Investment Analysis Methodologies - Introduction

We have learnt a lot about "What and How" to pitch to Venture Capitalists, but have you ever wondered what is going on in Venture Capitalist's brain? What is the math and science behind VC's investment decisions? Would it not be great to understand the basis of VC's decisions? So I decided to go behind the scenes and get those formulae and present them here and try to explain them in layman terms. Please remember there are other criteria used by investors, my purpose here is to help entrepreneurs tailor their projections in such a way that it increases the probability of their success.
Here are some of the popular methodologies:

* Net Present Value (NPV) - Capital budgeting where the present value of cash inflows is subtracted by the present value of cash outflows
* Payback Period - Initial Outlay Recovery Period
* Internal Rate of Return (IRR) - the return that a company would earn if they expanded or invested in themselves, rather than investing that money abroad.
* Book Rate of Return - Profit from Investment to Initial Capital Outlay Ratio
* Discounted Cash Flows (DCF) - Attractiveness of an Investment opportunity.

I will be discussing each methodology in upcoming posts in layman terms. Have a wonderful weekend.

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