When investing in venture capital, always keep one thing in perspective. All investments have equivalent danger, and also the typical cost of funds for the firm can be used for assessing investment proposals. Investment proposals differ in danger. An investment proposition to produce a new product, for example, is very likely to become more insecure than one between the replacement of an present plant. In view of such differences, variations in risk have to be considered in enterprise capital investment appraisal.
Oftentimes, the revenues expected from a project are estimated to be sure the viability of this proposed project is not readily threatened by adverse circumstances. The capital budgeting methods often have built-in devices for conservative estimation.
A margin of safety within venture capital investing is usually included in estimating cost figures. This fluctuates between 10 and 30 percent of what is termed as normal price. The size of the margin is dependent upon how management feels about the probable variation in cost. The cut- off line on an investment varies according to the conclusion of direction on how insecure the undertaking may be. In one company, replacement investments are okayed if the expected post-tax yield exceeds 15 percent but fresh investments are undertaken only if the anticipated post-tax return is greater than 20 per cent. Another company employs a brief payback period of three years for new investments. Its fund control stated this rule as follows: startup accelerator
"Our policy is to take a new job only if it has a payback period of 3 years. We've never, as far as I know, deviated from this. The use of a brief payback period automatically weeds out speculative projects." Some companies calculate what might be known as the total certainty index, dependent on some crucial factors affecting the achievement of the undertaking.