REAL OPTION ANALYSIS OF VENTURE CAPITAL INVESTMENTS
Alexandra Posza
Department of Finance and Accounting, Faculty of Business and Economics, University of Pécs, Rákóczi Street 80. Pécs, Hungary
DOI: https://doi.org/10.31410/Balkans.JETSS.2020.3.1.64-77
Alexandra Posza
Department of Finance and Accounting, Faculty of Business and Economics, University of Pécs, Rákóczi Street 80. Pécs, Hungary
DOI: https://doi.org/10.31410/Balkans.JETSS.2020.3.1.64-77
Balkans Journal of Emerging Trends in Social Sciences, (2020) , Vol 3, No 1
ISSN: 2620-164X
ISSN: 2620-164X
Abstract: Venture capital investments play an important role in the development and growth of start-up companies that are characterized by a high degree of uncertainty and growth potential, and venture capital is also one of the major sources of financing for entrepreneurial businesses. In the case of venture capital investment, staging has a huge potential, so the venture capitalists keep the right to participate in further financing rounds. The real option approach as an evaluation method provides an opportunity to evaluate this kind of investment with the help of flexibility in the case of a high degree of uncertainty. The paper puts the emphasis on the evaluation and the effectiveness of venture capital investments primarily from the aspect of real option theory tested on Hungarian venture capital cases. The paper concludes that the option-based valuation methods are more suitable for evaluating venture capital investments than others, especially the discounted cash flow method.
Keywords: Real Option Theory, Strategic Flexibility, Uncertainty.
JEL Classifications O16
REFERENCES
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A Review of Literature. The International Journal of Business and Management,
4(1) pp. 98-118.
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Business Horizons, 43(6) pp. 15-22. DOI: 10.1016/s0007-6813(00)80017-8
Bergemann, D., & Hege, U. (2005). The Financing of Innovation: Learning and Stopping. R&D
Journal of Economics, 36(4), 719-752.
Black, F., & Scholes, M. (1973). The Pricing of Option and Corporate Liabilities. Journal of Political
Economy, 81(3) 637-654. DOI: 10.1086/260062
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and Real Options, Centre for Interuniversity Research and Analysis on Organisations
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Quantitative Analysis, 26(2), 153-164. DOI:10.2307/2331262
Bygrave, W. D., & Timmons, J. A. (1992). Venture Capital at the Crossroads’, Boston: Harvard
Business School Press.
Bygrave, W., Fast, N., Khoylian, R., Vincent, L., & Yue, W. (1989). Early Rates of Return of
131 Venture Capital Funds Started 1978-1984. Journal of Business Venturing, 4(2), 93-105.
DOI: 10.1016/0883-9026(89)90024-4
Carvalho, A. G., Calomiris, C., & Matos, J. A. (2005). Venture Capital as Human Resource Management.
NBER Working Paper Series, National Bureau of Economic Research. Cambridge,
2005 May.
Cassar, G. (2004). The Financing of Business Start-ups. Journal of Business Venturing, 19(2) 261-
283. DOI: 10.1016/s0883-9026(03)00029-6
Chotigeat, T., Pandey, I. M., & Kim, D. J. (1997). Venture Capital Evaluation in Emerging Markets.
Multinational Business Review, 5(2), 54-62.
Copeland, T. E., & Antikarov, V. (2001). Real Options: A Practitioner’s Guide. New York, Texere,
372 p.
Cox, J., Ross, S., &Rubinstein, M. (1979): Option pricing: A Simplified Approach. Journal of
Financial Economics. 7(3), 229-263.
Csapi V. (2018): A reálopciók első 40 éve, Vezetéstudomány, 49(9), 34-45. DOI: 10.14267/veztud.
2018.09.03
Cumming, D. J., & MacIntosh, J. G. (2001). Venture capital investment duration in Canada and
the United States. Journal of Multinational Financial Management, 11(4-5), 445–463.
