When investing in venture capital, keep one thing in perspective. All investments have equivalent risk, and also the normal cost of funds for the firm may be used for assessing investment proposals. Investment proposals differ in danger. An investment proposal to manufacture a new item, as an example, is very likely to become more insecure than one involving the replacement of an existing plant. In view of such gaps, variations in risk have to be considered in enterprise capital investment evaluation.
In many cases, the earnings expected from a job are conservatively estimated to ensure that the viability of this proposed project isn't easily threatened by unfavorable circumstances. The capital budgeting methods often have built-in apparatus for conservative estimation.
A margin of safety within venture capital investing is generally contained in estimating price amounts. This varies between 10 and 30 percent of what is deemed as normal price. The size of this margin is dependent upon how management feels about the likely variation in price. The cut- off line on an investment varies according to the judgment of direction on how insecure the project may be. In one company, substitute investments are okayed if the anticipated post-tax return exceeds 15 per cent but new investments are undertaken only if the expected post-tax return is higher than 20 percent. Another company employs a brief payback period of three years to get new investments. Its finance control said this rule : financial investment
"Our policy will be to accept a new job only if it has a payback period of 3 years. We have never, so far as I know, deviated from this. The usage of a short payback period automatically weeds out more speculative projects." Some businesses calculate what might be known as the overall certainty indicator, dependent on some crucial elements affecting the achievement of the undertaking.