How do venture investors adjust for the belief that entrepreneurs tend to be overly optimistic in their sales forecast

Question

07-01-2021
Business

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How do venture investors adjust for the belief that entrepreneurs tend to be overly optimistic in their sales forecast

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AFOKE88 AFOKE88 · Answer 1 · 2021-01-07T10:42:38-05:00

Answer:

Explained below

Explanation:

Entrepreneurs usually get to be too optimistic in their sales and also cash flow forecasts.

Now, venture capitalists and other seasoned external investors know that the ability to forecast sales, and even cash flows, accurately, tend to be inversely related to the firms position in its life cycle.

Generally speaking, the more difficult it is to accurately forecast sales, the greater the riskiness of the venture. Due to that, the venture capitalists and other seasoned external investors normally adjust for this added difficulty by making sure the expected value of the entrepreneur's sales forecasts is adjusted downwards or by use of higher discount rates in order to value the cash flows of the venture.

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