ABSTRACT
The understanding of the concept of information asymmetry is crucial in entrepreneurship as it constitutes a major obstacle for small businesses seeking finance. Therefore, how entrepreneurs reduce the risk associated with information asymmetry, which is often claimed to be one of the main reasons that financiers shy away from early stage financing, becomes imperative. We explore in this chapter how reducing information asymmetry may result in lower transaction costs for obtaining debt, and greater opportunity to finance multiple investment, economies of scale and better firm performance. We also examine how the lack of transparency on business models and cash projections increases the risk for lenders and limits the number and amount of funds available to the entire small business pool within defined markets.
