Optimal investment and exit decision of venture capitals with multiple heterogeneous Beliefs

Abstract

Generally, traders hold different beliefs about the same project in venture capital activities. We propose a two-stage decision model with multiple heterogeneous beliefs using real options game theory. Based on this model, we analyse the optimal timing and amount of invested capital for venture capital in stage 1 (investing) and stage 2 (exiting). The results show that different beliefs decrease the optimal amount of invested capital but have little influence on the optimal investment timing, which accounts for the “agree to disagree” phenomenon. This negative effect can be offset by the learning process but can also be exacerbated by the differences in required returns.