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Venture capital investment decisions and frameworks Essay Example

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Venture capital investment decisions and frameworks

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Venture capital investment decisions and frameworks. That venture capital can be analyzed through a real options lens and distinguish a project strategy, which has its focus on economic profit potential, from an option strategy, which has its focus on future growth opportunities embedded in entrepreneurial investments. Some research studies have also analyzed venture capital contract design issues from a real options perspective (Cossin, Leleux, & Saliasi, 2002). Despite the fact that venture capital contracts display some contingent claims features, little research has been conducted to investigate venture capital investment decisions from a real options lens. My dissertation develops such a real options framework of CVC investment propensity, which complements extant behavioral perspectives of CVC investment decisions.

How should established firms decide whether to make corporate venture capital (CVC) investments with uncertain future prospects? This is an important question as the economic significance of CVC has increased over the years. CVC, as a type of external corporate venturing, is a minority equity investment that established firms make in independent entrepreneurial ventures that are fairly new and not publicly traded (Dushnitsky, 2004; Roberts & Berry, 1985). For established firms, venture capital investments have often been touted by both academia and practitioners as windows on opportunities and, in particular, windows on new technologies (Chesbrough, 2002; Dushnitsky & Lenox, 2005a). For entrepreneurial ventures, established firms, together with institutional investors and wealthy individuals, are among the more important sources of funding.Despite the economic importance of corporate venture capital, established firms face at least two major challenges in making corporate venture capital investments. First, corporate venture capital may be plagued by information asymmetry and conflict of interest problems. With information asymmetry, it is difficult for established firms to ascertain ex ante the economic value of entrepreneurial ventures; ventures are also wary of disclosing too much information to established firms for fear of imitation. Expost of the investment, established firms may be concerned about lack of diligent efforts on the part of entrepreneurs and ventures about expropriation on the part of established firms. Existing research studies on corporate venture capital have provided useful insights on how these concerns about the behavioral tendencies of each party may. Venture capital investment decisions and frameworks.

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