Venture capital and sequential investments: a real options approach
Résumé
We present a real options model that analyzes venture capitalists' (VCs') timing of sequential investments and stage length decisions. Our approach complements existing models by accounting for VCs' risk aversion, agency costs and VC activism in the startups. We identify two separate investment policies depending on whether the startup generates positive cash flows: optimal investment triggers decrease (increase) in the level of risk aversion when the startup generates positive (negative) cash flows. Stage length is shorter for both positive- and negative-cash-flow startups when VCs are more risk averse. We show that both agency costs and VC activism influences stage length.