Startup cash flows and venture capital investments: a real options approach

Donia Trabelsi () and Baran Siyahhan ()
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Donia Trabelsi: IMT-BS - DEFI - Département Droit, Économie et Finances - TEM - Télécom Ecole de Management - IMT - Institut Mines-Télécom [Paris] - IMT-BS - Institut Mines-Télécom Business School - IMT - Institut Mines-Télécom [Paris], LITEM - Laboratoire en Innovation, Technologies, Economie et Management (EA 7363) - UEVE - Université d'Évry-Val-d'Essonne - Université Paris-Saclay - IMT-BS - Institut Mines-Télécom Business School - IMT - Institut Mines-Télécom [Paris], KIND - Dynamique des réseaux, de l'innovation et de la connaissance - IMT-BS - Institut Mines-Télécom Business School - IMT - Institut Mines-Télécom [Paris]
Baran Siyahhan: IMT-BS - DEFI - Département Droit, Économie et Finances - TEM - Télécom Ecole de Management - IMT - Institut Mines-Télécom [Paris] - IMT-BS - Institut Mines-Télécom Business School - IMT - Institut Mines-Télécom [Paris], LITEM - Laboratoire en Innovation, Technologies, Economie et Management (EA 7363) - UEVE - Université d'Évry-Val-d'Essonne - Université Paris-Saclay - IMT-BS - Institut Mines-Télécom Business School - IMT - Institut Mines-Télécom [Paris], KIND - Dynamique des réseaux, de l'innovation et de la connaissance - IMT-BS - Institut Mines-Télécom Business School - IMT - Institut Mines-Télécom [Paris]

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Abstract: This paper studies venture capitalists' (VCs') sequential investment decisions in a real options model. We account for VCs' risk aversion, agency costs and VC activism. We identify two separate investment policies: when startups have positive cash flows, more risk averse and more active VCs expedite their investments while higher agency costs delay staged investments. The opposite is true for negative-cash-flow startups. The model predicts a negative relation between risk aversion and stage length in line with the idea that VCs use stage length as a monitoring tool. We also show that higher growth rates and lower volatility encourage earlier investments.

Keywords: Venture capital; Real options; Sequential investment (search for similar items in EconPapers)
Date: 2021-04
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Citations: View citations in EconPapers (1)

Published in Managerial and Decision Economics, 2021, 42 (3), pp.737-750. ⟨10.1002/mde.3269⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03005414

DOI: 10.1002/mde.3269

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