Investment Timing for New Business Ventures

George W. Blazenko and Andrey D. Pavlov
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George W. Blazenko: Simon Fraser University
Andrey D. Pavlov: The Wharton School, University of Pennsylvania

Journal of Entrepreneurial Finance, 2010, vol. 14, issue 3, 37-68

Abstract: A key requirement for the start of many entrepreneurial business is private equity or venture capital financing. In the traditional approach to entrepreneurial investment analysis, an entrepreneur starts a new venture and a venture capitalist finances the new venture when business return exceeds the financial opportunity cost for comparable risk - the cost of capital for the new venture. The real options literature recommends that entrepreneurs delay business start due to investment irreversibility until business return reaches a threshold greater than the cost of capital. In this paper, we show that for new ventures with modest earnings volatility, an entrepreneur starts his/her business before return exceeds the cost of capital. We identify the circumstances in which the cost of capital is an unduly conservative return benchmark for the start of a new business and discuss the empirical implications of our findings.

Keywords: New ventures; business start; corporate investment; entrepreneurship (search for similar items in EconPapers)
JEL-codes: G31 M13 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (1)

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