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REPOST: Screening out the “social” entrepreneurs

Summary:
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

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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.”

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