Adverse Selection

In investing, adverse selection is the condition of seeing deals only within arm’s reach — the lazy default that causes a portfolio to tilt toward what comes easily rather than what is best.

The term is borrowed from insurance (where it describes the tendency for only the riskiest applicants to seek coverage), but @Julian (Twitter) applies it directly to angel deal flow: if you only take meetings from warm intros in your existing network, you will systematically miss the best founders who are not yet connected to your circle.

The antidote is active Deal Sourcing: building distinct, differentiated sources of deal flow and deliberately hunting for what doesn’t come your way. Each source should reach a different community or geography, so the aggregate is not just one network resampled.

Where this appears

• An Intro to Angel Investing… (tweet)