact suppliers?

a. First 30 days
b. Sixty days
c. Between 3-6 months after opening
d. At the end of the year
Ans: B Page: 168

44. When should you establish a relationship with a bank in order to acquire a line of
credit in the near term?
a. First 30 days
b. Sixty days
c. Between 30-60 days
d. At the end of the year
Ans: D Page: 169

45. Which of the following insurance coverages should be considered, although not
required, as soon as you start you company?
a. Fire
b. Employee health and life
c. Business interruption
d. All the above
Ans: D Page: 170

Chapter 8: Funding the Venture - Part A

True / False
 1. A garage start-up is a myth in today’s world.
Ans: False Page: 184

2. Credit cards can be used as a source of funding for a new adventure.

Ans: True Page186

3. Outsourcing is a bootstrapping technique.

Ans: True Page: 186

4. Angels are low‐net‐worth individuals who have some funds that they are willing
to risk in start‐up companies.
Ans: False Page: 187

5. The best angels are those that can bring contacts, experience, and long-term
financing.
Ans: True Page: 188

6. Micro-loans were introduced initially in 1976.

Ans: True Page: 189

7. With Micro-loans you must provide personal guarantees.

Ans: True Page: 189

8. STTR program stands for Student Business Technology Transfer.

Ans: False Page: 192

9. Most states have programs that provide financial assistance or incentives to small
businesses.
Ans: True Page: 193

10. A minority-owned business is one that is 51 percent or more owned by one or

more owners who are either minorities or women.
Ans: True Page: 193

Short Answer / Fill in the Blank

11. ___________ are a very popular source for start-up capital because they are not as
worried about quick profits.
Ans: Family and friends Page: 187

12. ________ investors invest their own money.

Ans: Angel Page: 187

13. Angels are always looking for new deal opportunities, called __________.
 Ans: sourcing Page: 188

14. The average number of members in an angel group is ____________.

Ans: 10-15 Page: 188

15. Bootstrapping is a type of __________that can reduce costs from the current
operation and overhead.
Ans: self-funding Page184

16. Having a source of __________ income while a company is getting started

improves the chances of success.
Ans: survival Page: 184

17. In some cases, entrepreneurs use _________ from previous endeavors to invest in
their new enterprises.
Ans: profits Page: 183

18. ________ is a form of financing that is usually available to entrepreneurs who are
highly motivated and committed to using personal resources to launch a venture.
Ans: Self-funding Page: 183

19. When considering self-funding, carefully secede how much financial ________
you are willing to take.
Ans: risk Page: 183

Multiple Choice

20. Virtual companies are sometimes referred to as:

a. Micro-Equity.
b. Lean start-ups.
c. Bootstrapping.
d. Angels.
Ans: B Page: 182

21. Which of the following is the best source of funds for first-stage financing?
a. Small business investment companies
b. Public equity market
c. Private venture capital companies
d. Friends and family
Ans: D Page: 187

22. Which of the following is not a bootstrapping technique?

a. No or low rent
b. Trading intellectual property rights
 c. Angel funding
d. Outsourcing
Ans: C Page: 182-184

23. Leasing expensive equipment makes sense because:

a. You may only need the equipment for a short period.
b. It can be used as a tax write-off.
c. You don’t ever have to give the equipment back.
d. It never makes sense.
Ans: A Page: 185

24. Contingent litigation is:

a. Sharing the proceeds of litigation with your attorney in exchange for fees.
b. Going to court as a last resort.
c. Settling a case out of court.
d. Only filing a lawsuit if your partner agrees with you.
Ans: A Page: 186

25. The estimated total invested per year by angels in the US is:
a. $ 6 billion.
b. $ 54 billion.
c. $ 81 billion.
d. $490 billion.
Ans: B Page: 188

26. Which of the following is NOT considered a “4C” of credit::

a. Commitment
b. Character
c. Cash flow.
d. Contribution
Ans: A Page: 214

27. Which of the following is NOT a purpose that micro-loans may be used for?
a. Purchase of equipment
b. Purchase of Machinery
c. Working Capital
d. Weekend get-a-way
Ans: D Page: 189

28. To ensure a reasonable expectation of repayment, bank loans are generally based
on:
a. Accounts payable.
b. A percent of equity.
c. Either assets or cash flow.
d. Both A and C.
 Ans: D Page: 190

29. Typically, debt financing requires:

a. Reduction of short-term assets.
b. Giving up a degree of ownership in the firm.
c. An asset as collateral.
d. Reduction of working capital.
Ans: C Page: 190

30. Which of the following is not federally supported sources of small company
funding?
a. The SBIR program
b. SBA loans
c. EPA programs
d. The STTR program
Ans: C Page: 192

