If you are asking entrepreneurs to be rational

What is the biggest resource an entrepreneur can waste? According to Kevin Ready, author of  “Startup: An Insider’s Guide to Launching and Running a Business, it is not money. Ready says it is time spent trying to keep a start-up live long after its viability has been discredited.

Kevin Ready says,

I call this creature a “zombie start-up.”
… many intrepid entrepreneurs hold on and continue the vision — sometimes for years. Herein lies the true cost and risk of start-ups: Time.

When you hold on to a dead idea at the expense of other possibilities, even though you are not burning cash to keep it alive you are keeping yourself away from what you could be doing elsewhere.

Time is the one resource that we can never recover. The opportunity cost for chasing the wrong idea is immeasurable. What is the cost of a lost year? How about two years? A decade?

Kevin Ready makes a very good point. (Although he says we can’t put a price tag on time lost. We can.)

I would also add a close relative of opportunity cost,  sunk cost. Many are not able to walk away because they have already sunk so much of their time and money into the venture. Doing so may seem like they are wasting their “investment”.

But recognizing sunk cost bias, walking away from what is sunk and taking into account opportunity cost before making choices are rational behaviors.  If entrepreneurs are wired to do scenario analysis, calculate expected value over all possible options, consider opportunity cost of leaving their current job, etc.,  they would not be entrepreneurs at all. (See The Mind of an Entrepreneur and that of an Analyst.)

It  takes an irrational sense of optimism to believe their venture will be a big success when the base rate says less than 3% of the ventures live past their third year.

It is the irrational sense of optimism that makes an entrepreneur.

Don’t ask those irrational optimists to look at opportunity cost.

What Fraction of the Pie Will be Yours?

Yes there may be a market and a considerable number of customers who are willing to pay for certain products and services. Is the existence of the market a good enough reason to make the investment?

This is a quote from The Times story on entrepreneurs who started small businesses like coffee shop. One of them, Ms. Adler, who runs a bakery said,

More people may be on a tighter budget these days, but if you need your daily caffeine fix, you probably won’t give this up

Ms. Adler may be right. Economy or not there will a group of customers who need their daily caffeine fix and are willing to pay for it.  But, how many of those customers will choose your stores, how often and why? If you see the opportunity, how many others also see it?

The size of the pie may be big, assuming the pie exists, but what will you get to own for yourself?