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Risk and Return

In: Getting Funded

Author

Listed:
  • Chandra S. Mishra

    (Florida Atlantic University)

Abstract

Effective risk management is a core competency of successful entrepreneurs. The entrepreneur should determine what the most important uncertainties are and how to test and mitigate those uncertainties at the lowest cost. A framework is provided to develop the risk profile of a venture and develop an efficient risk mitigation plan. Do not simply use a high hurdle rate or the worst-case and best-case scenarios when qualifying potential investment opportunities. The company-killer risks should be prioritized and sequenced such that the deal-killer and incentive risks are tackled first, the path-dependent and critical operational risks next, and the remaining operational risks as they occur. The insurable risks and the nuisance risks can be addressed easily. The risk profile of a venture is determined. A framework is provided to estimate the risk of investment loss and the maximum potential investment loss. A two-stage due diligence procedure is shown to yield the risk-consistent and return-efficient investment opportunities. The venture delta may be used to assess the relative riskiness of a venture and to estimate the investor’s expected rate of return. The Venture Capital Asset Pricing Model (VCAPM) may be used to make venture investment and investor exit decisions.

Suggested Citation

  • Chandra S. Mishra, 2015. "Risk and Return," Palgrave Macmillan Books, in: Getting Funded, chapter 0, pages 193-218, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-38450-8_8
    DOI: 10.1057/9781137384508_8
    as

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