What is the "lemon problem" in economics?

are there any implications when a start-up approaches a venture capitalist?

The "Lemon Problem" refers to a paper written by Akerlof about used cars and asymmetric information. In short, he found that sellers would keep the best cars out of the market.

Buyers are looking for the best deal. If there are no "best deals" available, they'll have to revise their definition of a "good deal," based on the features of a car observed. The same process is used by the seller's preference, and shows that the best cars are kept out of the market.

This implies that the best start-ups will not be needing funding, because they were already selected by the top VC firms. Referring back to Akerlof's model, the "good" start-ups are the ones left on the market.

Lesson: easier to approach for further funding once discovered by a reputable financial sponsor.

Tags

　　Venture Investment 　　Venture Capitalist 　　Venture Capital 　　VC Fund 　　Vanguard Fund 　　Value Investment

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