When investing in venture funds, keep 1 thing in perspective. All investments have equal risk, and also the average cost of funds for the firm can be used for assessing investment proposals. Investment proposals differ in risk. An investment proposal to manufacture a new solution, by way of example, is very likely to be more insecure than one between the replacement of an existing plant. In view of such differences, variations in danger have to be thought about in venture capital investment evaluation.
Oftentimes, the revenues expected from a job are conservatively estimated to ensure the viability of this proposed project is not readily threatened by unfavorable conditions. The capital budgeting methods frequently have built-in devices for conventional estimation.
A margin of safety in venture capital investing is generally contained in estimating price figures. This fluctuates between 10 and 30 percent of what's termed as normal cost. The size of the margin is dependent upon how management feels concerning the likely variation in price. The cut- off line on an investment varies in line with the conclusion of management on how risky the project might be. In 1 company, substitute investments are okayed if the expected post-tax yield exceeds 15 per cent but fresh investments are undertaken only as long as the anticipated post-tax yield is higher than 20 per cent. Another provider employs a short payback period of 3 years for new investments. Its fund control stated this rule as follows: vc investment
"Our policy will be to take a new project only if it has a payback period of 3 years. We've never, so far as I know, deviated from this. The usage of a short payback period automatically weeds out risky projects." Some companies compute what may be called the general certainty index, based on some crucial factors affecting the success of the undertaking.