Risk and Return

Chandra S. Mishra
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Chandra S. Mishra: Florida Atlantic University

Chapter Chapter Eight in Getting Funded, 2015, pp 193-218 from Palgrave Macmillan

Abstract: 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.

Keywords: Investment Opportunity; Capital Asset Price Model; Hurdle Rate; Percent Chance; Risk Experiment (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-137-38450-8_8

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DOI: 10.1057/9781137384508_8

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