Analysts observe that startup companies that receive large amounts of capital as initial seed funds during the early start-up stages, spend the seed money on things considered frivolous by investors, whereas startup companies that receive small amounts of seed capital do not. Thus, in order to ensure that startups do not spend seed money frivolously, investors should not give these startups large amounts of money as seed capital. 

Which of the following pieces of information would be most useful in evaluating the validity of the conclusion above?

  1. The difference between the average annual revenues of companies that ask for large amounts of money versus those that ask for smaller amounts of money as seed capital. 
  2. The average amount of seed money received by startups who receive large seed capitals.
  3. The educational background of the financial analysts who made this observation.
  4. The percentage of startups that receive no seed funding.
  5. Any differences among investors in the standard used to judge as expense as frivolous.

OA: E

Question type: Evaluate

Difficulty level: Hard

Summary of the argument: Evidence shows that for startups that receive large seed capital, their investors believe that these companies spend this money more frivolously than do other companies that receive smaller seed capital. 

  1. The argument is about the size of the seed investment and the nature of the spending, not the revenues before investment. 
  2. Average amount of seed capital does not give us the entire picture and is not useful. 
  3. Educational background of financial analysts is irrelevant to the argument. 
  4. Startups that receive no seed funding is out of scope. 
  5. Standards of what constitutes frivolous spending is relevant, as this would seriously question the validity of the investors’ conclusion. 
X

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