Asymmetry Is Expensive

Your lack of knowledge is another's take your precious capital!

How we make a living in the knowledge economy is by knowing something for which others are willing to pay to access. But as an entrepreneur, where every cost has to be watched, not being knowledgeable in every aspect of your business can be expensive. In this Inspirations we explore the cost of information asymmetry.

I Snagged A Bargain!

Several years ago, I attended a presentation by an entrepreneur, whose business is selling gifts over the internet, to learn how they built their business. Armed with $15,000 in capital, this person contacted a website designer for the venture's website. During the discussion the designer asked how much capital the entrepreneur had, which the entrepreneur advised. In reply the designer stated "You're in luck! This week we're having a special on website design. Normally, $20,000 but this week we're offering $15,000". The entrepreneur was delighted and, having snagged a bargain, signed up that day. But was it really a bargain? As we discuss later there was an asymmetry of information here, and while the entrepreneur went on to be successful, they were the exception.

Capital Is Hard to Raise And Easy To Spend

Successful entrepreneurs are good at managing costs. It's easy when you establish your business to think that your capital is going to last a long time and therefore, to get things moving, it's easy to fall into the outsourcing trap. It takes time to build a business. The rule of thumb is it takes two years to become profitable and five years to generate sufficient return to make it worthwhile. The key to survival is keeping costs low to ensure your capital lasts through the establishment phase. One of my clients said it the best: "Capital is hard to raise yet easy to spend".

Know Your Limitations

The catch-phrase from the Clint Eastwood film Magnum Force was "A man's got to know his limitations" and that is sage advice for the entrepreneur. As the leader, everything you do must be adding value to your business. But there comes a point where doing it yourself is more expensive than outsourcing.

We all have a friend who tried to renovate their home themselves to save money only to discover that because they lacked the expertise the outcome was of lower quality than otherwise, the project took longer than otherwise, and it cost more than otherwise. There are times when it pays to outsource.

I Can Do That With A Bit Of Research

As a qualified chemical engineer there's a saying in our household "if I can design it I can fix it"! An extension of this saying is "If I can design it AND I have the right tool, I can fix it". There also is an extension on that extension "If I can design it AND I have the right tool AND I know how to use the tool, I can fix it". This means I'm pretty useful around the house, but I know my limitations. I can fix a tap and a leaking shower, but that is the extent of my plumbing capabilities. If there is a problem with the water heater, I call in the experts.

When it comes to businesses my advice to clients is similar; "if you have the skills and experience, or if you can learn the skills quickly, consider doing it yourself. If you don't have the necessary skills or experience you have to do your research to understand what questions you need to ask to ensure you get what you want and to ensure you don't pay too much for the product or service."

Extending the website example; when I researched the costs for my website, I learnt that for less than $100 per annum and with less than two weeks of development time I could build my own website to suit my needs. OK, so I have programming skills and experience in my background; and website development isn't everyone's skill set. But even without the skills to develop your own website, with a bit of research you can determine a reasonable price for a commercially developed website to suit your business and a reasonable price for hosting.

My advice to clients is look to where the value is being added. Then, consider spending a little bit of time to do the research to determine whether or not you have, or can develop, the skills either to add the value yourself, or to know what questions to ask so that value may be added efficiently. Doing so will save you a considerable amount of capital.


The entrepreneur is responsible for every aspect of their business, and while the leader of a firm with many employees is not solving every problem that arises they need to be able to ask the right questions to ensure tasks are delivered efficiently. It is tempting and easy to outsource; but this depletes the most precious resource the entrepreneur needs to build the business; capital. With a little bit of research, often with some guidance from a business mentor, the business leader can acquire the skills, or at least acquire the knowledge to ask the right questions, to get the task completed efficiently, in terms of time, resources, and cost.

To learn more about developing your skills to avoid the asymmetry of information trap contact Inspirational Leaders (This email address is being protected from spambots. You need JavaScript enabled to view it.).