Entrepreneur, learn how to profit through information

All new businesses are based on an opportunity, where new products or services can be brought to a market and sold profitably. According to Joseph Schumpeter, an economist and father of term innovation, these opportunities emerge from the way individual members of the society value products, services and resources.

When a buyer values a product more than the sellers do, an entrepreneur can sell with a price that is higher than the costs. Entrepreneurs can also make profits by combining undervalued resources to produce overvalued products. But why on earth would sellers undervalue and buyers overvalue? Why won’t the sellers capture the profits instead of the entrepreneurs?

According to Schumpeter the new information created by the continuous changes of the markets is typically not available to everyone at the same time. Sometimes the information is available to the entrepreneur, but not to the buyers and sellers. Schumpeter argues that this type of asymmetric information is a key enabler of new entrepreneurial opportunities. But how can the entrepreneur leverage this information and collect the profits?

Experience builds asymmetric information

Entrepreneurs can leverage many sources of asymmetric information:

• New technology is a typical source of asymmetric information for tech startups. The entrepreneur (or a team) is in command of an emerging technology that is not yet commoditized. The technology enables improvements in performance or costs of products or services, hence creating new business opportunities. Examples include Google, Microsoft and Skype, but also Applifier, F-Secure and Polar.
• Market and customer related information can include changes in competitors (or current incumbents) or in customer behaviour, but also in legislative or political environment. When these changes affect the valuation of specific products, services or resources, a newcomer may be able to capture the opportunity. Examples include Airbnb, Facebook and Uber, but also Verkkokauppa.com, IRC-galleria and Onnibus.
• Skills and human capital of the entrepreneur can also be seen as asymmetric information. The entrepreneur herself has skills that buyers value, while the other sellers (competitors or current incumbents) are not able to fully satisfy the demand. This is very common for self-employers, such as designers, journalists, trainers, consultants and freelance developers.
• Networks and social capital turns the question of what do you know to who do you know. Having strong networks and relationship with prospective sellers and buyers can often be enough to capture a new business opportunity. Great examples are various import/export and wholesale businesses.

Asymmetric information is often built over experience. The more professional experience you have, the more you may know about the specific quirks of a market or an industry, and see the opportunities not everyone sees. Experience often helps you to improve your skills and builds your social capital over time. Essentially, experience helps entrepreneurs to identify and take advantage of entrepreneurial opportunities.

However, too much experience can also be a disadvantage. In his book “The Founder’s Dilemmas” Noam Wasserman talks about golden handcuffs, which prevent an experienced professional to pursue entrepreneurial opportunities. Golden handcuffs come in many forms: a high salary in current position, stock options, mortgage, family situation and so on. The further you proceed with your career, the stronger your golden handcuffs often become.

The entrepreneur’s aptitude test

So how much previous experience is ideal for recognizing asymmetric information? It’s probably impossible to give an exact answer, as the answer depends on the nature of opportunity and other individual qualities. As prospective entrepreneur, to evaluate your experience you can ask yourself:

• What is it that I know, that only few other do?
• What is it that I can do well, that only few other can?
• Who do you know, and how can you leverage it?
• Can I break my golden handcuffs?

Remember, what you know can be related to industries, markets, technologies and customer segments. It can also be related to emerging political or legislative changes. What you can do is related to your skills, and who you know within your network.

If answering these questions feels difficult, it might be that the prospective entrepreneur hasn’t yet built enough experience. Wasserman would probably instruct her to continue building experience, skills and networks, and remain as a non-founder for now. After all, one of the best ways to learn and industry where you want to set up a company is to work for an existing one.

Ultimately, experience is the thing that helps entrepreneurs to identify and take advantage of entrepreneurial opportunities and finally capture the profits.

 

---

Mikko Järvinen is an entrepreneurship scholar, author and practitioner, currently working as a Project Manager at Haaga-Helia StartUp School. The article is adapted from “Yritä, erehdy, onnistu”, a guidebook for the entrepreneur-to-be. The book is written by Mikko Järvinen and Matti Kari, and published by Otava in 2017.