DOI:10.1016/s1042-444x(01)00034-2
Dahiya, S., & Ray, K. (2012). Staged Investments in Entrepreneurial Financing. Journal of Corporate
Finance, 18(5) 1193-1216. DOI: 10.1016/j.jcorpfin.2012.07.002
Davis, M., Schachermayer, W., & Tompkins, R. G. (2004). The Evaluation of Venture Capital as
an Instalment Option: Valuing Real Options Using Real Options. In: Dangl T., Kopel M.,
Kürsten W. (eds) Real Options, ZfB-Ergänzungshefte: Gabler Verlag, Wiesbaden pp. 77-96.
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Making. Financial Management, 23(3), pp. 28-37. DOI: 10.2307/3665619
Gerasymenko, V., & Arthurs, J. D. (2014). New insights into venture capitalists’ activity: IPO
and time-to-exit forecast as antecedents of their post-investment involvement. Journal of
Business Venturing, 29(3), 405-420. DOI: 10.1016/j.jbusvent.2013.06.003
Gompers, P. A. (1995). Optimal Investment, Monitoring, and the Staging of Venture Capital. The
Journal of Finance, 50(5), 1461-1489. DOI:10.2307/2329323
Gompers, P., & Lerner, J. (1999): The Venture Capital Cycle. Cambridge: The MIT Press.
Gong, P., He, Z., & Meng, J. (2006). Time-dependent Volatility Multi-stage Compound Reap
Option Model and Application. Journal of Industrial Engineering and Engineering Management,
1–14.
Hartmann, M. (2006). Realoptionen als Bewertungsinstrument für frühe Phasen der Forschung
und Entwicklung in der pharmazeutischen Industrie. Genehmigte Dissertation. Berlin,
(Technische Universität Berlin), 256 p.
Hege, U., Schweinbacher, A., & Palomino, F. (2009). Venture Capital Performance: The Disparity
Between Europe and the United States. Finance, 30(1), 7-50. DOI: 10.2139/ssrn.482322
Herder, P. M., de Joode, J., Ligtvoet, A., Schenk, S., & Taneja, P. (2011). Buying real options.
Valuing uncertainty in infrastructure planning. Futures, 43(4), 961-969. DOI: 10.1016/j.futures.
2011.06.005
Hommel, U., & Pritsch G. (1999). Marktorientierte Investitionsbewertung Mit Dem Realoptionsansatz.
Finanzmarkt und Portfoliomanagement, 13(2), 115-144.
Hsu, D. H. (2002). What Do Entrepreneurs Pay for Venture Capital Affiliation? Hsu, David H.,
What Do Entrepreneurs Pay for Venture Capital Affiliation? University of Pennsylvania
Wharton School Working Paper. Available at SSRN: https://ssrn.com/abstract=350380 or
http://dx.doi.org/10.2139/ssrn.350380
Huang, Y., & Chou, S. (2006). Valuation of Minimum Revenue Guarantee and the Option to
Abandon in BOT Infrastructure Projects. Construction Management and Economics,
24(4), 379-389. DOI: 10.1080/01446190500434997
Jägle, A. J. (1999). Shareholder Value, Real Options, and Innovation in Technology Intensive
Companies. R&D Management, 29(3) 271–288. DOI: 10.1111/1467-9310.00136
Karsai, J. (2006). Kockázati tőke európai szemmel. Közgazdasági Szemle, LIII, 1023-1051.
Karsai, J., Wright, M. Dudzinski, Z., & Morovic, J. (1998). Screening and Valuing Venture Capital
Investments: Evidence from Hungary, Poland and Slovakia, Entrepreneurship and Regional
Development, 10, 203-224. DOI: 10.1080/08985629800000012
Ko, C., Lin. T. T., & Yang, C. (2011). The Venture Capital Entry Model on Game Options with
Jump-diffusion Process. International Journal of Production Economics, 134, 87-94. DOI:
10.1016/j.ijpe.2011.02.016
Kogut, B., & Kulatilaka, N. (2001). Capabilities as Real Options. Organization Science, 12(6),
744-758. DOI: 10.1287/orsc.12.6.744.10082
Landier, A. (2002). Startup Financing: From Banks to Venture Capital. Working Paper – Massachusetts
Institute of Technology.
