Abstract:

This paper develops a theory of the effects of episodic venture capital financing on the probability that the project will be sustained from its inception to the date it becomes financially self-sustaining. The theory in this paper is based, in part, on the assumption that the time-varying expenses of the venture at each of its multiple stages of development have the properties of a stationary stochastic process. The main result of the paper is the derivation of a probability density function showing how variation in the financing cash flow determines the probability that the venture will be economically self-sustaining. The distribution can also be applied to reveal how the probability of a successful exit strategy by the venture capitalist is affected by variations of the scheduled financing. That property will facilitate capital budgeting protocols carried out by the VCs; calculations of discounted cash flows and internal rates of return can be assigned probabilistic weights.