Entrepreneurship Overview Guide 5 — Questions and Answers
Question 1: What is the 'lean startup' methodology's core principle?
- Minimize headcount to reduce operating costs from day one
- Build-measure-learn cycles using a minimum viable product to reduce waste (Correct answer)
- Focus exclusively on organic growth without any external funding
- Launch only after the product is fully developed and tested
Correct answer: Build-measure-learn cycles using a minimum viable product to reduce waste
The lean startup approach uses rapid experimentation with an MVP to test hypotheses, gather real customer data, and iterate quickly before committing large resources.
Question 2: An entrepreneur notices that her company is consistently profitable but is struggling to pay bills on time. This problem is most likely caused by:
- Poor product quality
- Cash flow mismanagement despite positive net income (Correct answer)
- Excessive employee turnover
- Weak social media presence
Correct answer: Cash flow mismanagement despite positive net income
A company can be profitable on paper while experiencing cash flow problems if revenue is collected slowly or expenses are due before customers pay.
Question 3: Which of the following BEST describes 'disruptive innovation' as defined by Clayton Christensen?
- A costly premium product that outperforms all competitors
- An innovation that initially targets overlooked segments before displacing established players (Correct answer)
- A sudden technological breakthrough funded by large corporations
- An advertising campaign that disrupts competitor marketing strategies
Correct answer: An innovation that initially targets overlooked segments before displacing established players
Disruptive innovation starts in low-end or new market footholds and gradually moves upmarket, eventually displacing incumbent products that are over-engineered for average customers.
Question 4: What is the primary risk of taking on venture capital funding for an entrepreneur?
- Interest payments increase the company's debt load
- The entrepreneur must give up equity and some control over business decisions (Correct answer)
- Venture capital is only available to publicly traded companies
- The funding must be repaid within one year
Correct answer: The entrepreneur must give up equity and some control over business decisions
Accepting venture capital means selling ownership stakes, which dilutes the founder's control and requires alignment with investors on strategy, milestones, and exit timelines.
Question 5: What does 'due diligence' mean when an investor is considering funding a startup?
- The investor's legal obligation to pay dividends to existing shareholders
- A thorough investigation of the startup's financials, team, market, and legal standing before investing (Correct answer)
- The startup's duty to file quarterly reports with the SEC
- A background check required only for publicly traded companies
Correct answer: A thorough investigation of the startup's financials, team, market, and legal standing before investing
Due diligence is the comprehensive review process investors conduct to verify a startup's claims and assess risks before committing capital.
Question 6: A founder who holds 60% of her company's equity after multiple funding rounds has experienced:
- Debt consolidation
- Equity dilution (Correct answer)
- Profit sharing
- Stock buyback
Correct answer: Equity dilution
Equity dilution occurs when new shares are issued to investors, reducing the original founder's percentage ownership even if her total share count stays the same.
Question 7: Which of the following BEST describes a franchise business model?
- A startup that sells its software as a subscription service
- A licensing arrangement where a franchisor lets franchisees operate under its brand and system for a fee (Correct answer)
- A cooperative where all members share equally in profits and losses
- A joint venture between two independent companies to enter a new market
Correct answer: A licensing arrangement where a franchisor lets franchisees operate under its brand and system for a fee
In franchising, the franchisor grants franchisees the right to use its brand, systems, and support in exchange for upfront fees and ongoing royalties.
Entrepreneurship Overview Guide 5
What is the 'lean startup' methodology's core principle?