adverse selection

Definition

The phenomenon where the worst investment opportunities are most aggressively marketed to investors, while the best deals are oversubscribed and hard to access. If they're begging you to invest, run.

Example Usage

The demo day company pitching us the hardest ended up being a classic case of adverse selection—the smart money had already passed.

Origin

Economics term from insurance markets, popularized by George Akerlof's 'Market for Lemons' paper (1970)

Fun Fact

Adverse selection explains why cold emails from founders almost never lead to VC investments—top deals are sourced through warm introductions.

Source: Economics and information asymmetry theory

Related Terms

Advanced

fund velocity

The speed at which a venture fund moves through its investment cycle, from raising capital to deploying it to returning capital to LPs. Faster isn't always better—ask anyone who inhaled their food and got heartburn.

🚀 Startup / VC

Intermediate

founder mode

An operating style where founders maintain deep involvement in company details rather than delegating everything to managers. Popularized by Paul Graham as a counterpoint to conventional management wisdom that says CEOs should stay hands-off.

🚀 Startup / VC

Beginner

warm introduction

A referral to an investor through a trusted mutual connection, as opposed to cold outreach. The difference between getting a response and having your email automatically archived.

🚀 Startup / VC

Beginner

lead investor

The VC firm that sets the terms and does the heavy lifting in a funding round, while other investors gratefully follow along. Someone has to negotiate while everyone else free-rides.

🚀 Startup / VC

Intermediate

discount rate

The percentage discount early investors get when their notes convert to equity, rewarding them for investing before a priced round. It's the early bird special of startup investing, typically 15-25%.

🚀 Startup / VC

Beginner

Wantrepreneur

Someone who talks about starting a company the way other people talk about going to the gym -- constantly, passionately, and with absolutely no intention of following through. Their startup is always launching next month, and next month is always next month.

🚀 Startup / VC

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