31. In Phase Two of the Small Business Innovation Research grant program:
a. Funds are provided for theoretical research.
b. No direct funding is provided.
c. Money is provided to develop prototypes.
d. Phase one is repeated.
Ans: C Page: 192

32. Minority-owned business is one that has ______ percent or more owned by a
minority.
a. 10
b. 25
c. 51
d. 90
Ans: C Page: 193

33. Which of the following is more suitable funding for later stage?
a. Self-funding
b. Personally secured bank loans
c. Family and friends
d. Government programs
Ans: D. Page: 182

34. Trading intellectual property rights is a type of:

a. Bootstrapping.
b. Part-time working.
c. Moonlighting.
d. Angel investing.
Ans: A Page: 185
35. Which of the following is NOT a reason the SBA was created?
a. To aid the small business community
b. To protect the small business community
c. To control the small business community
d. To counsel the small business community
Ans: C Page: 191

36. To qualify for an SBIR grant applicants must:

a. Have been in business for more than 5 years.
b. Have been in business for less than 5 years.
c. Have less than 500 employees.
d. Have more than 500 employees.
Ans: C Page: 192

37. A company that has no offices, very few employees, and no communication
costs is called:
a. Parent Company.
b. Virtual Company.
c. Corporate Company.
d. Self-funding Company.
Ans: B Page: 181

38. Private lenders that provide funds for your operations using purchase orders as
security for the loan is called:
a. Factors.
b. Micro-loans.
c. Bank Loans.
d. Angels.
Ans: A Page: 190

39. In exchange for getting your purchase orders, suppliers may give you a(n):
a. Invoice.
b. Loan.
c. Line of credit.
d. Micro-loan.
Ans: C Page: 190

40. Which of the following best describes Phase I of the SBIR Program?
a. A grant of up to $1 million can be awarded
b. This is not a funding stage
c. There is a two-year decline to complete this phase
d. There is a grant award of up to $150,000
Ans: D Page: 192
 41. According to the textbook, the BEST method of locating angel investors is
through:
a. LinkedIn.
b. Newspaper.
c. TV ads.
d. Word of Mouth.
Ans: D Page: 188
42. Angels are:
a. Individuals who rarely invest.
b. High-net-worth individuals that never risk their wealth.
c. High-net-worth individuals who are willing to risk their funds in start-up
companies.
d. Low-net-worth individuals that risk everything on investments.
Ans: C Page: 187

43. When family and friends are your main investors, you should:
a. Not disclose any details of your business plan.
b. Only disclose information that they ask about.
c. Disclose all information just as they are a regular investor.
d. Do not do business with family or friends.
Ans: C Page: 187

44.______________________ is the most common reason for small companies to

fail.
a. Running out of money
b. Gaining too few customers
c. Not having patent awarded
d. Not receiving a government grant
Ans: A. Page: 180

Chapter 8: Funding the Venture - Part B

True / False

1. Do not take cash from external shareholders unless you intend to build the
company for sale.
Ans: True Page: 194
 2. Super‐angels typically invest less than a million and can bring other like‐minded
super‐angels along with them.
Ans: False Page: 197

3. Public stock and private equity are the two basic classes of ownership in
companies.
Ans: True Page: 198

4. Growth capital refers to a strategy of making equity investments as part of a

transaction in which a company, business unit, or business assets are acquired
from the current shareholders, typically with the use of financial leverage.
Ans: False Page: 196

5. Venture capital is a broad subcategory of private equity that refers to equity

investments made, typically in less mature companies, for the launch, early
development, or expansion of a business.
Ans: True Page: 198

6. It is important to understand that with a VC firm, all interests are focused to

maximize the return on investment; there is no other agenda.
Ans: True Page: 209

7. When lenders consider a loan request, they concentrate on what are sometimes
referred to as the “four Cs” of credit: character, cash flow, collateral, and (equity)
contribution.
Ans: True Page: 214

8. Structuring a strategic partnership that includes an equity investment is a last

resort for many companies to raise equity funds.
Ans: False Page: 216

9. The first step taken by investors looking at a seed or early‐stage company is to

estimate the company’s future value at the planned exit date of usually three to
five years.
Ans: True Page: 217

10. In the end, all of the valuation methods, though helpful in establishing a basis for
discussions, are overridden by the negotiations between the company’s board and
the investors where other factors come into play.
Ans. True Page: 219

Short Answer/ Fill in the Blanks

 11. ________________are typically less demanding than venture capital and other
institutional professional investors.
Ans: Angel investors Page: 219

12. ________________ means selling part of the ownership of the company to

investors through the purchase of shares.
Ans: Equity funding Page: 194

13. ______________ are an emerging group of investors that sit between

conventional private angel investors and venture capitalists, invest over $1 million
of their own personal funds, and, can bring other like‐minded investors along with
them.
Ans: Super-Angels Page: 197

14. ______________________ refer to investments in equity or debt securities of a

distressed company or a company where value can be unlocked as a result of a
one‐time opportunity (e.g., a change in government regulations or market
dislocation).
Ans: Distressed or special situations Page: 198

15. _______________________ refers to subordinated debt or preferred equity

securities that often represent the most junior portion of a company’s capital
structure that is senior to the company’s common equity.
Ans: Mezzanine capital Page: 199

16. __________________are usually undemanding on the annual return (IRR) that

they expect from investing since they are usually helping out for personal, not
financial, reasons. 