Landström, H. (2007). Handbook of Research on Venture Capital. Cheltenham, U.K.: Edward
Elgar Publishing Ltd.
Lee, J. (2018). Venture Capital and Firm Performance. The Korean Experience in a Global Perspective.
New York: Routledge.
Li, Y. (2008). Duration Analysis of Venture Capital Staging: A Real Options Perspective. Journal
of Business Venturing, 23(5), 497-512. DOI: 10.1016/j.jbusvent.2007.10.004
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Luehrman, T. A. (1998). Investment Opportunities as Real Options: Getting Started on the Numbers.
Harvard Business Review, 76(7-8), 51-67.
Lukas, E., Mölls, S., & Welling, A. (2016). Venture capital, staged financing and optimal funding
policies under uncertainty. European Journal of Operational Research, 250(1), 305-313.
DOI: 10.1016/j.ejor.2015.10.051
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of Financial Economics, 18(1) 7-27. DOI: 10.3386/w1654
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Metrick, A., & Yasuda, A. (2011). Venture Capital and the Finance of Innovation. Hoboken, New
Jersey (USA): John Wiley & Sons
Miltersen, K., & S. Schwart, E. (2004). R&D Investments with Competitive Interactions. Review
of Finance, 8(3), 355-401. DOI: 10.3386/w10258
Park, C. S., & Herath, H. S. B. (2000). Exploiting Uncertainty-Investment Opportunities as Real
Options: A New Way of Thinking in Engineering Economics. The Engineering Economist,
45(1), 1-36. DOI: 10.1080/00137910008967534
Pennings, E., & Lint, O. (1997). The Option Value of Advanced R&D. European Journal of Operational
Research, 103(1), 83-94.
Pless, J., & Arent, D. J., Logan, J., Cochran, J., Zinaman, O. (2016). Quantifying the Value of
Investing in Distributed Natural Gas and Renewable Electricity Systems as Complements:
Applications of Discounted Cash Flow and Real Options Analysis with Stochastic Inputs.
Energy Policy, 97 378–390.
Pritsch, G. (2000). Realoptionen als Controlling-Instrument: Das Beispiel Pharmazeutische
Forschung und Entwicklung. Wiesbaden: Deutscher Universitätsverlag;
Rodrigues, A., & Armada, M. (2007): The Valuation of Modular Projects: A Real Options Approach
to the Value of Splitting. Global Finance Journal, 18(2), 205-227. DOI: 10.1016/j.
gfj.2006.10.002
Rosenbusch, N., & Brinckmann, J., Müller, V. (2013). Does Acquiring Venture Capital Pay Off
for the Funded Firms? A Meta-analysis on the Relationship Between Venture Capital Investment
and Funded Firm Financial Performance. Journal of Business Venturing, 28(3),
335–353. DOI: 10.1016/j.jbusvent.2012.04.002
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61.
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Szakmai füzetek. 19, 50-63.
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of Financial Economics, 27, 473-521. DOI: 10.1016/0304-405x(90)90065-8
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Option Approach in Practice. Göttingen, Cuvillier Verlag, 309 p.
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Keywords: Real Option Theory, Strategic Flexibility, Uncertainty.
JEL Classifications O16
REFERENCES
Adetunji, O., & Owolabi, A. (2016). The Evolution of Real Options and its Applications in Management:
A Review of Literature. The International Journal of Business and Management,
4(1) pp. 98-118.
Adler, R. W. (2000). Strategic Investment Decision Appraisal Techniques: The Old and the New.
