One of the biggest differences between being an individual investor versus investing on behalf of an institution is how you weigh opportunity cost. As an individual, your investment strategy is not constrained by a ‘fund’ model and the many of the factors that come with it. Funds are bound by upfront capital commitments and a finite deployment period which implies a set strategy throughout the fund lifecycle.

Further, every firm and investor will have a different way of looking at opportunity cost. A larger firm may be less concerned with capital than time, whereas a small partnership may have the opposite concern. In my view, there are 4 types of opportunity costs to weigh in venture investing. *I’m not an economist so I’m using this term loosely. 

• Capital: the opportunity cost of capital is the most straightforward. By investing in one company, you allocate the dollars you might have otherwise invested elsewhere. While most firms don’t have a strict budget model that dictates how much each partner can invest out of the fund, still the effort to weigh opportunity cost comes down to an individual level. This can be an issue if the individual partner is making decisions that apply only to the set of options they see. At a firm level, funds need to determine how they will allocate dollars across different sectors (and sometimes geographies) and between new investments vs follow on. For example, is it better to deploy a disproportionate share of the fund into b2b software vs. consumer or perhaps better to do fewer total investments in order to deploy more capital into the existing portfolio (which often happens in an economic downturn). Interestingly, the introduction of SPVs and opportunity funds have alleviated some of this friction by creating pools of capital that can be tapped into later on when the information set may have evolved. 

• Time: the decision to invest is only the start of the relationship with the company. In early stage investing, that relationship can be a 7-10 year journey with plenty of ups and downs. As a lead investor, especially in or after the Series A, your relationship with the company is formalized by having board representation. When shit hits the fan and the founder needs help, you cannot simply bail on the company. Not only does the board member have a fiduciary duty to the company, but their reputation can be built in these moments. By definition, investing in a company today is a commitment of present and future time. As an investor takes on more board roles, the time spent supporting those companies reduces time that could be spent elsewhere. A classic dilemma is when you make an investment knowing that the founder/CEO may not be able to scale as CEO - is the cost of your time in recruiting a new CEO and going through the pain of a CEO change worth it?

• Preclusion: most institutional investors will avoid making investments in competing companies. That often means that within a specific theme, you must bet on one company even if the ultimate winner in that space doesn’t yet exist. Simply put, the investors in Friendster would never have invested in Facebook while both companies existed as independent private companies. Perhaps this also plays into horizontal vs vertical companies: had Etsy been around prior to Ebay going public, would Benchmark have invested in both? I’m not sure but it feels doubtful. The other issue here is when a rising tide floats all boats and when investing in multiple companies in the same space can actually provide for greater returns than diversifying capital into other sectors. For example, investing in every ride sharing business globally may have produced exceptional returns and far better than trying to pick a winner from the many early entrants.

• Founder relationship: Good things come from relationships with great founders. In a sense, this may not be an opportunity cost as much as a benefit. Working with great founders can change the way you think about a market and teach you how companies can operate better. They attract strong talent who become part of the diaspora of the company and go on to be high performing founders / executives afterwards. Additionally, smart entrepreneurs seek out these founders for their advice so they are often in the flow of other great founders and ideas.

Consciously or not, many investors end up weighing these different opportunity costs before making a decision.