Ans: Friends and family Page: 200

17. A __________________ means that if the company has not created a

liquidity event within a stated time frame, the investors can take
independent action and find a buyer and impose it on the board of the
company. 

Ans: forced buyout term Page: 206

18. The __________valuation is the value that the entrepreneur and the investor
agree the company is worth prior to any investment.
Ans: pre-money valuation Page: 202

19. ______________is the company’s valuation immediately after the investment is

made.
 Ans: Post-money Page: 202

20. The entrepreneur should undertake ______________ on the potential investor(s)

to make sure that the deal is a good fit to their investment criteria, that they have deep
knowledge in the business area, and take an active role to help and be there for a
follow‐up round.
Ans: due diligence Page: 202

Multiple Choice

21. Which of the following factors would likely NOT influence a venture capital
firm’s funding decisions?
a. Specialized industries for the venture
b. Location of the venture
c. Stage of fund and stage of development
d. If the entrepreneur changed directions from their original business plan after
learning about their environment and opportunities.
Ans: D Page: 210

22. A ______________ is a personal or signature loan that requires no collateral; it

is granted on the background and strength of the borrower’s reputation.
a. commercial loan
b. unsecured loan
c. secured loan
d. personal loan
Ans: unsecured loan Page: 213

23. Which of the following is not one of the seven key parts of a loan proposal?
a. Summary
b. Employee Job Descriptions
c. Management Team Profiles
d. Financial Projections and Financial Statements
Ans: B. Page: 214

24. The __________ the term, the __________ the monthly payment (principal and
interest) will be, but there will be more monthly payments, more interest accruing,
and more money paid in total to meet the debt requirements.
a. longer; lower
b. shorter; higher
c. shorter; lower
 d. longer; higher
Ans: A. Page: 215

25. Asking the following three questions can help an entrepreneur to ________:
• How much lending authority does the banker have, and what is the approval
process?
• Can the banker understand the business? Is there any personal excitement
about the business potential?
• What experience does the banker have with similar companies?
a. set up a checking account
a. obtain an SBA loan
b. choose a loan officer
c. prepare a business plan
Ans: C Page: 215

26. Which of the following is not a fundamental way(s) to calculate an estimation of

the company’s future value at the planned exit date of usually three to five years.
a. Cash Flow Estimates
b. Strategic Sale
c. Industry Average Rate of Return
d. Both a. and b.
Ans: D. Page: 217

27. Working prototypes, patents issued, first customers, strong management and
advisory boards are examples of_______
a. milestones
b. securities
c. collateral
d. venture capital model
Ans: A. Page: 218

28. A method to secure capital or debt financing, when the entrepreneur is rejected
from traditional financing methods or is unwilling to accept the equity valuations
assigned by potential investors is to structure a
a. bank loan
b. strategic partnership that may include an equity investment
c. credit cards
d. factoring
Ans: B Page: 216

29. A (n)________________________ means that if the company has not created

liquidity event within a stated time frame, the investors can take independent action
 and find a buyer and impose it on the board of the company.
a. antidilution rights
b. piggybacking
c. forced buyout term
d. registration rights
Ans: C. Page: 206

30. Ways of structuring a strategic alliance include all but which one of the
following?
a. Majority investment by a small company
b. Setting up a separate legal entity (joint venture)
c. Establishing cooperative arrangements to fund R & D or exploit an idea or
strategy
d. Instituting cross-licensing or cross-distribution agreement.
Ans: A. Page: 216

31. Most business debt today is provided at a _________rate, usually fluctuating

with the prime rate (the rate banks charge their “best” customers), usually quoted
as “prime plus” multiplied by percentage points, often 0.5 to 2 percent, but it can
be as much as 3 or even 4 per- cent greater than prime, depending on risk and
other variables that motivate the lender.
a. variable interest
b. monthly interest
c. annual fee
d. stationary interest
Ans: A. Page: 215

32. Collateral to support a loan may include types of securities except for which one
of the following?
a. endorsers or cosigners
b. accounts receivables
c. reference letters
d. real estate, stocks and bonds, and personal savings.
Ans. C. Page: 190

33. ______________ invest more than _________________.