Business Horizons, 43(6) pp. 15-22. DOI: 10.1016/s0007-6813(00)80017-8
Bergemann, D., & Hege, U. (2005). The Financing of Innovation: Learning and Stopping. R&D
Journal of Economics, 36(4), 719-752.
Black, F., & Scholes, M. (1973). The Pricing of Option and Corporate Liabilities. Journal of Political
Economy, 81(3) 637-654. DOI: 10.1086/260062
Boyer, M., Christoffersen, P., Lassere, P., & Pavlov, A. D. (2003). Value Creation, Risk Management,
and Real Options, Centre for Interuniversity Research and Analysis on Organisations
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4816345_Value_creation_risk_management_and_real_options (2018.10.02).
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Breen, R. (1991). The Accelerated Binomial Option Pricing Model. The Journal of Financial and
Quantitative Analysis, 26(2), 153-164. DOI:10.2307/2331262
Bygrave, W. D., & Timmons, J. A. (1992). Venture Capital at the Crossroads’, Boston: Harvard
Business School Press.
Bygrave, W., Fast, N., Khoylian, R., Vincent, L., & Yue, W. (1989). Early Rates of Return of
131 Venture Capital Funds Started 1978-1984. Journal of Business Venturing, 4(2), 93-105.
DOI: 10.1016/0883-9026(89)90024-4
Carvalho, A. G., Calomiris, C., & Matos, J. A. (2005). Venture Capital as Human Resource Management.
NBER Working Paper Series, National Bureau of Economic Research. Cambridge,
2005 May.
Cassar, G. (2004). The Financing of Business Start-ups. Journal of Business Venturing, 19(2) 261-
283. DOI: 10.1016/s0883-9026(03)00029-6
Chotigeat, T., Pandey, I. M., & Kim, D. J. (1997). Venture Capital Evaluation in Emerging Markets.
Multinational Business Review, 5(2), 54-62.
Copeland, T. E., & Antikarov, V. (2001). Real Options: A Practitioner’s Guide. New York, Texere,
372 p.
Cox, J., Ross, S., &Rubinstein, M. (1979): Option pricing: A Simplified Approach. Journal of
Financial Economics. 7(3), 229-263.
Csapi V. (2018): A reálopciók első 40 éve, Vezetéstudomány, 49(9), 34-45. DOI: 10.14267/veztud.
2018.09.03
Cumming, D. J., & MacIntosh, J. G. (2001). Venture capital investment duration in Canada and
the United States. Journal of Multinational Financial Management, 11(4-5), 445–463.
DOI:10.1016/s1042-444x(01)00034-2
Dahiya, S., & Ray, K. (2012). Staged Investments in Entrepreneurial Financing. Journal of Corporate
Finance, 18(5) 1193-1216. DOI: 10.1016/j.jcorpfin.2012.07.002
Davis, M., Schachermayer, W., & Tompkins, R. G. (2004). The Evaluation of Venture Capital as
an Instalment Option: Valuing Real Options Using Real Options. In: Dangl T., Kopel M.,
Kürsten W. (eds) Real Options, ZfB-Ergänzungshefte: Gabler Verlag, Wiesbaden pp. 77-96.
Fried, V. H., & Hisrich, R. D. (1994). Toward a Model of Venture Capital Investment Decision
Making. Financial Management, 23(3), pp. 28-37. DOI: 10.2307/3665619
Gerasymenko, V., & Arthurs, J. D. (2014). New insights into venture capitalists’ activity: IPO
and time-to-exit forecast as antecedents of their post-investment involvement. Journal of
Business Venturing, 29(3), 405-420. DOI: 10.1016/j.jbusvent.2013.06.003
Gompers, P. A. (1995). Optimal Investment, Monitoring, and the Staging of Venture Capital. The
Journal of Finance, 50(5), 1461-1489. DOI:10.2307/2329323
Gompers, P., & Lerner, J. (1999): The Venture Capital Cycle. Cambridge: The MIT Press.
