Econ 483_Lecture 24_Venture Capital

Venture capital a venture capitalist is planning to

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Unformatted text preview: ed. Venture capital A venture capitalist is planning to invest in a bio-technology startup. It is expected that the startup will have 0.5, 0.4, 0.4 and 0.1 failure probabilities respectively in the …rst 4 years. If it is successful, the payo¤ will be $2M. For the risk taken, the discount rate is 30%. How much is she willing to invest today? Lecture 24: Venture capital, Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved. Venture capital Lecture 24: Venture capital, Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved. Venture capital Probability of success: P (success ) = 0.5 0.6 0.6 Expected return = P (failure ) 0.9 = 0.162 0 + P (success ) 2M = 324, 000 Present value of return: PV = 324,0004 = 113, 441 ( 1 + 0 .3 ) The investor will be willing to invest only if the cost of investment (today) is less than $113, 441. The net present value need to be positive: 113, 441 K > 0 , 113, 441 > K Lecture 24: Venture capital, Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved....
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This note was uploaded on 03/16/2014 for the course ECON 483 taught by Professor Staff during the Spring '08 term at University of Illinois, Urbana Champaign.

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