a. Angels; professional VC firms.
b. Professional VC firms; angels.
c. Friends; angels.
d. Friends; professional VC firms.
Ans: A. Page: 211
34. Which of the following statements is FALSE about VC firms?
a. Venture capital firms look for generally larger deals and more impressive
returns than do angel investors.
b. VC firms focus all interests to maximize the return on investment; there is no
other agenda.
c. Venture capitalists usually do not invest until a product or service can be
demonstrated or a prototype is ready for commercialization.
d. The aim is to make the pie bigger for everyone by making the entrepreneur’s
slice smaller.
Ans: D. Page: 209

35. ____________gives all shareholders holding such rights to sell their stock at an
IPO. An IPO may be used to sell the company’s stock (treasury stock) only in
order to raise further funding for the company.
a. piggybacking
b. antidilution rights
c. forced buyout term
d. later rounds
Ans: A. Page: 206

36. To select a venture capitalist, all but which one of the following is suggested?
a. Target the search
b. Investigate possible venture partners
c. Keep a low profile so the VC’s will visit.
d. Beef up management
Ans: C. Page: 211

37. Investments from larger firms usually fall in the range of _____________dollars,
gaining ownership of up to 25 percent.
a. one to $500,000
b. one to two million
c. two to 25 million
d. two to 50 million
Ans: C Page: 217

38. ________________ are estimates of values that might be attained in a strategic

acquisition are usually calculated on the basis of comparison with other purchases
that have taken place recently in the same industry sector.
a. Valuation models
b. Comps
c. Milestone methods
 d. Positions
Ans: B. Page: 218

39. The Berkus Valuation Milestones include all but which of the following?
a. Sound idea
b. Prototype
c. Customer Service
d. Quality Board and quality management
Ans: C Page: 218

40. By looking at forecasted earnings (profits) and multiplying those earnings by a

factor that is relevant to the industry, a value can be computed called _______.
a. strategic sale
b. cash flow estimates
c. strategic acquisition
d. perceived market price
Ans: B. Page: 217

41. ______________________ is perceived when observable milestones are met.

a. Value
b. Profit
c. Strategic Sale
d. Profit
Ans: A. Page: 218

Chapter 9: Managing the Resources—Money and People

True/False

1. Net profit (or loss) = variable costs – total expenses.

Ans: False Page: 229

2. The difference between book value and going concern value is called goodwill.
Ans: True Page: 229

3. Cash disbursements can also be referred to as “cash out”.

Ans: True Page: 235

4. According to the time value of money approach, it is better to receive a dollar

today than it is to receive a dollar any time in the future.
 Ans: True Page: 238

5. If the IRR of a potential investment is lesser than the required rate of return, the
investment should be undertaken.
Ans: False Page: 239

6. Fortunately, taxes do not affect cash flow because they are deposited into separate
accounts and dispersed later.
Ans: False Page: 239

7. Support, a cultural attribute of a successful innovative company, is the degree to

which new ideas from all sources are welcomed and responded to promptly and
appropriately.
Ans: True Page: 242

8. A good manager never fires an employee.

Ans: False Page: 242

9. Overdisclosing is far better than restricting information.

Ans: True Page: 248

10. You cannot use a separation agreement when someone leaves the company
voluntarily.
Ans: False Page: 249

Short Answer / Fill in the blank

11. Book value is derived through an analysis of the __________.

Ans: balance sheet Page: 229

12. __________ are costs that are assigned to inventory before being sold.
Ans: Inventory costs Page: 229

13. __________ are costs that are identified with the product.
Ans: Production costs Page: 229

14. COH is the cash in all bank accounts __________ expected cash from customers,
suppliers, and other accounts.
Ans: plus Page: 232

15. A(n) __________ is when you ask yourself, “If one of the stakeholders finds our
later what happened, could this be embarrassing or worse, create serious
problems, even legal repercussions?”
 Ans: gut-feel test Page: 248

16. A __________ agreement clearly explains the conditions and expectations of an

employee leaving the company.
Ans: separation Page: 249

17. “I trust the people I work with. I find it easy to be open and honest with people
from other departments” is an example statement of ____________.
Ans: honesty Page: 242

18. __________ is the difference between revenues and expenses as reported in the
income statements.
Ans: Profit Page: 229

19. ___________ accounting does not recognize that cash may have been required to
purchase materials, labor, and other resources in advance of the sale.
Ans: Accrual Page: 232

Multiple Choice

20. The Income Statement:

a) Represents Assets=liabilities + shareholder equity.
b) Allows a manager to monitor deterioration in shareholder equity.
c) Allows a manager to see how profitable the company is on a monthly
and annual basis.
d) Shows the company’s long-term asset position.
Ans: C Page: 229

