It’s well known that there’s an inherent opportunity cost to investments. However, the opportunity cost that’s considered is usually a financial one — a concern over what the money could have otherwise been invested in. There are other intangible factors that I’d like to consider beyond the financial, such as time and effort.

These intangible factors are especially important in early-stage investing as an investor is typically able to add value and improve the potential chances of success of a business by adding more time and effort. Further, an investor might be prevented from investing in a future company in a similar sector that could have more promising prospects because of perceived conflicts.

As an investor, how do you decide when to cut and run (expend no further time and effort) and when it’s worth sticking with an investment and continuing to provide support? Some investments might be utterly hopeless so it’s better to cut and run at the first signs of trouble. Whereas other investments might be close to turning a corner which would allow them to evolve into self-sustaining or even enviable enterprises.

Regardless of whether we are talking about public or private investments, there’s a level of time and effort that’s required to maintain a minimum level of diligence and understand developments impacting the investment position.

Time

Time is relatively easy to quantify, as some investments take more active management and others less. Angels will typically dedicate anything from a couple of hours to a couple of days per month to work with each of their portfolio companies. If they decide that an investment is no longer worth the time, then they just stop interacting with the portfolio company.

Effort

The effort could also be considered headspace or mental energy. If you’re thinking about a losing position then it’s detracting mental energy that could be used to find other potential investments or add value to portfolio companies that are in a slightly better position. In my experience, when I’ve had losing positions trading public equities (where you cannot have any influence on the outcome) it has generally been beneficial to cut those positions and find more beneficial investments. However, this decision isn’t as easy when it comes to a situation where you might be able to positively impact an outcome if you continue to work with a business.

When do you cut and run?

The question is, when should an investor decide that it’s time to cut and run? Typically, there’s no single event that turns a hopeful situation into a hopeless situation and it’s made even more complex because of the personal relationships and emotions involved (not to mention the capital).

While I’m still trying to develop a better framework that will enable me to make better decisions on whether it’s worthwhile sticking with an investment or cutting and running, there are a couple of heuristics that I’ve found useful by talking with other investors.

Is the current situation a result of internal or external influences? If the situation is a result of the entrepreneurs doing when they have been advised against the course of action or advised differently, then it’s likely a good time to cut and run. If the entrepreneurs have used their judgment and are unwilling to listen to external guidance then it’s unlikely that anyone will be able to influence the situation.

However, if the situation is a result of external influences — market shifts, macro shocks, unforeseen competition, regulatory interference, etc — then I’d give the company the benefit of the doubt and move onto the next question.

Has the fundamental story changed? In this step it’s important to review why the investment was made in the first place. Does the same line of reasoning still exist? If there was some increased competition, does this validate the market opportunity or is it a winner-takes-all market? Is the company able to pivot or adapt to the new situation to create other opportunities? If the overall, story remains the same or similar as a result of external influences then it could be beneficial to continue expending time and effort on the business to help them create change.

Conclusion

In conclusion, it’s difficult to work out when to cut and run and stick around. If you follow the simple framework of 1) Is the current situation a result of internal or external influences? And 2) Is the original story (read: the reason you invested) largely the same or similar? Then it’s probably worthwhile continuing to be involved with the investment. If it’s unable to clear both of these hurdles then it might not be worth any more time and effort.