Applying jump-diffusion processes to liquidate and convert venture capital

Abstract

This study attempts to apply real options and expand the model designed by Lin and Huang [Lin, T.T., Huang, Y.T.: J. Technol. Manage. 8(3), 59-78 (2003)], which helps venture capital (VC) companies to optimize project exit decisions. The expected discounted factor and a jump-diffusion process combine to assess the value of a start-up company, and determine the threshold of the exit timing of liquidation or convertibility for establishing the optimal disinvestment evaluation model for VC companies. When the project value is below V(L)*, the VC company carries out liquidation, but when the project value exceeds V(C)*, the VC company performs convertibility. The project value is ranging between (V(L)*, V(C)*), and the best choice is holding the decision and waiting to carry out the rights of liquidation and convertibility next time. Besides, this work attempts to identify the expected discounted time in terms of the investment time for VC companies.