Start-up Companies Financed by Venture Capitalists have a much Lower Failure Rate than Companies Financed by Other Means.

Question: Start-up companies financed by venture capitalists have a much lower failure rate than companies financed by other means. Source of financing, therefore, must be a more important causative factor in the success of a start-up company than are such factors as the personal characteristics of the entrepreneur, the quality of strategic planning, or the management structure of the company.

Which of the following, if true, most seriously weakens the argument above?

1. Venture capitalists tend to be more responsive than other sources of financing to changes in a start-up company’s financial needs.
2. The strategic planning of a start-up company is a less important factor in the long-term success of the company than are the personal characteristics of the entrepreneur.
3. More than half of all new companies fall within five years.
4. The management structures of start-up companies are generally less formal than the management structures of ongoing businesses.
5. Venture capitalists base their decisions to fund start-up companies on such factors as the characteristics of the entrepreneur and the quality of strategic planning of the company.

Answer: E
Explanation: We have to choose the option that most seriously weakens the argument given in the passage to solve this GMAT Critical reasoning topic.

Let’s go through each of the options and find the one that fits the condition best.

Option A: Venture capitalists tend to be more responsive than other sources of financing to changes in a start-up company’s financial needs.
Option A states that venture capitalists are more responsive than any other source of financing for changes in a start-up company’s financial needs. This option only talks about funding by venture capitalists and nothing about the personal characteristics of the entrepreneur, quality of strategic planning, and management structure of the company. Since the conclusion of the above argument is drawn in relation to all these factors. This statement does not weaken the argument in any sense. So, Option A is incorrect.

Option B: The strategic planning of a start-up company is a less important factor in the long-term success of the company than are the personal characteristics of the entrepreneur.
According to Option B, the strategic planning of a start-up company is not an important factor in the long-term success as compared to the personal characteristics of the entrepreneur. This statement only talks about the strategic planning and personal characteristics of the entrepreneur. No mention of the funding by venture capitalists is there. So, this does not weaken the conclusion. Option B is incorrect.

Option C: More than half of all new companies fall within five years.
Option C states that more than half of the new companies collapse within five years. This statement is completely irrelevant to the argument as it does not talk about the strategic planning, the management structure of a company, the funding by venture capitalists, or their impact on a start-up company. Since it does not weaken the argument presented, Option C is incorrect.

Option D: The management structures of start-up companies are generally less formal than the management structures of ongoing businesses.
Option D states that the management structure of a start-up company is less formal than the management structure of ongoing businesses. This statement only talks about the management structure of the company and not about the relation between the management structure and funding by venture capitalists. Option D is incorrect.

Option E: Venture capitalists base their decisions to fund start-up companies on such factors as the characteristics of the entrepreneur and the quality of strategic planning of the company.
Option E states that the venture capitalists make their decision to fund the start-ups on the basis of the characteristics of the entrepreneur and the quality of strategic planning of the company. This statement talks about the strategic planning of the company and the personal characteristics of the entrepreneur on the venture capitalists. It shows that these factors influence venture capitalists’ decision and weakens the conclusion. So, Option E is correct.

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