21. The Balance Sheet:

a) is a reflection of economic value.
b) reflects what the business is worth and its resale value.
c) takes inflation into account.
d) is based on historical costs and may not reflect economic value, worth,
and resale value.
Ans: D Page: 228

22. The three major sections of the Balance Sheet are the:
a) revenues, expenses, and current assets.
b) assets, liabilities, and equity.
c) cash, fixed assets, and interest payments.
d) cash flow, fixed assets and other assets, and debt structure.
Ans: B Page: 228

23. Which of the following statements is TRUE?

 a) Working capital and fixed costs act like a variable cost
b) Working capital and fixed assets act like a fixed cost
c) Working capital acts like a variable cost; fixed assets act like a fixed cost
d) Working capital acts like a fixed cost; fixed assets act like a variable cost
Ans: C Page: 234

24. The balance sheet equation is:

a) Assets= Liabilities + Shareholder equity.
b) Liabilities-Assets= WIP.
c) Assets + Liabilities= Shareholder equity.
d) WIP= Assets + Liabilities.
Ans: A Page: 228

25. The “Runway” refers to:

a) How often the company turns over inventory.
b) How long the company has been in business.
c) How many months it would take for the company to run out of money.
d) The time in which it takes to calculate the COH.
Ans: C Page: 232

26. To use the breakeven technique, you need all but which one of the following
types of information:
a) fixed costs of operation
b) variable costs of production
c) price per unit
d) lifetime value of a customer
Ans: D Page: 236

27. A legal document instructing an employee to return all materials that belong to
the company at the time of termination is an example of an:
a) Separation agreement.
b) ISO.
c) Full disclosure.
d) Employment agreement.
Ans: D Page: 249

28. A cost that varies proportionately with increases in activity is called:

a) a variable cost.
b) a fixed cost.
c) a semi-variable cost.
d) none of the above.
Ans: A Page: 236

29. Which of the following statements is more likely to be true?

 a) Not all business costs can be classified as variable costs or fixed costs; the
terms vary with the unit produced or the service provided
b) The higher the fixed costs, the easier it is to gain a high return on assets
c) The higher the variable costs, the easier it is to achieve a high gross margin
d) The higher the fixed costs, the easier it is to achieve a high gross margin
Ans: C Page: 237

30. Which of the following statements is true?

a) Revenues remain constant, regardless of the level of business activity
b) Variable costs remain constant, regardless of the level of business activity
c) The ratio of fixed to variable costs is likely to decline as business activity
increases
d) The ratio of fixed to variable costs is likely to increase as business activity
increases
Ans: C Page: 236

31. To increase the lifetime value of your customers, all but which one of these
objectives apply?
a) Increase length of time a customer buys from you
b) Decrease length of time a customer buys from you
c) Increase the amount customers spend on each purchase
d) Decrease the time between purchases
Ans: B Page: 238

32. Incentive stock options:

a) are rarely used today.
b) are only available to employees.
c) are not available to employees.
d) are generally transferred to investors.
Ans: B Page: 249

33. The breakeven point is the level of activity (units) at which:

a) Revenues equal contribution.
b) Variable costs equal fixed costs.
c) Total revenue equal costs.
d) Fixed costs equal contribution.
Ans: C Page: 236

34. Which of the following is not a step of handling an employee resignation?

a) Analyze.
b) Conduct an exit interview.
c) Celebrate.
d) Cause and effect.
Ans: D Page: 246
35. Preparation of a monthly cash flow statement is recommended in order to:
a) Periodically assess the company’s cash position.
b) Keep the accountant busy.
c) Determine inventory levels.
d) They are not recommended.
Ans: A Page: 230

36. Receipts and Disbursements are the main headings on which of the following
financial statements?
a) Balance sheet
b) Cash flow
c) Income
d) Breakeven
Ans: B Page: 234

37. Which of the following is NOT one of the eleven categories of a standard budget?
a) Net Income
b) EBIT
c) COH
d) Operating Profit
Ans: C Page: 233

38. The amount available for dividends or reinvestment in the company is called:
a) Profit.
b) Net income.
c) EBIT.
d) Sales.
Ans: B Page: 233

39. “The degree to which there is both planned and random interaction between
functions and division at all levels of the organization” is the definition of which
cultural attribute of a successful innovative company?
a) Freedom
b) Support
c) Engagement
d) Communication
Ans: D Page: 242

40. Which of the following is NOT a cultural attribute of a successful innovative

company identified in the textbook?
a) Risk
b) Honesty
c) Platitudes
d) Communication
 Ans: C Page: 242

41. Which of the following is NOT one of the three principals to resolve ethical
dilemmas?
a) Employee agreement
b) The gut-feel test
c) Analysis of conflicts
d) Full disclosure
Ans: A Page: 248

