The Real Options Analysis Of Venture Capitalist's Optimal Investment Strategy

The real options approach is a method has been accepted by more and more investors for valuing project. Using real options approach to valuing risky investment decision flexibilities is a new research trend in financial economics and management science. In recent years, the rapid development of venture capital industry, which provides the real options approach very rich background research. This paper suggests that property rights are weak, venture capitalist has two options when he faces the project shown by the owner. The first one is venture capitalist expropriates the owner's project, and undertakes on his own; the other one is cooperating with the owner, and sharing some rents from the project with the owner. Therefore, the venture capitalist needs to decide the optimal option strategy and the optimal investment strategy. And the investment strategy's selection is mainly based on the comparison of valuations of the project in both cases. Using stochastic analysis, the values of two real options about the decision of the project are derived, and then developing the optimal strategy on the basis of two values.This paper first provides the project valuation when the venture capitalist and the project's owner cooperate with each other. The research result gives the venture capitalist's optimal investment rule. And this paper also analyses some parameters'impact on the value of invest option and investment threshold.Secondly, the paper suggests that the property right is weak. ie. Once the owner of the project discloses the project to the venture capitalist, the latter expropriates the project but not finance for him. If the venture capitalist does so, he needs to pay a certain amount of compensation to the project's owner. Using real options approach, the paper get the venture capitalist's investment value and investment threshold. This paper also analyses some parameters'impact on the investment value and the investment threshold. The outcome is not similar with result of the standard option pricing model.Finally, this paper focus on the venture capitalist's investment strategy when venture capitalist has two options. If the venture capitalist needs to decide on initial time, through comparison two investment values. We get the optimal option strategy. If not, consider the venture capitalist has a better-of option, combing two risky assets'Black-Scholes equation, the paper gets the value of this option and then analyses some parameters'effect on it.