In life, we are taught that resources are scarce. We have a limited amount of money in the bank. We have a limited number of developers on the team. But the most scarce resource for a founder is focus. Every time you say “yes” to a project, you are implicitly saying “no” to a thousand others. This invisible price tag is called Opportunity Cost.
Opportunity Cost is the loss of potential gain from other alternatives when one alternative is chosen. It is the value of the road not taken.
For a startup, this concept is lethal because it is silent. If you lose money, you see it on the balance sheet. If you lose an opportunity, there is no line item in your accounting software that flashes red. You simply fail to grow as fast as you could have.
The Cost of “Good” Ideas
#Bad ideas are easy to reject. It is easy to say no to building a feature nobody wants. The real killer is the “good” idea.
A good idea makes money. A good idea makes customers happy. But if pursuing a good idea prevents you from pursuing a great idea that could 10x your business, the opportunity cost is massive.
Imagine you run a software company. A client offers you $50,000 to build a custom feature. That is real revenue. It looks like a win. But if building that custom feature distracts your engineering team for two months, delaying the launch of your core product that could generate $1 million in recurring revenue, that $50,000 check actually cost you $950,000.
Time as Currency
#Founders often undervalue their own time. They spend three hours fixing a printer to save $100 on a repair technician.
The math here is broken. If your time is worth $500 an hour as a CEO (based on the value you create, not your salary), you just spent $1,500 to save $100. The opportunity cost was the investor meeting you missed or the recruiting call you didn’t make.
You must ruthlessly delegate or outsource anything that is below your “aspirational hourly rate.” If you are doing $20/hour work, you are effectively telling the market that you are a $20/hour CEO.
The Sunk Cost Fallacy
#Opportunity cost is the antidote to the Sunk Cost Fallacy. Sunk cost says, “We have already spent six months on this project, we have to finish it.” Opportunity cost asks, “If we stopped today, what could we do with the next six months instead?”
Startups die because they cling to failing projects to justify past spend. Looking at opportunity cost forces you to ignore the past and optimize for the future. It gives you the permission to kill a project that is “kind of working” to free up resources for a project that might explode.
The Decision Matrix
#To manage this, you need a mental filter. Before approving any new initiative, ask:
- What is the potential upside of this?
- What are we not going to do because we are doing this?
- Is the upside of #1 greater than the potential upside of #2?
If you cannot answer #2 clearly, you are not managing opportunity cost. You are just adding to the pile.