ACCA Financial Management (F9) Certification Practice Exam

What does venture capital primarily provide to startups?

1. Long-term debt financing.

2. Risk capital in exchange for an equity stake.

3. A guaranteed return on investment.

4. A public offering to finance growth.

The correct answer is: Risk capital in exchange for an equity stake.

Venture capital primarily provides risk capital in exchange for an equity stake in startups. This type of financing is crucial for early-stage companies that often do not have access to traditional forms of financing, such as bank loans or public offerings, due to their high risk and lack of established revenue streams. Venture capitalists invest not only capital but also provide valuable expertise, mentorship, and connections that can help a startup grow and succeed. Their investment usually comes with an expectation of high returns due to the considerable risks involved, as many startups may fail. As a result, venture capitalists obtain equity in the company, aligning their success with that of the business. In contrast, long-term debt financing is more about borrowing funds that need to be repaid over time, which might not be suitable for startups that lack sufficient cash flow. A guaranteed return on investment is not a characteristic of venture capital since it involves a high level of uncertainty. Lastly, a public offering is a method of raising capital but occurs at a later stage when a company is more established and typically not applicable to early-stage startups seeking venture capital.