What Opportunity Cost Means For Entrepreneurs

Opportunity cost is often one of the first things taught in a basic economics class. In essence, opportunity cost is the value of the next best option when a decision is made. Opportunity cost is ubiquitous. It is in every decision we make, whether we consciously think about it or not. For example, let’s say you decided to drive to school this morning because it saves you time. Your next best alternative was to ride the bus, which is free for students. In the process of making the decision to drive, your opportunity cost is the money you could’ve spent elsewhere that you ended up using for gas. Looking at it even deeper, the opportunity cost can encompass the wear you put on the car itself, which will inevitably depreciate the value of the car over time. In reality, most people are not this rational in their decision making. However, the ability to look at potential options and choose the one with the most favorable opportunity cost is a valuable skill for entrepreneurs. Let’s look at some key situations where opportunity cost comes up in an entrepreneurial context. First, from the investor perspective. Investors are often faced with the challenging decision of where to put their money to get the most value back -- whether that is monetary return on investment or the ability to make a valuable social contribution (check out our article on social entrepreneurship here). Any capital they invest in your business is capital they are not investing elsewhere. This is why it is so important to clearly indicate the specific benefits of supporting your idea when pitching to investors. Some investors, like angel investors may be open to more riskier investments with high potential opportunity costs, while other investors, like venture capitalists, may focus on tried-and-true investments with lower opportunity costs (see our article on angel investors here). For the aspiring entrepreneur, pursuing one idea or project is giving up the time, entrepreneurial ability, and other resources for pursuing some other idea. With any allocation of resources you must ask yourself, “could these resources yield more or better results elsewhere?” Doing so will help with efficiency, which will be a topic for a separate article. The very choice to be an entrepreneur is associated with a clear opportunity cost: the stable income that could be generated from working for a company or organization that could use your skill set. Hopefully, with an outlook on decision-making that actively looks for opportunity costs, you will be able to be a better informed entrepreneur.