The underlying principle behind value creation is that a successful business identifies activities that generate more value than the opportunity cost of the resources employed. This concept applies equally well to the allocation of your time. The value of an hour spent generating leads or perfecting a business model may far exceed the value of that same time allocated to less goal-oriented tasks. And so, it would seem reasonable that any activity that can be delegated should. In Economics, this concept is referred to as Comparative Advantage. The greatest amount of value is generated when resources are allocated to their highest valued use. Or equivalently, making coffee should be delegated to whomever can do so with the lowest opportunity cost.
For an aspiring entrepreneur, time spent polishing the formatting of a brochure or developing a website is not time spent reaching out to potential clients or generating original content. Yet many devote countless hours to such activities. But this is potentially costly. Assume for example it will take one hundred hours for you to learn the necessary skills and then to develop a rudimentary website. Now assume a website developer that charges one hundred dollars per hour can complete the same website in twenty hours. You’ve effectively sold your time at twenty dollars per hour. If your time otherwise is worth, say $50, you’ve destroyed value in process.
Valuing Your Time
So, why do many aspiring entrepreneurs devote countless hours to such activities? In many cases, it may simply reflect a lack of awareness. A useful exercise in that case is to price your time to yourself and then based on this decide between hiring the activity out or doing it yourself. Naval Ravakant, a successful Silicon Valley entrepreneur and angel investor, for example, once commented that he evaluated all potential uses of his time against a $1,000 per hour threshold. This is of course a bit excessive for most of us and so you might choose a more modest number, for example fifty dollars per hour. Referring to the example above, in that case you’d hire the web developer and allocate your time to other higher value tasks.
What is Your Opportunity Cost?
A simple question without a simple answer. If you have a job that pays $100,000 per year, you might start with $50. $50 times forty hours per week then times fifty weeks is $100,000. But can you earn $50 during the spare few hours you find in the evening? Probably not. And so, using $50 might not be appropriate. Then of course your salary is taxable while money saved is not. And finally, imagine you were given the choice between earning $50 per hour at work and the equivalent amount for working on your dream. Likely, you’d be willing to accept less to work on your dream.
So, it’s not completely irrational for an aspiring entrepreneur to engage in what appears to be low-value work. But remember, your objective is not simply to create value. You can do this when you take a job that compensates you for another foregone job or lost leisure. No, to create extraordinary value, you must seek opportunities to hire and then reallocate resources to better use.