Gong, P., He, Z., & Meng, J. (2006). Time-dependent Volatility Multi-stage Compound Reap
Option Model and Application. Journal of Industrial Engineering and Engineering Management,
1–14.
Hartmann, M. (2006). Realoptionen als Bewertungsinstrument für frühe Phasen der Forschung
und Entwicklung in der pharmazeutischen Industrie. Genehmigte Dissertation. Berlin,
(Technische Universität Berlin), 256 p.
Hege, U., Schweinbacher, A., & Palomino, F. (2009). Venture Capital Performance: The Disparity
Between Europe and the United States. Finance, 30(1), 7-50. DOI: 10.2139/ssrn.482322
Herder, P. M., de Joode, J., Ligtvoet, A., Schenk, S., & Taneja, P. (2011). Buying real options.
Valuing uncertainty in infrastructure planning. Futures, 43(4), 961-969. DOI: 10.1016/j.futures.
2011.06.005
Hommel, U., & Pritsch G. (1999). Marktorientierte Investitionsbewertung Mit Dem Realoptionsansatz.
Finanzmarkt und Portfoliomanagement, 13(2), 115-144.
Hsu, D. H. (2002). What Do Entrepreneurs Pay for Venture Capital Affiliation? Hsu, David H.,
What Do Entrepreneurs Pay for Venture Capital Affiliation? University of Pennsylvania
Wharton School Working Paper. Available at SSRN: https://ssrn.com/abstract=350380 or
http://dx.doi.org/10.2139/ssrn.350380
Huang, Y., & Chou, S. (2006). Valuation of Minimum Revenue Guarantee and the Option to
Abandon in BOT Infrastructure Projects. Construction Management and Economics,
24(4), 379-389. DOI: 10.1080/01446190500434997
Jägle, A. J. (1999). Shareholder Value, Real Options, and Innovation in Technology Intensive
Companies. R&D Management, 29(3) 271–288. DOI: 10.1111/1467-9310.00136
Karsai, J. (2006). Kockázati tőke európai szemmel. Közgazdasági Szemle, LIII, 1023-1051.
Karsai, J., Wright, M. Dudzinski, Z., & Morovic, J. (1998). Screening and Valuing Venture Capital
Investments: Evidence from Hungary, Poland and Slovakia, Entrepreneurship and Regional
Development, 10, 203-224. DOI: 10.1080/08985629800000012
Ko, C., Lin. T. T., & Yang, C. (2011). The Venture Capital Entry Model on Game Options with
Jump-diffusion Process. International Journal of Production Economics, 134, 87-94. DOI:
10.1016/j.ijpe.2011.02.016
Kogut, B., & Kulatilaka, N. (2001). Capabilities as Real Options. Organization Science, 12(6),
744-758. DOI: 10.1287/orsc.12.6.744.10082
Landier, A. (2002). Startup Financing: From Banks to Venture Capital. Working Paper – Massachusetts
Institute of Technology.
Landström, H. (2007). Handbook of Research on Venture Capital. Cheltenham, U.K.: Edward
Elgar Publishing Ltd.
Lee, J. (2018). Venture Capital and Firm Performance. The Korean Experience in a Global Perspective.
New York: Routledge.
Li, Y. (2008). Duration Analysis of Venture Capital Staging: A Real Options Perspective. Journal
of Business Venturing, 23(5), 497-512. DOI: 10.1016/j.jbusvent.2007.10.004
Lorenz, A. (1989). Venture Capital Today. London: Woodhead Faulkner.
Luehrman, T. A. (1998). Investment Opportunities as Real Options: Getting Started on the Numbers.
Harvard Business Review, 76(7-8), 51-67.
Lukas, E., Mölls, S., & Welling, A. (2016). Venture capital, staged financing and optimal funding
policies under uncertainty. European Journal of Operational Research, 250(1), 305-313.
