Duration analysis of venture capital staging: A real options perspective
Section snippets
Executive summary
This study examines the staging decision in venture capital from a real options perspective. Once the initial investment in a portfolio company is undertaken, the venture capital firm has an option to invest in each subsequent round. The staging decision can thus be viewed as whether to hold the current option to invest and wait or to invest now and obtain the option to invest subsequently. The current study proposes that this staging decision depends on the factors that influence the value of
Theory and hypotheses
Organizations and individuals make capital investments in order to create and take advantage of profitable opportunities. These investment opportunities are real options — rights but not obligations to take some action in the future. Therefore, capital investments are essentially about real options (Dixit and Pindyck, 1995). Real options create economic value by generating future decision rights, or more specifically, by offering management the flexibility to act upon new information such that
Data and sample
We test the real options view on the timing of staging using venture capital data collected from Venture Economics' VentureXpert database. We focus on standard venture capital investments in the U.S. We must drop investments for which portfolio companies' names are undisclosed, because such investments cannot be uniquely identified and the duration between financing rounds cannot be determined. The resulting sample includes 46,976 portfolio company-round pairs for 1975–2005, involving 3737
Analysis and results
Table 1 presents the mean and standard deviation of the measures. None of the correlations are sources of concern for multi-collinearity.
Table 2 reports the estimation results. Model 1 is the baseline model that includes all the control variables. Models 2–5 examine the effects of the variables of our interest. Model 6 is the full model specification with all the explanatory variables, and Models 7–8 are for robustness checks. The Wald chi square tests in Table 2 indicate that all the models
Discussion and conclusions
This study investigates the staging decision in venture capital. Venture capital firms have the choice between investing and delay at each round of financing. From a real options perspective, venture capital firms must decide whether to hold the current option to invest or to invest now and obtain an option to invest subsequently. This timing decision depends on the factors that influence the economic value of these two options, such as market uncertainty, competition, and project-specific
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I acknowledge funding from the Academy for Entrepreneurial Leadership at the University of Illinois at Urbana-Champaign. I thank Tailan Chi, Tim Folta, Glenn Hoetker, Huseyin Leblebici, Joseph Mahoney, Steven Michael, Dean Shepherd, Tony Tong, and the anonymous reviewers for their helpful comments. All errors remain mine.