Tuesday, September 1, 2015

Screening out the "social" entrepreneurs

Funding early stage ventures presents a HUGE adverse selection problem:  How do capitalists find the twenty-something entrepreneur committed to making money for his or her investors, and screen out those who want to be entrepreneurs because it supports their lifestyle?  Here are four different ways:
  •  Mr Hommels employs a subtle test of character. During a chat about funding, he deliberately changes the subject. “The cool entrepreneur will immediately get back to the topic and not be a social talker,” he reckons. “The good ones are more focused.”
  • Mr Lobato’s test is more direct. “I get edgy and unpleasant,” he says. “I want to see what their reaction is. For them, I’m a means to an end. It shouldn’t matter how unpleasant I get. I want to see that they behave rationally and understand they need to get what they need to succeed.”
  • Danny Rimer, a partner at Index Ventures, a global tech fund, says an obvious turn off is an entrepreneur keen to discuss a quick “exit”. He doesn’t want to hear how they plan to sell out to Google or Facebook within a couple of years. Instead, he wants to hear how their company will be around for another decade.
  • And sometimes, obnoxious overconfidence has the karmic effect it deserves. “I had a pitch from an entrepreneur once,” Mr Rimer recalls. “She said: ‘I am the American dream.’ That was a tell-tale sign.”

3 comments:

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  2. There are many valid points I can relate to reading this post. Having been in my early twenties when I bought my business and secured funding, it is interesting to read about various perspectives and judgements from the other side of that process. This post has also created an even deeper gratefulness for those who believed in me.

    I purchased an existing retail gift and floral business. I remember the cockiness I felt then, fully confident that I could run the business better. At that time I had an associates in business administration and felt I had a strong knowledge foundation on how to run a business. However, the first year was the roller coaster ride anyone could have predicted. Learning from the punches and driven to succeed, my team and I were able to gain market share and increase profits.

    Being able to gain as much information regarding the entrepreneur’s drive, ambition and ability to rationalize decision making will better secure your financial investment in these entrepreneurs. As many have seen, there are entrepreneur’s that have great ideas but little to no knowledge about running a business. The fundamentals such as knowing wealth is created when assets move from lower to higher valued uses, or a buyers willingness to buy if the price is below his value, are truths that are lost on these entrepreneurs.

    Froeb, L.M., McCann, B.T., Ward, M.R. & Shor, M. (2014). Managerial Economics: A Problem Solving Approach. Mason, Ohio: Southwestern Cengage Learning.

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    1. Hi Kim!
      I'm actually in my early twenties now, so it's great reading your experience. I'm currently taking business classes along with achieving my primary career goal in Optometry. I hope to one day open my own clinic. Before taking classes, I didn't think it would be as big of a deal starting something on my own, because I've seen so many success. But I guess i'm overestimating myself not realizing that most of these successes probably started of rocky as you said. Being an entrepreneurs really takes hard work, dedication and knowing a lot about the business your about to partake! I never thought of myself as one, but maybe with this ambition to open up a clinic I can perhaps call myself that some day!

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