Explain liquidity risk and relate it specifically to venture capital. Do you believe that liquidity risk is more important or crucial in venture capital than in other types of investment? Explain.

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Sixta KovacekLv2

3 Nov 2018

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You work for a venture capital firm and are approached to finance a new high-tech start-up. While you believe in the business idea, you also believe it is very risky. What strategies can help to mitigate the risk to your firm? Explain how these measures would work.

1. In contrast to venture capital, commercial banks are notoriously conservative in lending to new business firms. What makes venture capitalists more eager to finance risky projects?

2. Suppose you are very favorably considering a venture that has the following risk-return profile.

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1/3 -10

1/3 0

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Since the expected return = 1.0, you give it a thumbs up.

But the venture capitalist who will fund the venture requires that he receive 25% of any positive profit. How would that change your verdict??

Short answers please, original work only. Thank you.

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Explain liquidity risk and relate it specifically to venture capital. Do you believe that liquidity risk is more important or crucial in venture capital than in other types of investment? Explain.

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