42. The balance sheet equation is:

a) Liabilities + shareholder equity = Assets
b) Shareholder equity - Liabilities = Assets
c) Shareholder equity + cash = Assets
d) Assets-Liabilities = Shareholder equity
Ans: A. Page: 228

43. Which of the following is not one of the three methods used to measure
financial performance?
a. Sales performance
b. Customer service
c. Profits
d. Cash generated
Ans: B. Page: 232

Chapter 10: Communicating the Opportunity

True / False

1. A well-written executive summary, or “teaser” gains the attention of the targeted

audience.
Ans: False Page: 255

2. An executive summary document should be given with a short personal cover

letter.
Ans: True Page: 256

3. An elevator pitch should be a lengthy pitch to an investor that details every aspect
of your business.
Ans: False Page: 255
 4. The verbal equivalent of the teaser is called an elevator pitch.
Ans: True Page: 255

5. It is recommended to hand out a copy of your PowerPoint when giving a

presentation to potential investors.
Ans: False Page: 267

6. Fortunately, most investors read business plans in detail.

Ans: False Page: 262

7. In preparing a teaser, you should avoid using words such as “should, might,
could, etc.”
Ans: True Page: 261

8. When presenting, it is recommended to use catchy words such as “revolutionary,

cutting edge, and best-of breed.”
Ans: False Page: 259

9. Personal chemistry does not affect how investors see your business plan.
Ans: False Page 263

10. Fewer slides are better than too many.

Ans: True Page: 267

Fill in the blank

11. __________ refers to the terms and timing of the deal.

Ans: Structure Page: 268

12. __________ is the stock, cash, or debt that will complete the transaction.
Ans: Price Page: 268

13. The final financing agreement that includes ownership, control, and financial
objectives is called a ____________.
Ans: term sheet Page: 269

14. Another alternative to finding active investors is to pursue _____, or arm’s-length,

investors, who will have little or no involvement in the business.
Ans: passive Page: 257

15. A(n)_________ is a teaser or document short, clear compelling document that

must be impeccable in its appearance.
Ans: Executive summary Page: 258
 16. Letting an independent third party review an invention and comment on its status,
viability and originality is called ____________.
Ans: escrowing the IP Page: 263

17. ____________ should be at the end of your PowerPoint to cover more detail to
address anticipated questions.
Ans: Back-up slides Page: 267

18. Entrepreneurs should use a(n) __________ rather than a “shotgun” strategy for
engaging in potential investors.
Ans: rifle Page: 257

19. Good ____________ is vital throughout the life of the investor-company

relationship.
Ans: communication Page: 255

Multiple Choice

20. Angel investment can best be found by:

a. Networking within your local business community.
b. Asking for referrals from your accountant and attorney.
c. Talking to other companies in your region that have received angel
investors.
d. All of the above.
Ans: D Page: 257

21. Which of the following is NOT an appropriate way to identify a Venture

Capitalist?
a. Searching the Internet for VC firms that have invested in companies like
yours
b. Talking to law firms that specialize in patents and early stage company
formation
c. Looking through the phonebook
d. Talking to companies like yours that have received investments from VCs
Ans: C Page: 257

22. A teaser is typically:

a. A short written document.
b. A long written document.
c. A short verbal pitch.
d. A long verbal pitch.
Ans: A Page: 255

23. An elevator pitch is typically:

 a. Less than 2 minutes long, highly targeted, and prepared.
b. Unrehearsed and spontaneous.
c. Longer than five minutes.
d. The length of an elevator ride.
Ans: A Page: 255

24. When making an investors’ presentation you should:

a. Use 10-16 Slides.
b. Read the content carefully to the audience.
c. Have at least four persons present the information.
d. Not tell them your name.
Ans: A Page: 256

25. An investors’ presentation must cover the following topics:

a. Your personal financial status.
b. The size of the market.
c. Detailed 10-year financial predictions.
d. The résumés of the people you intend to bring on board.
Ans: B Page: 263-266

26. How are back-up slides used in an investors’ presentation?

a. address pertinent detailed questions
b. Never used in a presentation
c. To fill in time if you finish early
d. To disarm difficult questions
Ans: A Page: 266

27. You should follow these guidelines when making a presentation:

a. Do not over rehearse as you will lose your spontaneity.
b. Keep to the script and avoid interruptions.
c. Listen carefully to the audience.
d. Avoid small talk before the formal presentation.
Ans: C Page: 267

28. Why is it a bad idea to hand out copies of your presentation?

a. They will look ahead and may engage in side conversations
b. It is a waste of paper
c. You are suggesting your investors have poor eye sight
d. It is a good idea to hand out copies of your presentation
Ans: A Page 267

29. When wrapping up your presentation, you should:

a. Refuse to answer any questions.
b. Leave as quickly as possible.
c. Finish on an up note.
 d. Give candy to the investor as a gesture of goodwill.
Ans: C Page: 267

