Startup valuation in the first round of venture financing by considering real options before and after commercialization

Startup valuation in venture capital investment has been a complex and important issue in negotiations between entrepreneurs and venture capitalists due to the high degree of uncertainty about their future. Considering the uncertainty in the first round of financing as well as the flexibility available to venture capitalists in the previous (abandon option) and the subsequent (expand option) stages of product commercialization in this research, we present a new approach to determining the value of startup companies. Due to the lack of an analytical solution for the developed approach, the numerical method of least squares Monte-Carlo simulation (Longstaff-Schwartz) was used to solve it. Comparing the result of the model with the results of three other scenarios confirms the role and importance of the aforementioned flexibilities in the making of a venture investment decision. Finally, there were suggestions for developing an approach under competitive interactions or developing it for other stages of investment.