When investing in venture capital, all the time preserve one thing in perspective. All investments have equal risk, and the common price of capital for the agency can be used for evaluating investment proposals. Funding proposals differ in risk. An investment proposal to fabricate a brand new product, for instance, is more likely to be more risky than one involving substitute of an existing plant. In view of such differences, variations in risk should be considered in venture capital investment appraisal.
In many cases, the revenues anticipated from a undertaking are conservatively estimated to make sure that the viability of the proposed undertaking is not simply threatened by unfavorable circumstances. The capital budgeting methods often have constructed-in gadgets for conservative estimation.
A margin of security in venture capital investing is usually included in estimating price figures. This varies between 10 and 30 per cent of what is deemed as normal cost. The scale of the margin depends upon how administration feels concerning the seemingly variation in cost. The minimize- off point on an investment varies according to the judgment of administration on how risky the undertaking might be. In a single company, substitute investments are okayed if the anticipated publish-tax return exceeds 15 per cent but new investments are undertaken provided that the anticipated publish-tax return is larger than 20 per cent. One other company employs a brief payback period of three years for brand spanking new investments. Its finance controller acknowledged this rule as follows:
?Our policy is to just accept a brand new undertaking provided that it has a payback period of three years. We have never, as far as I know, deviated from this. Using a brief payback period mechanically weeds out risky projects.? Some firms calculate what may be known as the overall certainty index, based on just a few essential factors affecting the success of the project.
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