Template-Type: ReDIF-Article 1.0
Author-Name: Balázs FazekasBalázs Fazekas
Author-Workplace-Name: PhD student at the University of Debrecen
Author-Email: fazekas.balazs@econ.unideb.hu.


Title: Value-Creating Uncertainty – A Real Options
Approach in Venture Capital

Abstract: This article investigates how venture capital is able and willing to enter the scene of
innovative startup enterprises as a primary source of finance, despite the significant
degree of uncertainty surrounding these firms. The paper explores venture capital’s
unique risk attitude by proposing a real options approach. The tools and mechanisms
applied by venture capitalists enable them to take advantage of the flexibility
and uncertainty associated with startups, to exploit the value-enhancing ability
stemming from continuous corporate learning, and to profit from the opportunities
offered by such firms. As a result, young, innovative enterprises receive a higher
rating from venture capital investors who are willing to participate and compete
with other sources of finance in the financing of such enterprises. At the same
time, the article points out that adapting the valuation applied in the case of
financial options to venture capital investments is methodologically problematic;
supplementing the real option valuation by decision trees may better capture the
value-enhancing effect of the flexibility inherent in startups.

Classification-JEL: G24, O31, M13
Keywords: venture capital, innovation, startup, real options
Journal: Financial and Economic Review  
Pages: 151–166
Volume: 15
Issue: 4
Year: 2016
File-URL: http://english.hitelintezetiszemle.hu/letoltes/balazs-fazekas.pdf
File-Format: Application/pdf
Handle: RePEc:mnb:finrev:v:15:y:2016:i:4:p:151-166