When investing in venture funds, keep 1 thing in perspective. All investments have equal risk, and the average cost of funds for your company may be used for evaluating investment proposals. Investment proposals differ in danger. An investment proposition to manufacture a new solution, as an example, is very likely to be much more risky than one between the replacement of an present plant. In view of such differences, variations in risk need to be considered in enterprise capital investment appraisal.
Oftentimes, the earnings expected from a job are conservatively estimated to be sure that the viability of the proposed project is not easily threatened by unfavorable circumstances. The capital budgeting methods frequently have built-in apparatus for conservative estimation.
A margin of security in venture capital investing is generally included in estimating price amounts. This varies between 10 and 30 percent of what is deemed as normal price. The size of this margin depends on how management feels concerning the possible variation in price. The cut- off point in an investment varies in line with the judgment of direction on how insecure the undertaking might be. In 1 company, replacement investments are okayed when the anticipated post-tax return exceeds 15 per cent but fresh investments have been undertaken only as long as the anticipated post-tax return is greater than 20 percent. Another provider employs a brief payback period of three years to get new investments. Its fund controller said this rule as follows: vc investment
"Our policy will be to accept a new job only if it's a payback period of 3 years. We've never, so far as I know, deviated from this. The use of a brief payback period automatically weeds out more hazardous jobs" Some businesses compute what may be known as the general certainty index, based on a few crucial elements affecting the achievement of the project.