30. After you have made an investors’ presentation you should NOT:
a. Look too eager by following up within 1-2 days on any outstanding factual
issues.
b. Wait for a month before calling them.
c. Call them after a few days.
d. Set up another date for a follow up meeting.
Ans: B Page 267

31. If a potential investor indicates that they are not interested in investing in your
company you should NOT:
a. Ask for the reasons.
b. Suggest that you stay in contact.
c. Ask for referrals to other investors.
d. Bad-mouth them to other investors.
Ans: D Page: 268

32. Most PowerPoint presentations are:

a. Too long.
b. Not detailed enough.
c. Too short.
d. Very boring.
Ans: A Page: 263

33. After making three presentations to the partners of a VC firm, you are asked to
submit a detailed business plan. The firm will not sign a confidentiality
agreement. You:
a. Decline to submit the plan.
b. Modify the plan to take out the highly confidential items.
c. Submit the plan with all the confidential information.
d. Accuse them of trying to steal your business plan.
Ans: B Page: 262

34. It is usually possible to remove how much text between the first and the final
version of the teaser?
a. 2-4 percent
b. 10-15 percent
c. 30-50 percent
d. 85-95 percent
Ans: C Page: 259

35. When presenting to an audience, you should:

 a. Be enthusiastic.
b. Overact.
c. Primarily focus on the nonverbal behavior.
d. Be abrupt.
Ans: A Page: 262

36. Which of the following should you NOT do when presenting to an audience?
a. Use no more than two speakers
b. Face the audience
c. Read from the slides
d. Use less than 16 slides
Ans: C Page: 263

37. If investors have expressed any degree of interest, the entrepreneur should:
a. Move into action.
b. Wait a few days to build anticipation.
c. Never call back, wait for investors to move on the opportunity.
d. Force them to invest immediately.
Ans: A Page: 268

38. Which of the following is NOT a fundamental section of the evaluation period?
a. The Deal
b. Context
c. Investment
d. Business Model
Ans: C Page: 268

39. The term sheet is between:

a. The company and the investor.
b. The shareholders and the company.
c. The issuer and the investor.
d. The issuer and the shareholders.
Ans: C Page: 269

40. In preparation for making a presentation to investors, you should:

a. Present in front of several people.
b. Ask investors if you can do a trail presentation to them.
c. Send each investor a videotaped version of your presentation.
d. Act and not prepare.
Ans: A Page: 263

41. Context refers to:

a. The detail of your presentation.
b. The intelligence level of your management team.
c. The market size of the potential company.
 d. Internal and external factors that affect the business.
Ans: D Page: 268

42. Which of the following is NOT a proper way to locate an appropriate investor?
a. Look within the industry
b. Use the internet
c. Speak with other entrepreneurs
d. Advertise in the newspaper
Ans: D Page: 257

43. Which is NOT a category that a VC firm focuses on?

a. Location
b. Stage of Fund
c. Employee potential
d. Stage of Company
Ans: C Page: 258

Chapter 11: Exiting the Venture

True/ False

1. Before making an IPO decision, you should ask yourself, “Am I ready to share
ownership of this company with the public?”
Ans: True Page: 291

2. One of the benefits of going public is that the company can then issue stock
options to management and employees.
Ans: True Page: 290

3. Loss of control is an advantage of going public.

Ans: False Page: 293

4. Fortunately, when going public there are no added fiduciary responsibilities.

Ans: False Page: 293

5. Going public is a cheap process.

Ans: False Page: 293

6. Before going public, a company needs to take out a personal liability insurance
policy.
 Ans: True Page: 296

7. The first step in discounting cash flow is to forecast the next 5 years of sales.
Ans: False Page: 280

8. When establishing an alliance, the first step is to identify the objective of the
alliance.
Ans: True Page: 282

9. A selling memorandum normally includes information about the company’s

history, the market, company’s products, operations and strengths.
Ans: True Page: 284

10. In the “employees” section of a selling memorandum, it should specify whether a

union represents them or not.
Ans: True Page: 285

Fill in the blank

11. The time and date the company agrees with the investment firm to offer the
securities to the public until twenty-five days after the securities become available
to the public is known as the ____________.
Ans: quiet period Page: 295

12. The SEC places restrictions on what a company can do while in

_______________.
Ans: registration Page: 294

13. ______________ are meetings that give perspective members of the underwriting
syndicate to meet the management team and ask questions.
Ans: Road shows Page: 295

14. When the IPO is completed and finalized, the entrepreneur and the management
team must begin meeting the shareholders and _______________.
Ans: board of directors Page: 296

15. _____________ is more suitable for a company with an established track record.
Ans: Earnings Valuation Page: 279

16. ____________ is based on the worth of the business’s assets.