DOI: 10.1016/j.ejor.2015.10.051
Majd, S., & Pindyck, R. (1987). Time to Build, Option Value, And Investment Decisions. Journal
of Financial Economics, 18(1) 7-27. DOI: 10.3386/w1654
Maula, M. V. J. (2007). Corporate Venture Capital as a Strategic Tool for Corporations, In:
Metrick, A., & Yasuda, A. (2011). Venture Capital and the Finance of Innovation. Hoboken, New
Jersey (USA): John Wiley & Sons
Miltersen, K., & S. Schwart, E. (2004). R&D Investments with Competitive Interactions. Review
of Finance, 8(3), 355-401. DOI: 10.3386/w10258
Park, C. S., & Herath, H. S. B. (2000). Exploiting Uncertainty-Investment Opportunities as Real
Options: A New Way of Thinking in Engineering Economics. The Engineering Economist,
45(1), 1-36. DOI: 10.1080/00137910008967534
Pennings, E., & Lint, O. (1997). The Option Value of Advanced R&D. European Journal of Operational
Research, 103(1), 83-94.
Pless, J., & Arent, D. J., Logan, J., Cochran, J., Zinaman, O. (2016). Quantifying the Value of
Investing in Distributed Natural Gas and Renewable Electricity Systems as Complements:
Applications of Discounted Cash Flow and Real Options Analysis with Stochastic Inputs.
Energy Policy, 97 378–390.
Pritsch, G. (2000). Realoptionen als Controlling-Instrument: Das Beispiel Pharmazeutische
Forschung und Entwicklung. Wiesbaden: Deutscher Universitätsverlag;
Rodrigues, A., & Armada, M. (2007): The Valuation of Modular Projects: A Real Options Approach
to the Value of Splitting. Global Finance Journal, 18(2), 205-227. DOI: 10.1016/j.
gfj.2006.10.002
Rosenbusch, N., & Brinckmann, J., Müller, V. (2013). Does Acquiring Venture Capital Pay Off
for the Funded Firms? A Meta-analysis on the Relationship Between Venture Capital Investment
and Funded Firm Financial Performance. Journal of Business Venturing, 28(3),
335–353. DOI: 10.1016/j.jbusvent.2012.04.002
Rózsa A. (2004). Stratégiai beruházások reálopciós megközelítése. Vezetéstudomány, 35(2), 53-
61.
Rózsa A. (2007). A reálopciók lehetőségei és korlátai a stratégiai beruházások értékelésében.
Szakmai füzetek. 19, 50-63.
Sahlman, W. A. (1990). The Structure and Governance of Venture Capital Organizations. Journal
of Financial Economics, 27, 473-521. DOI: 10.1016/0304-405x(90)90065-8
Sahlman, W. A. (1993). Aspects of Financial Contracting in Venture Capital. In: Chew, D. H.
(ed.): The New Corporate Finance: Where Theory Meets Practice. New York: McGraw-
Hill, p. 229-242.
Schulmerich, M. (2010). Real Options Valuation: The Importance of Interest Rate Modelling in
Theory and Practice. 2nd Edition, Berlin, Springer, 389 p.
Scialdone, P. (2007). Valuing Managerial Flexibility: Challenges and Opportunities of the Real
Option Approach in Practice. Göttingen, Cuvillier Verlag, 309 p.
Seppa, T. J., & Laamanen, T. (2001). Valuation of Venture Capital Investments: Empirical Evidence.
R and D Management, 31(2), pp. 215–230. DOI:10.1111/1467-9310.00211
Smith, J. A., & Cordina, R. (2014). The Role of Accounting in High-Technology Investments. The
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Association of Economists and Managers of the Balkans
- UdEkoM Balkan -
179 Ustanicka St, 11000 Belgrade, Republic of Serbia
E-mail: [email protected]
www.udekom.org.rs
- UdEkoM Balkan -
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