Venture Capital question

Christina Wagner is a CFA level 2 candidate currently studying about hedge funds, private equity and commodity futures. One of her friends is fascinated by what Wagner is learning and asks several questions on the topic. In particular, she is curious to know what exit options are available to a promising young venture capital (VC) firm if it is having difficulty attracting buyers due to poor market conditions. What should be Wagner’s most appropriate response? A) The VC firm should consider the acquisition of another firm and sell the merged entity once capital market conditions have improved. B) The VC firm should be liquidated in the absence of prospective buyers through the sale of the firm’s assets. C) Since an initial public offering is not feasible, the VC firm should be sold to another firm through a buyout or secondary market sale.

I would say C, although I can’t give a reason why it isn’t A. I just know that management buyouts and secondary market sales are the next most profitable ways to exit in VC after an IPO.

Answer is A. Even I opted for C and got it wrong.

Damn that sucks. I suppose because of the poor market conditions the idea is that you can get the other entity at a depressed price, therefore increasing your profits once the markets improve.

A - It is clearly an opportuntity to reap in the synergies and value-investing style in order to take profit when the business cycle improves in the future.

Yeah it’s obviously A because you were just given the answer. And you pretty much just reiterated what A said. It’d be more helpful to explain why C is incorrect and why A is correct.

in a down market - a sale would be at depressed / reduced prices. Liquidation too would be at low prices. either way the VC firm would lose. However if it bought a firm at a low price, was able to build up some form of synergies, and wait out time, a sale at a future date, at better prices, could be feasible.

I did not bother to read any of the responses, as I only responded directly to the question being posed. On why C is incorrect, I think all the negative news and low valuation being in the down cycle would not give the investor any benefit (i.e., very low consideration for the sale).

But then, even A is subject to realising merged synergies. These answers seem more like rejecting the incorrect answers rather than selecting the correct one.

That was my very first point.

difference between A and C is --> which company is still alive at the end of the txn. in A) VC Firm still exists. So it can think about its value in future, synergies etc. matter here. in C) VC Firm ceases to exist. And it will get a much lower value in the down market. It does not matter what synergies are present -> your sale price is going to be low, given the state of the economy, etc.

I think the question is largely depending on one word.that is “promising”,which means the firm has very good future and the difficulty now is just caused by macro economic conditions. So in the three answers,A is the best. at first I choosed C too. it’s easy to ignore the word.