Venture Capital and Sequential Investments

57 Pages Posted: 4 Nov 2008 Last revised: 20 Feb 2015

See all articles by Dirk Bergemann

Dirk Bergemann

Yale University - Cowles Foundation - Department of Economics; Yale University - Cowles Foundation

Ulrich Hege

Toulouse School of Economics; European Corporate Governance Institute (ECGI)

Liang Peng

Smeal College of Business, The Pennsylvania State University

Multiple version iconThere are 3 versions of this paper

Date Written: April 11, 2011


We present a dynamic model of venture capital financing, described as a sequential investment problem with uncertain outcome. Each venture has to pass a sequence of milestones, and there is a chance of terminal failure in each milestone. The investors decide sequentially about the speed of the investment and, due to contract frictions and agency costs, will optimally structure investments in a discrete sequence of staged investments. We derive the dynamically optimal funding policy in response to the arrival of information during the development of the venture. We develop three types of predictions from our theoretical model and test these predictions in a large sample of venture capital investments in the U.S. for the period of 1987-2002.

First, the investment flow starts low if the failure risk is high and accelerates as the projects mature. Second, the investment flow reacts positively to information that arrives while the project is developed. We find that the investment decisions are more sensitive to the information received during the development than to the information held prior to the project launch. Third, investors distribute their investments over more funding rounds if the failure risk is larger.

Keywords: Venture Capital, Sequential investment, Stage financing, Intertemporal returns

JEL Classification: D83, D92, G11, G24

Suggested Citation

Bergemann, Dirk and Hege, Ulrich and Peng, Liang, Venture Capital and Sequential Investments (April 11, 2011). EFA 2009 Bergen Meetings Paper; Cowles Foundation Discussion Paper No. 1682R. Available at SSRN: or

Dirk Bergemann (Contact Author)

Yale University - Cowles Foundation - Department of Economics ( email )

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Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Ulrich Hege

Toulouse School of Economics ( email )

Place Anatole-France
Toulouse Cedex, F-31042
+33 5 61 12 86 01 (Phone)

HOME PAGE: http://

European Corporate Governance Institute (ECGI)

B-1050 Brussels

HOME PAGE: http:/

Liang Peng

Smeal College of Business, The Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

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