In comparison with developed countries, venture capital of China is still in the primary stage. Many scholars have studied the theories on its macro-operating mechanism while few have done research on its appraisal method. The lagging of appraisal method has delayed the development of China's venture capital. Therefore it is of great significance to find an appropriate investment appraisal method under China's current economic situation.Option pricing theory is one of the greatest discoveries in finance in the last century. Its principle, method and conclusion can be applied in many economic and management fields. When option-pricing theory is applied in financial budgeting, it is called real options theory, which opens an entirely new way to investment appraisal for people as well as enterprise.The paper attempted to introduce real options theory & method to the investment appraisal of venture capital. On the basis of properties of venture capital such as high profit with high risks as well as many stage of capital investment, the multi-stage compound real options model was build to appraise the investment decision of venture capital. The empirical study on a real venture capital project in China was conducted to test the application of the theory & method. Finally, the paper explained the value, condition as well as problems of real options theory & method in venture capital. Then the frame and stage of the application of real options theory & method in venture capital was constructed to constitute the investment appraisal system of venture capital project. The work of the paper will help to improve the investment method and tools of China's venture capital and build a more scientific system to complement venture capital appraisal. Thus venture capital company and venture enterprise will evaluate the value and risks of their projects in a more precise way so that their investment efficiency of venture capital will be improved and the venture capital industry will come to prosperity.