New Venture Creation: A Drift-Variance Diffusion Control Model

A Model for New Venture Creation New ventures go through multiple stages: In the early stage, there is a business concept and preliminary evidence supporting the concept. In later stages, there are revenues and sales. In each stage, there are usually milestones for the venture to meet in order for investors to provide additional funding. Otherwise, the venture is abandoned. The entrepreneur can engage in a set of costly activities that aim to create value and reach the appropriate milestones. In “New Venture Creation: A Drift-Variance Diffusion Control Model,” Wang and Zenios develop a framework for new venture creation. The authors provide theoretical guidance on the optimal policy, which is relatively simple to describe. Their analysis reveals a trade-off between how costly an activity is and how much upside potential the activity generates, and their result shows how a new venture creator can manage that trade-off.