Venture Capital Investing

When investing in venture capital, always keep onedeemed as normal cost. The size of the margin
thing in perspective. All investments have equal risk,depends on how management feels about the likely
and the average cost of capital for the firm can bevariation in cost. The cut- off point on an investment
used for evaluating investment proposals. Investmentvaries according to the judgment of management on
proposals differ in risk. An investment proposal tohow risky the project might be. In one company,
manufacture a new product, for example, is likely toreplacement investments are okayed if the expected
be more risky than one involving replacement of anpost-tax return exceeds 15 per cent but new
existing plant. In view of such differences, variationsinvestments are undertaken only if the expected
in risk need to be considered in venture capitalpost-tax return is greater than 20 per cent. Another
investment appraisal.company employs a short payback period of three
In many cases, the revenues expected from ayears for new investments. Its finance controller
project are conservatively estimated to ensure thatstated this rule as follows:
the viability of the proposed project is not easily"Our policy is to accept a new project only if it has a
threatened by unfavorable circumstances. The capitalpayback period of three years. We have never, as
budgeting systems often have built-in devices forfar as I know, deviated from this. The use of a short
conservative estimation.payback period automatically weeds out risky
A margin of safety in venture capital investing isprojects." Some companies calculate what may be
generally included in estimating cost figures. Thiscalled the overall certainty index, based on a few
varies between 10 and 30 per cent of what iscrucial factors affecting the success of the project.