Research On The Application Of Real Option On Venture Capital Decision Making

Venture capital is a kind of unconventional financing technology. It is a kind of financing technology combined with capital, technology, management and entrepreneurship. It is the incubator of high technology development. It helped a lot of famous corporation to succeed, such as Microsoft, IBM, Apple, Intel, ORCL and so on. In china, the speed of economic growth has been keeping fast since the reform and opening-up. But this kind of growth much depends on the growth of investing. The added value of intellectual property is far from enough. Under this circumstance, it is necessary for us to develop venture capital to promote fundamental shift in the mode of economic growth. Since the opening of the first venture capital company-CVIC in China in 1985, VC has developed fast. But it falls behind some other countries in general, especially to in domestic VC fund.In recent years, more and more scholars research on VC in our country. Lots of research is on the macroeconomic including the concept, the capital resource, exit route mechanism of VC. Research on the microeconomic such as the evaluation methodology of VC is not so much. In the field of investment decision making, the model of DCF is the most mature theory. But it has some defects when it is used in VC. It ignores the flexibility of management.The theory of real option can combine option and investment analysis. The theory the right of investing is like a kind of option. It makes full use of information asymmetry, uncertainty of the future and the flexibility of the right to invest. It is the characteristic of venture capital. It is also the problem that the conventional method can not solve, so it offers an opportunity for the application of real option theory. This paper studies on the theories of venture capital and real option, the application of real option in venture capital.In the first chapter, it introduces some relevant conception. Then it summarizes the characteristics of venture capital, including high risk, high profit, special invitee, and special investment. It introduces the operation process. In the last of the first chapter, it summarizes the development of venture capital in our country.In the second chapter, it introduces some conventional method in VC decision making, including the model of DCF, the model of appraisal ration and the method of comprehensive evaluation. After analyzing the principle and characteristic of the conventional methods, it indicates the defects of these methods when they are applied in venture capital.In the third chapter, it introduces the theory of real option, including its conception, background, the characteristic and classification of real option. It analyzes the feasibility of real option into venture capital decision making. Then it introduces the methods of computing the option value in venture capital project. The characteristics of venture capital such as flexibility, uncertainty, staged investment and so on. Then it constructs a frame for the application of real option in venture capital decision making. On the basis of the preceding theory, it researches on the methods calculating option value.The fourth chapter is empirical analysis. It analyzes two cases on the basis of the theory. In the first case, it applies B-S Pricing Model. It calculates the NPV of the venture capital case at first and makes a simulation using Monte Carlo simulation. Then it computes the option value by B-S and compares these two methods. In the second case, it applies the model of Binomial Tree. It analyzes the relationship between different options and calculating the overall value of real option in the venture capital project.In the fifth chapter, it gives some further reflection for the application of real option in venture capital decision making, including some defects of this method and the prospect of this theory.This paper makes a summary on the application of real option in venture capital on the basis of preeminent research and raises the opinion of the writer. It adopts both qualitative analysis and quantitative analysis. There are both theory research and empirical analysis. It constructs a frame for the use of real option. It is useful for some similar projects.