Ans: Asset Valuation Page: 280

17. The final step in calculating discounted cash flow is estimating when the firm will
reach _______________ and what characteristics it will have when it does.
Ans: stable growth Page: 280
 18. The ______________ company is a concept that can help you identify the most
appropriate assets.
Ans: essential Page: 293

19. For a company that has established a history of operations, the sale is more likely
to be for a _______________.
Ans: going concern Page: 284

Multiple Choice

20. A “liquidity event” is:

a. bankruptcy.
b. shareholders selling their stock to the public or another company for cash.
c. obtaining a bank loan.
d. having at least three months’ cash on hand.
Ans: B Page: 277

21. An “exit strategy” is:

a. a liquidity event.
b. being able to retire with sufficient funds.
c. paying a dividend to angels to keep them happy.
d. paying down your bank loan.
Ans: A Page: 277

22. It is necessary to provide an exit strategy for:

a. angel investors or venture capitalists.
b. state governments.
c. bankers.
d. employees.
Ans: A Page: 277

23. The most common method for a private equity investor to get a return is:
a. Receiving a regular dividend on earnings from the company.
b. Outright sale to another company.
c. Partial sale to another company.
d. An initial public offering.
Ans: B Page: 283

24. An ESOP provides an exit strategy for:

a. Angels and Venture Capitalists.
b. Employees.
c. Lenders.
d. Founders.
Ans: D Page: 290
25. An MBO provides an exit strategy for:
a. Employees.
b. Banks.
c. Managers.
d. Founders.
Ans: D Page: 290

26. Planning a merger requires calculating values of both the business and all:
a. existing resources.
b. the other business.
c. the management salaries.
d. goodwill.
Ans: A Page: 289

27. A selling memorandum need not have which of the following items?
a. Historical financial statements
b. Executive Summary
c. Expected sales price of the company
d. Full description of the business
Ans: C Page: 284

28. A road show is:

a. Pitching the sale of stock government agencies.
b. Exhibiting at a trade show.
c. A recruiting drive at colleges.
d. A dog-and-pony show.
Ans: D Page: 295

29. MBO stands for:

a. Major buyout.
b. Multi buyout.
c. Management buyout.
d. Majority buyout.
Ans: C Page: 290

30. ____________is the most widely used method of valuing a business, which
provides the investor with the best estimate of the probable return on investment.
a. Dividends.
b. Historical earnings.
c. Discounted cash flow valuation
d. Future earnings.
Ans: D Page: 279
31. Which of the following is NOT a part of a selling memorandum:
a. Management
b. Marketing and sales
c. Earn-out agreements
d. Employees
Ans: C Page: 285

32. In a selling memorandum, financial projections should be prepared for the next:
a. 1 Year.
b. 3-5 years.
c. 10-15 years.
d. 20 years.
Ans: B Page: 285

33. Which of the following is NOT included in the letter of intent?

a. What is being purchased
b. The structure
c. Government’s role
d. Due diligence
Ans: C Page: 286

34. Asking “what are the timing and extent,” in the letter of intent, is part of:
a. the structure.
b. due diligence.
c. exclusivity agreement.
d. bust-up fees.
Ans: B Page: 289

35. Which of the following is NOT a typical condition of a sale?

a. Maintenance of minimum net worth requirements
b. Transfer of material agreements
c. Delivery of financial statements
d. Acceptance of ESOP
Ans: D Page: 288

36. Before going public, a company needs to take out __________________that will
protect the officers and directors from being held personally liable if a
shareholder suit is brought based on incorrect information in the Registration
Statement.
a. workers compensation
b. a personal liability insurance policy
c. an underwriter’s policy
d. business insurance
Ans: B. Page: 296
37. Before making an IPO decision, all but which one of the following questions need
to be addressed?
a. Can the family business survive through the third generation?
b. Are you ready to share the ownership of your company with the public?


c. Can you live with the continued scrutiny of investors and market analysts?


d. Are you prepared to disclose your company’s most closely held secrets?
Ans: A. Page: 291

38. Which of the following is a benefit of going public?

a. You solely own the company
b. No one can tell you how to run your business
c. You have greater access to capital
d. You can hire all your closest friends
Ans: C Page: 291

39. Which of the following is a disadvantage of going public?

a. Management and employee incentives
b. Access to capital
c. Improved financial condition
d. Upfront expenses
Ans: D Page: 292

40. Which of the following is NOT a benefit of going public?

a. Enhanced corporate reputation
b. Improved opportunities for future financing
c. Sharing success
d. Access to capital
Ans: C Page: 291

41. Which of the following is NOT a factor to consider when selecting an

underwriter?
a. Post-IPO support
b. Distribution
c. Experience
d. His/her personal wealth
Ans: D Page: 294