Staging of venture capital investment: a real options analysis |
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Authors: | Yao-Wen Hsu |
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Institution: | (1) Asset Pricing and Infrastructure Economics Research Group (APIER), College of Management, National Taiwan University, No. 1, Sec. 4, Roosevelt Rd., Taipei, 10617, Taiwan, ROC |
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Abstract: | This paper uses contingent claims analysis to investigate the staging decision of venture capitalist (VC) in a principal-agent
framework. Venture capital investment opportunities are modeled as real options with multiple volatilities, and the entrepreneur’s
incentive is assumed to maximize the probability of getting funded in the next financing round. Two celebrated formulae in
the option pricing literature are generalized to evaluate these real options. We find that staging not only gives the VC a
waiting option but also mitigates the agency problem of the entrepreneur undertaking too conservative activities. Moreover,
we find that the VC tends to stage her investment when the expected growth rate of the venture’s market value is lower. However,
the risk-free interest rate is not an important factor in the staging decision. Our model also provides a good explanation
for existing empirical evidence on the staging of venture capital investment. |
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Keywords: | |
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