ACCA Advanced Financial Management (AFM) Practice Exam

What kind of restrictions do venture capital companies impose?

1. No restrictions at all

2. Only financial reporting requirements

3. Restrictions on management and fund dispersion

4. Limited marketing activities

The correct answer is: Restrictions on management and fund dispersion

Venture capital companies often impose restrictions on management and fund dispersion as a means to protect their investment and ensure that the business has a higher chance of success. These restrictions typically include governance controls, such as requiring certain governance structures or processes to be in place, involvement in key management decisions, or stipulating how capital can be used or withdrawn. By imposing restrictions on management, venture capitalists can ensure that the company's leadership aligns with the business's growth objectives and adheres to best practices in managing the company. Fund dispersion restrictions help in allocating resources effectively and making informed decisions about investments, reinvestments, and expenditures. Such controls also serve to minimize risks and maximize potential returns for both the venture capitalists and the entrepreneurs by keeping the focus on the company’s long-term growth strategy. In contrast, the other options do not accurately reflect the nature of the relationship between venture capital firms and their portfolio companies, as they either suggest a lack of involvement or suggest a narrower scope of restrictions than what is typically the case. Therefore, the imposition of restrictions on management and fund dispersion is a common and strategic practice in venture capital investments.