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Investment Timing for New Business Ventures

Author

Listed:
  • George W. Blazenko

    (Simon Fraser University)

  • Andrey D. Pavlov

    (The Wharton School, University of Pennsylvania)

Abstract

A key requirement for the start of many entrepreneurial business is private equity or venture capital financing. In the traditional approach to entrepreneurial investment analysis, an entrepreneur starts a new venture and a venture capitalist finances the new venture when business return exceeds the financial opportunity cost for comparable risk - the cost of capital for the new venture. The real options literature recommends that entrepreneurs delay business start due to investment irreversibility until business return reaches a threshold greater than the cost of capital. In this paper, we show that for new ventures with modest earnings volatility, an entrepreneur starts his/her business before return exceeds the cost of capital. We identify the circumstances in which the cost of capital is an unduly conservative return benchmark for the start of a new business and discuss the empirical implications of our findings.

Suggested Citation

  • George W. Blazenko & Andrey D. Pavlov, 2010. "Investment Timing for New Business Ventures," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 14(3), pages 37-68, Fall.
  • Handle: RePEc:pep:journl:v:14:y:2010:i:3:p:37-68
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    New ventures; business start; corporate investment; entrepreneurship;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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