Decision Analysis in Venture Capital

Abstract

A number of decision criteria are evaluated in the context of a portfolio of investments in venture capital. The essence of this activity is that it is a sequential decision problem with stochastic time intervals between decisions, where the choice is to make an investment or not. The pay-off from the investment is a payment of random magnitude after a time interval of random length. Some of the criteria used in security portfolio analysis are adapted for use in this context and compared with simpler criteria. Due to the typically risky nature of these investments, the level of information about the investment is kept to a realistic level. The results of simulation experiments demonstrate effectively the benefit of using rational decision criteria, but that there is surprisingly little difference between the effects of these criteria.