ACCA Advanced Financial Management (AFM) Practice Exam

What is meant by venture capital?

1. Investment in established firms

2. Money invested to finance a new firm

3. Government grants for businesses

4. A type of crowdfunding

The correct answer is: Money invested to finance a new firm

Venture capital specifically refers to the funding provided to early-stage, high-potential startups and small businesses that are believed to have long-term growth potential. This form of investment is critical for new firms that may lack access to traditional financing methods, such as bank loans or public equity markets. Venture capitalists typically offer not just capital but also mentorship and strategic advice, positioning themselves as partners in the business's development. This investment carries higher risk compared to investing in established firms because new ventures are more likely to fail. However, it also has the potential for substantial returns if the startup becomes successful or is acquired by a larger company. The other choices do not encapsulate the concept of venture capital as effectively. For instance, investing in established firms represents a more stable, less risky investment approach. Government grants do not require equity in return and are aimed at support rather than investment. Crowdfunding encompasses a broader range of funding methods, often raising smaller amounts from many individuals, which is distinct from the structured and typically larger investments seen in venture capital.