The High-Cost of Transactions… All Investments Have a Cost
“I never confuse the cost of something with its value.” – Robin Hobb
All investments have a cost whether it be annual fees, legal costs, loss of capital or time. Investors believe they are making it when it comes to their investment portfolio because they have spent time and money in diligence processes to ensure the viability of each deal made. But, investors don’t always read or realize the fine print of investments and may be giving more than they will receive in the end. A couple of years ago, a Forbes article estimated individuals with 401Ks and IRAs were spending 1/3 of their lifetime retirement savings on administrative and overhead costs.
Investments have costs associated to ensure that nothing is overlooked, the entrepreneur is not bludgeoned with high expenses leaving the investment at a much lower amount than expected, and to deter investors with small capital interest.
Annual fees on investments typically are accrued to the deal lead, possibly an account manager, or the entrepreneur as a means of revenue. Legal costs are charged so the entrepreneur is not burdened with the entirety of legal costs of the business and investment. Loss of capital is obviously the worst outcome or cost for investors and can come at a cost of between thousands and even millions of dollars. Lastly, the loss of time can be equated to the amount of time an energy due diligence processes take, nurturing of the start-up and time to gain return on investment.
Investors are willing to pay the costs of investment when they believe that there is a viable investment opportunity that could create substantial returns; and therefore, profit. “Decide what you want. Decide what you are willing to exchange for it. Establish your priorities and go to work.” – H.L. Hunt