THE BLOG
07/30/2012 03:52 pm ET Updated Sep 29, 2012

Opportunity Costs: What You Have to Lose

When I was 16 I started my first company. I invented herbal ecstacy, which sparked the 1990s "natural smart drug" revolution. In less than a year we had reported earnings in excess of $350 million. I was a teenage millionaire and had done the seemingly impossible: create a winning product and brand with no real money or experience. It all started with a simple idea and the measurement of risk and opportunity cost.

I decided over the last few years to invest in a few high-potential companies. I have been investing in early stage startups for a number of years now. For more than 20 years people have been coming to me with all types of product pitches and business ideas. Some are genuinely great. Some are possible but improbable. Most and just plain bad and not measured by any logical metric whatsoever.

The first thing I encourage budding entrepreneurs to do is to consider the opportunity cost of their venture and to measure the proposed venture by a clearly defined and measureable metric. Opportunity cost is the cost of any venture measured in terms of the value of the next best alternative that is not chosen.

The thing that always shocks me the most is that most entrepreneurs never consider the opportunity cost and have no metrics to measure the true potential of their proposed idea. What is more is that so many entrepreneurs work in a "vacuum" so to speak. They take very little critical feedback from the outside. Getting critical and unbiased feedback is essential. It could mean the difference between success and failure.

The primary considerations for any serious entrepreneur should be time and money invested, speed to profit, risk and personal ethos. Personal ethos is what I define as being in line with the guiding beliefs or ideals that characterize your ideology and who you are. It should be at the core of every major decision you make. It is the only metric that can void all the others.

Here are some simple metrics that you can use to measure any venture:
1. What are the other options before you and what is the risk/reward associated with each? Create a written list.
2. What is the speed to profitability? How long will it take to see a profit? Estimate, if you do not have hard figures.
3. What is the maximum profit potential of each option?
4. What is the maximum risk of each option?
5. On a scale of 1-10, how in line is each option with your personal ethos?
6. How much time will each option take? Does the time required fit into your current life and future plans?

In my book The Brain That Changes Everything I discuss techniques for making better decisions in life and business. Create a spread sheet with the metrics above and share it with people who you trust to give you honest and critical feedback. With that feedback and these metrics in hand your decisions will not only be better informed but they will ultimately lead to the best possible outcomes for your future.