Small Business Economics

, Volume 35, Issue 3, pp 265–281 | Cite as

Staging of venture capital investment: a real options analysis

  • Yao-Wen Hsu


This paper uses contingent claims analysis to investigate the staging decision of venture capitalist (VC) in a principal-agent framework. Venture capital investment opportunities are modeled as real options with multiple volatilities, and the entrepreneur’s incentive is assumed to maximize the probability of getting funded in the next financing round. Two celebrated formulae in the option pricing literature are generalized to evaluate these real options. We find that staging not only gives the VC a waiting option but also mitigates the agency problem of the entrepreneur undertaking too conservative activities. Moreover, we find that the VC tends to stage her investment when the expected growth rate of the venture’s market value is lower. However, the risk-free interest rate is not an important factor in the staging decision. Our model also provides a good explanation for existing empirical evidence on the staging of venture capital investment.


Venture capital Real options Staging Agency cost Compound options Contingent claims analysis 

JEL Classifications

G24 G13 D81 G31 L26 



The author is grateful to Bart Lambrecht, Mark Shackleton, and Gishan Dissanaike for their many helpful comments and suggestions. The author also thanks two anonymous referees for their comments that helped to improve the article substantially. The usual disclaimer applies.

Supplementary material

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Copyright information

© Springer Science+Business Media, LLC. 2008

Authors and Affiliations

  1. 1.Asset Pricing and Infrastructure Economics Research Group (APIER), College of ManagementNational Taiwan UniversityTaipeiTaiwan, ROC

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