The opportunity cost of being an entrepreneur

by Ashvini on August 8, 2012 · 7 comments

in My Personal Thoughts

Opportunity cost is defined in wikipedia as

Post image for The opportunity cost of being an entrepreneur

the cost of any activity measured in terms of the value of the next best alternative forgone (that is not chosen).

Recently I came across a discussion on opportunity cost of entrepreneurship. To my friend it was sum total of the salary he would have received for those years in job in which he actually was an entrepreneur. By being an entrepreneur , he would have to earn equal amount to make sure that money that has been lost is recovered in almost similar time frame.

While the logic looks correct( and that I am not an economist), the wanna-be entrepreneurs would be dissuaded if they were to think only in the terms of the money that they had to forego to become entrepreneurs. In my job vs entrepreneurship article, I had argued that job is more like mathematics and entrepreneurship is more like arts. It is much harder to determine how much money would one make in entrepreneurship compared to being in a stable  job where the cheque lands at your desk at the end of every month.

To me entrepreneurship needs to be looked as another career though a slightly more difficult one than being employed. While being employed has its own charms ( of perceived stability, career growth and fixed salary), entrepreneurship has its own set of great learning and rewards, if one is patient enough.

A job comes with its own peril of layoffs, redundancy while no one can practically fire an entrepreneur.  On the other hand entrepreneur faces monetary losses , closure of business which may have severe impact on his lifestyle.

I am not even going into the comparison of which is better because both have their own pluses and minuses. However to a person who has left his job to start entrepreneurship , it should be clear that he cannot substitute one for the other ( most of the cases). It is “either/or” and not an “and”.

Of course there could be alternative opinions , but I think , opportunity costs of both these alternatives cannot be compared as they are based on assumptions/risks/divergence of path that are not comparable.

A fair basis for calculating opportunity cost in a job maybe for example taking a salary hike in current organization vs. getting promoted upon joining other and resigning from current job.

What do you think about the topic ? Let us discuss it in the comments below .

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{ 7 comments }

migisi August 21, 2012 at 2:57 pm

Hi Ashvini,
For a businessman really opportunity will help a lot. For every man who are doing business cannot succeed in their first chance itself. They have to wait till the second chance knock at the door.
Even in my life also i failed in my first attempt but the another second project gave me a good opportunity to prove myself and gave me a very good name.
Nice post thanks for sharing this post with us.

Ashvini Kumar Saxena August 30, 2012 at 12:11 pm

Thanks Migisi. I am very happy to know that things are working out for you. Yes we need to keep trying till we succeed.

DiNaRa August 20, 2012 at 7:14 pm

I think that it is no use at all to assume how much you would have earned if you were a businessman. As soon as you start working independently you should think about the potential profits and pleasures that rpivate business gives.

Jeevan Jacob John August 11, 2012 at 9:44 pm

It depends.

But, we shouldn’t measure opportunity costs in just terms of money. We should also look at the effort, the state (of the field, in which we are planning to work).

Like you said, there are many disadvantages of being employed to someone else: You can get fired (and you have to “go according” to your boss, that’s fine if you boss is a nice guy).

And of course, like Daria said earlier, we need to look at job satisfaction and lot of others things. It is kind of impossible to accurately measure opportunity cost with all these factors (so you bring them down to 1-2 factors: let’s say money and happiness.

In terms of happiness, you are most likely to be happy if you are self employed (I think).

Money: Both have its own advantages, depends upon the field and how much work your friend can put in, right?

Ashvini Kumar Saxena August 30, 2012 at 12:45 pm

Hi Jeevan,

Daria did bring out some great points about the whole thing. I think money is only just one factor in the whole equation. Happiness and satisfaction indeed count a lot. So if one is satisfied with one’s work ( either in a job or own) , I think that opportunity cost cannot be not applied there. I had written about opportunity cost when a company loses an employee to competition. The opportunity cost is comparable because there are obviously costs related to hiring new employees and training him/her to replace old employee. It is easy to find out how much one has lost there.
But entrepreneurship and job are two entirely different concepts and opportunity costs cannot be compared. .

Thanks for your opinion on this important topic :).

Daria Steigman August 9, 2012 at 11:53 pm

Hi Ashvini,

I’m finally catching up on my reading, starting of course with your blog.

I think the premise that value = dollars is too narrow (I know this is your friend’s take on this and not yours). The problem is that this only looks at straight earnings, and does not take into account job satisfaction, personal and professional growth (e.g., earnings potential within different jobs or b/w a day job and entrepreneurship), tax environments (the tax rate for solos in the U.S. is significantly higher than for day jobs, which means you have to earn more to have break-even take-home pay), the cost of purchasing health care (at least in the U.S.), paid vs. unpaid vacation time, and a bunch more things that aren’t coming immediately to mind.

Good conversation starter. It will be interesting to hear how others chime in.

Ashvini Kumar Saxena August 30, 2012 at 12:38 pm

Hi Daria,

Welcome back . Thanks for starting reading with my blog :). It made my day. I am sorry to reply so late because I was not well.
I think it is often in minds of many individuals who wish to be entrepreneurs that they are losing money when they are not doing job. I think it is not really the right way to look at the thing. I have a problem with opportunity cost concept itself. It may not apply suitably to all the scenarios but a few. When we start on our own, it is a good idea not to compare it with our job. Both have different priorities, advantages and disadvantages. I believe that comparison happen only when a person is in both the boats ( job and his own work). Other than that both cannot be compared.

I think on the technical front , you have given some great examples which illustrate the futility of this whole exercise.

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