What's your opportunity cost?

One of the few things that you can say about both building companies and investing that is consistently true is that most of your decisions won’t really matter. Don’t get me wrong, you will make countless operational decisions and those decisions will be necessary. But when it comes to the successful long-term outcome of the company, it usually (when you look back) comes down to a very small number of things which you did or didn’t do. 

In company-building circles, people celebrate speed of execution and use intimidating phrases like ‘bias-to-action’ while nodding their heads with approval. I’ve always thought this sounds a lot like how a marketing campaign for minefield running might sound or that maybe it’s just the same people who failed the marshmallow test when they were kids looking to rationalise their result. The biggest determination of outcome almost certainly won’t be the speed of your action but instead where you choose to deploy your resources. 

When you’re building (or indeed investing), how are you thinking about your opportunity cost? What does doing this new shiny thing mean that you can’t do? I think most people understand that concept but I’m equally pretty sure that if you asked a lot of founders what they’ve actually set as their opportunity cost, you’d get a blank look. 

I suppose you could argue that the current interest rate is a logical one, I mean if you’re going to do something it should return at least better than just leaving your money in the bank, right? A good way to think about opportunity cost is whether the initiative can deliver the kind of return to the company which your investors are relying on. If you’re a later-stage company, this might be double the rate of interest. But if you’ve just raised seed capital, that probably means an opportunity cost of ~40% IRR. That may sound like a steep bar to even the most optimistic founder. Good, it should be. 

People often dismiss opportunity cost arguments when there’s an opportunity to do something that has ‘strategic value’. Just writing that sentence makes me wince when I think about how many times I’ve done that. I know you can justify it. I know you can convince your board. It’s just so rarely true in the long-run. Remember that choosing to allocate resources to an opportunity which doesn’t clear your opportunity cost isn’t (usually) an isolated vector, it will also reduce the average returns rate for everything else you’re doing in the company. 

While I have mixed views on boards, chairs and all the apparatus which goes along with corporate governance, I do think that a valuable thing a board member can contribute is challenging a management team on opportunity cost. Honestly, if every board member was legally required to read Jerry Neuman’s (uncharacteristically short) post on this topic, it might change the face of private company investment returns.

You can probably argue that if you are ruthlessly prioritising (which someone once reminded me was singular, not plural) then you simply don’t need an opportunity cost concept. In practice I’ve never found that practical: facts change, markets change, interest rates rise etc. 

Opportunity cost is not just about company resources, it’s also about founder time and energy. This is less binary though. Founders care about everything, it’s part of what drives a company (and why replacing them with professional management is never a like for like). Can they write website copy better than anyone else in the company? Probably. Should they? Obviously not. Will they? Absolutely yes. And that can kind of work early on but at some level of scale, there is definitely a converging of opportunity cost assessment between company and founders.

There is a relationship between strategy, prioritization and opportunity cost. One day I hope to be more eloquent about it but in the meantime here’s my best: your strategy is what you’re doing (and not doing), your priority is what you’re doing first and opportunity cost is how you assess any changes to those two. 

“I’ve got jewels in the safe that I don’t even wear” Central Cee

---

Reading

Walter Kiechel’s history of management consultants is, on the surface, not at all a book that sounds interesting. It is in fact, very interesting, both to see how knowledge services businesses get built but also around the alignment that they created (or didn’t) with their clients over time. While it’s way too simple to say that management consultants spawned private equity (at least as an industry), there was certainly a lot of overlap. 

Matt Clifford recently asked what might the AI future of OSINT and citizen journalism look like. It’s a very interesting question and I’m enjoying the history of Bellingcat as a sort of pre-thinking primer. 

Compute x genetics x archaeology: the origins of the indo-european language tree by Razib Khan. 

I read Matthew Haidt’s The Anxious Generation and I should probably write something about it beyond a cursory mention. I thought his views on the importance of free play were the most interesting elements.