Opportunity Costs

The founding CEO of a startup always has more to do than they can fit into their available time – even if they are working every waking hour (which I do not recommend, by the way). That means one of the most significant success factors for such CEOs is their ability to consider opportunity costs and make wise decisions about where to invest their time.

“But if I don’t investigate every possible investor, I will feel like I wasn’t thorough and might miss out on a great investor,” said the first-time startup CEO I was discussing fundraising strategy with. Even though he was raising a less than $5M seed round for a specialty business rather than a pure-play tech rocketship, he still wanted to spend time researching and reaching out cold to a bunch of the big-name $1B+ Silicon Valley funds like Sequoia Capital (with $85B+ under management and known for funding companies that show potential for massive growth); Andreessen Horowitz (with $35B+ under management and a propensity for leading Series A rounds in the eight-to-nine figures); and Accel (with $18B+ under management and a desire to invest in category-defining businesses). While there was nothing to stop him from cold-calling such funds, it was a terrible misjudgment because his startup did not fit the investment profile for such massive funds, he did not have the personal track record to attract such investors, and he was building a capital-efficient startup that was likely to consider a few hundred million dollar exit a fantastic success. Of course, it is ridiculous to imagine that any CEO can reach out to “every possible investor,” so his thinking was just misguided. In fact, it was such a mistake that it made me start to wonder if he had the “right stuff” actually to be a startup CEO/founder at all.

Why was this lack of judgment so concerning? Because it showed a lack of appreciation for the idea of opportunity costs – a critical startup CEO master skill. The bottom line is that this CEO would be investing his most precious resource – his time – into long-shot contacts instead of focusing on potential investors who were likelier to get very excited about what he was doing. In other words, he needed to consider where to best spend his time – and it wasn’t chasing massive high-profile funds that were unlikely to be interested in his startup. He needed to focus his energy where he had a good chance of success.

This fundraising story is an example of failing to consider the opportunity costs of where you are investing your time and resources. Opportunity costs are the alternatives you do not choose when committing to a specific course of action.

• Opportunity costs can be what you might have done with the time you invested chasing long-shot potential investors.
  
  
• Opportunity costs can be what you could not afford to spend money on after you invested the resources you had in hiring a hot-shot salesperson too soon (a.k.a. before you have evidence of product-market fit).
  
  
• Opportunity costs can be the resources you could have invested intensely in delighting those early-adopter potential customers who were telegraphing their excitement about trying your product instead of spending your team’s time and previous financial resources on low-yield social media initiatives getting people to click on your website.   

Early-stage startups typically have small teams (which equals limited cycles), limited financial resources (never enough money for everything you want to spend money on), and limited time (which means everything has a sense of urgency to get it done faster). All of those limits mean that the judgment of the startup CEO and their senior leaders about where to invest those precious resources are some of the most consequential decisions they will make day in and day out as they build the company. Startup leaders who cannot do this most essential decision-making increase the risk of their startup failing. When you think of investing in, joining, or founding a startup, be sure to assess the pattern of choices and opportunity cost assessments the startup leadership team makes.