When analyzing deals involving start-ups, VC practitioners set a maximum required rate of return on their equity investment, and then focus on whether the investment generates that return given their exit plan.

Question

BlackTom AI · Accepted Answer

The statement describes how venture capital practitioners analyze deals with start-ups in a single sequential step, so let’s break it down carefully.
First, the claim says they 'set a maximum required rate of return on their equity investment.' In practice, venture investors typically establish a minimum hurdle rate or target IRR/MOIC that they want to achieve, not a maximum. A maximum would imply they cap the upside, which is contrary to how VCs seek outsized returns from high-risk bets; thus this portion is conceptually inaccurate.
Next, the statement says they then focus on whether the investment 'generates that return given their exit plan.' While pursuing the target return is indeed a central concern, the process is not as linear or narrow as the sentence suggests. In reality, deal evaluation involves multiple dimensions beyond just whether the exit would meet a target: the team quality, market size, product feasibility, competitive dynamics, stage of funding, capital structure, and the likelihood of achieving the exit plan are all scrutinized. Moreover, scenarios are modeled to assess probability-weighted outcomes rather than assuming a straightforward path to the target return.
Additionally, even if an exit plan exists, the ROI is not guaranteed; investors stress-test the plan under various contingencies, consider dilution, follow-on funding, and potential exit timing, and assess whether the portfolio construction and diversification justify the investment.
Taken together, the claim conflates a mistaken concept (a maximum required return rather than a minimum hurdle) with an oversimplified evaluation approach that ignores the broader due diligence and probabilistic nature of venture investing. The description as a whole does not accurately reflect standard VC practice.

COMM_V 370 101-108 2025W1 COMM 370 2025W1 - Practice Final

When analyzing deals involving start-ups, VC practitioners set a maximum required rate of return on their equity investment, and then focus on whether the investment generates that return given their exit plan.

View Explanation

Log in for full answers

Similar Questions

Considering our course discussion, which of the below are correct for an early-stage venture capital investment fund? (select all that apply)

In the reading “Designing Corporate Ventures in the Shadow of Private Venture Capital”, the author suggests that CVCs will be more successful if they imitate staged financing similar to independent venture capital funds. (true or false?)

Who are venture capitalists?

According to this article, what percentage of VC investments are from the United States? Please read this article: https://news.crunchbase.com/venture/chinese-startups-lead-us-rivals-in-2018-venture-race/

Which of these is a major player in the VC space?

Pre-seed capital is NOT Venture Capital. True or False?

What is VC money used for? (Check all that apply)

Venture Capital is a public-based market. True or False?

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler