Final answer:
Venture capitalists provide vital early-stage financing, but not always enough to cover all expenses. IPOs are a way for established companies to raise significant public capital, and while they can serve to repay early investors, they are not typically second-stage financing. Stock prices can dip after an announcement of new shares due to dilution and implications about the company's needs.
Step-by-step explanation:
Mark the following as true or false:
- Venture capitalists typically provide first-stage financing sufficient to cover all development expenses. False. Venture capitalists do provide early-stage financing, but it's not always sufficient to cover all development expenses, and companies may seek additional rounds of funding.
- Second-stage financing is provided by stock issued in an IPO. False. An IPO is a method of obtaining public investment, but it is usually not considered second-stage financing; it's a way for a company to raise significant capital once it's more established.
- Underpricing in an IPO is only a problem when the original investors are selling part of their holdings. False. Underpricing can leave money on the table for the issuing company regardless of whether original investors are selling part of their holdings.
- Stock price generally falls when the company announces a new issue of shares. This is attributable to the information released by the decision to issue. True. When a company announces a new issue of shares, stock price can fall due to the potential dilution of existing shares and what the new issue indicates about the company's current capital requirements.
Small companies raise money from private investors like venture capitalists because it's difficult to generate sufficient public interest in a high-risk venture to justify an IPO. Venture capitalists often have better information about a company's prospects compared to potential bondholders because of their more involved role in the company's management and strategy.