I was recently thinking about the characteristics of strong performing startups and those that perform less well. The goal of the exercise was to identify patterns in the strong and poor performers in order to improve our investment decisions. However, as part of the exercise I discovered that, in addition to the first way of identifying the common traits of successful and less successful startups, there’s a second way to make better investments.
This is by thinking about the cost of making an investment before doing so. The first cost that comes to mind for a poor investment is its financial cost. You lose the dollars that you invest in the company.
While money is certainly an important cost, you can recoup it. Money is made and lost. In fact, you need to take the risk of losing money on certain investments in order to make money on others. Because of this, thinking about the potential loss of money alone when making an investment only goes so far in detracting you from making those investments.
Lost time is a much greater cost than lost money. You can’t make up for the time you lose working on a poor investment. It’s gone forever. And poor investments take up more of an investor’s time than the best performing ones that run smoothly without you.
So if you think about the cost of a poor investment in terms of the time you’ll lose trying to fix things rather than the money you’ll lose, you’re likely to make much better investment decisions.
The underlying assumption here is that you value time more than money. If this isn’t already the case, if you think about it you’ll probably arrive at this conclusion.