A Study On The Evaluation Of Venture Capital Project Based On Real Options

In 1946, venture capital emerged in the USA. Because of it, the USA had an economy boom of low-inflation,low-unemployment for a long time in the last half century. Venture Capital played an important role in the development of economy in the USA. So in China, the government did many things for the venture capital such as establishing CHINANASDAQ. But in the end the venture capital did not make much progress. If we pay attention to the venture capital of China, we could find that it is not the problem of withdraw but the project evaluation that influence the venture capital development. So this paper paid much attention to the evaluation of the project. First we compared the traditional evaluation methods: Price to Earnings (P/E) method and Net Present Value (NPV) method with the option pricing. We find that there are many weakness in the traditional methods. The reason is that NPV method based on the Discounted Cash Flow (DCF) method which did not consider the uncertainty in evaluation. And we could not find the enterprise that is similar to the venture capital enterprise. So we could not use these methods to evaluate the venture capital project. On the other hand, because the venture capital has the property of options, we introduced the real options to analyze the problem on the basis of options. We use Black-Scholes model and binomial model with the traditional NPV method to evaluate the project. Finally we find the way that the value of the venture capital project is the sum of NPV and the value of option premium in the project. On basis of that, we analyzed the different options that included in the project. In the end we used a real example to prove the evaluation of the venture capital project.