When investing in venture capital, always keep 1 thing in view. All investments have equivalent danger, and also the average cost of funds for the firm can be used for assessing investment proposals. Investment tips differ from risk. An investment proposal to manufacture a new product, by way of instance, is likely to become more risky than one involving replacement of an present plant. In view of these differences, variations in danger need to be considered in venture capital investment evaluation.
Oftentimes, the revenues expected from a job are conservatively estimated to be certain the viability of the proposed project is not readily threatened by unfavorable conditions. The capital budgeting systems frequently have built-in apparatus for conventional estimation.
A margin of safety within venture capital investing is usually contained in estimating cost amounts. This fluctuates between 10 and 30 percent of what's deemed as normal cost. The size of the margin depends on how management feels regarding the probable variation in cost. The cut- off point on an investment varies in line with the conclusion of management on how risky the undertaking might be. In 1 company, substitute investments are okayed when the anticipated post-tax yield exceeds 15 per cent but new investments have been undertaken only as long as the anticipated post-tax yield is higher than 20 percent. Another company employs a brief payback period of three years for new investments. Its fund controller stated this rule as follows: venture capital investment
"Our policy will be to accept a new job only if it's 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 indicator, based on a few crucial factors affecting the achievement of the undertaking.