An Applied Research On The Decision Of Venture Capital Based On Real Option

With the knowledge economy arrival, the technical innovation has become the key of the economic development. At present the Chinese enterprises when carry on the technical innovation, may lack the fund. Generally speaking, the way to solve the problem is venture capital.The venture capital plays the role which could not be substituted in the high tech enterprise's development. The most successful example is US. As a result of the venture capital, US's industry and GDP can grow rapidly.In China, recently venture capital's growth was rapid, but the success ratio was not high and the benefit was not good. Because venture capital starts late in our country and policy environment needs improvement, specially lacks the effective venture capital decision-making method. Therefore, how to apply venture capital decision-making method, reduce the risk and enhance the success ratio is the key.The traditional venture capital decision-making method is NPV. As classical method, it is an important basis in decision-making. But with the use of NPV, we discovered that it had the insufficiency in certain aspects. The real option has made up the NPV's insufficiency. Real options method views the investment opportunity of managerial flexibility as a series of options that can achieve returns on investment. It greatly breaks through the limitation and manacles of the traditional investment evaluation, adapting well to the new investment environment characterized by uncertainty and risk, and offering a revolutionary solution to quantify the managerial flexibility and strategic adaptability. The introduction of the real options approach in venture capital decision can provide a new idea of venture capital management and scientific decision, which has certain innovative meanings.In 1973, Black and Scholes published《the pricing of options and corporate liabilities》in《Journal of Po1itical Economy》.In this paper, they inferred the B1ack—Scholes Model. Merton published《theory of rational option pricing》in《Bell Journal of Economics and Management Sciences》. These two papers have laid the foundation of option. Stephen Ross said that option is the most successful economic theory. Form 1990's, based on the B1ack—Scholes Model, so many persons have the strong interest in real option. In fact, we can use the option pricing model to check any contract which its price depends on the value of future property.Manager can control risk with certain cost in the help of option. Because option means the loss is limited and the potential is infinite. Now, in China, investment programs face massive uncertainty, for example, chaotic price in stock market, accidental factor in high-tech, high risk in loan .So, option is suit for China. The thinking mode of option can help us challenging uncertainty.The application of option does not mean direct utilization of formula. The option theory is strictly follows the scientific procedure and rule. It is a system process which deal with uncertainty in financial life. So we insist that option is analysis tool, thought method.On the purpose of promoting the development of venture capital, the research work is carried out around the application in the venture capital decision of real options. The paper mainly includes the following content and achievements. Firstly, the paper discusses the existing major problem in the venture capital operation based on the analysis of the development significance and current status of the venture capital of our country. Secondly, by the analysis of future uncertainty, the paper discusses the limitation of the tradition investment decision method used in the decision of venture project and the advance of venture capital decision with real options. Thirdly, through the discuss of the essential concept, basic feature and common option pricing theory, the common idea of establishing the option-based evaluation methods is summarized, and the applied frame of real option is constructed. Finally, the paper the paper proposes the improvement in view of method feasibility, usability and structure rigorousness.This paper include five parts, part 1 to part 3 is main content:Foreword: Research goal, significance and background, literature summary.Part 1: Introduces the basic content of venture capital. Part 2: Introduces the basic content of real option.Part 3: An applied research on the decision of venture capital based on real option.Part 4: Conclusion about research content, weak point and forecast. The real option is a new research topic, needs knowledge from many disciplines, for example, Finance, investment, technical economics, financial control, etc. With this knowledge, I use the theory research and the practice research to finish this paper.Innovations in this paper include three points. Firstly, I make real option combined with venture capital. Secondly, I improve the traditional model. Last, I propose the solution for the problem in venture capital in China.At last, I must say that this article does not deny the traditional method. What I do is to revise the traditional method in order to show the managerial flexibility and uncertainty of project. I think these are good at the development of venture capital.