A Founder’s “Opportunity Cost”

I recently caught up with a friend of mine. He has raised a few rounds of VC money, and his start-up is making some progress, but isn’t a rocket ship. They run out of money soon, and he doesn’t think he will be able to attract a new VC to the syndicate.

He asked me what he should do. I told him he should think about the concept of “opportunity cost.”

I told him that a founder has a finite number of companies he can start. At some point, you just won’t have the energy or the new idea. So, if he doesn’t think his start-up isn’t going to take off (and, he’s been in it for four years already), I told him to move onto the next thing. Do right by his employees and investors and begin meeting with strategics to see if there’s an exit scenario.

So, the cost of staying at his current start-up, to produce what he thinks will be a mediocre economic outcome, is his opportunity cost. There is a cost to staying where you are.

We speak often about opportunity cost at our firm.

We want to work with founders who really want to build something great and meaningful as opposed to someone who really needs a job. There’s nothing wrong with the latter, except that it may encourage a founder to keep a company going for longer than he should.

For example, I know a start-up CEO who was going through an expensive divorce and really needed money to pay for alimony. IMO, he had lost objectivity about his start-up. He didn’t have opportunity cost. In fact, after his company closed, he ended up at a big company. He had to go for the salary. The start-up burnt up in flames. He wasted a lot of VC money and his employees’ time.

So, opportunity cost. Time is precious, and there’s no shame in failure. It creates urgency. It lets you move on to the next start-up. It will also help you avoid funding sources and employees who do not share your sense of urgency.

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