Two separate entrepreneurs have approached a potential investor to raise money for starting up their new businesses. One entrepreneur has good experience and skills for the planned new business. The other entrepreneur has considerably less experience and skills. The potential investor does not know this and decides to invest in the new business proposed by the entrepreneur with less experience and skills because that person was a more convincing speaker. This demonstrates the idea of
A) proforma financing.
B) insolvent financing.
C) adverse selection.
D) self financing.
E) mandatory redemption.

Question

Quizplus · Accepted Answer

This scenario demonstrates adverse selection, which occurs when the potential investor lacks information about the two entrepreneurs and decides to invest in the one who appears more convincing but has less experience and skills. This can lead to a higher risk of failure and lower return on investment. Adverse selection is a common problem in venture capital and can be mitigated by conducting due diligence and gathering more information on the entrepreneurs and their proposed businesses.

Two Separate Entrepreneurs Have Approached a Potential Investor to Raise