The 4 Paths To Mega Money | Ep 975

Poor people stay poor because they want a fast way to get rich and instead the richest people that I know I pick one of these four paths Play it for a decade and then end up with more money than everyone else that is just chasing shortcuts And just a fun reminder for you no president no economy is gonna make you rich You have to do that for yourself. So in this video I'm gonna show you the four paths to mega money and I'll show you how to pick the right path of the right time for you Let's get into them you've got your money in your business You've got other people's money and other people's businesses and then permutations of those and so your money your business Right is a bootstrapped business if you have other people's money and your business now you're raising capital If you have your money and other people's businesses now you're investing Finally, you have other people's money and other people's businesses which is fund Management now to give you some proof points around this I actually looked up the top 11 richest people Currently on the Forbes list and I'm gonna tell you where they are So you've got Elon Musk. He's a race capital guy. Almost every single company's had he's raised raised outside capital And then he's continued to fund it and grow it Larry Elson. Who's number two raised capital Mark Zuckerberg raised capital Jeff basis raised capital Larry Page Raise capital Surge a brain raise capital Steve Balmer bootstrapped Microsoft bootstrapped a lot of people don't know that Underneath of that you got Jensen Wang raised capital Warren Buffett investing Michael Dell bootstrapped the Walton's as in Walmart Bootstrapped and so that's the top 11 wealthiest people in the world now you might have noticed that fund management wasn't there If I go like six deeper you'll find people who did fund management now one of the interesting things about each of these Constructors There's a little bit of risk and there's a little bit of trade-off with each of them and I personally have done one two three and four Believe it or not and so I'll actually walk you through my own examples and which one's right for you So let's start with number one bootstrapped Bootstrapped just means that you fund the business from your own savings and cash flow you have no outside Investors and you grow through reinvesting your own profits. You have a website and you've got a cell phone and you've got skills And you start trading one for the other get a little excess money take that excess money and then continue to build now typical examples for this are usually low cost businesses to start a lot of times that's services So agencies home service businesses B2B services professional services things like that sometimes nowadays You actually do this with software. It didn't used to be that way, but now kind of is education businesses e-con brands if you do dropshipping If you don't drop shipping you have to front some capital in order to get the you know first inventory started local businesses Most normal companies now to be fair that scope is continued abroad and because the cost of entering businesses Continue to drop now for me personally my first brick-and-mortar business was a gym and so that was bootstrapped I use the profits from that to start prestige labs, which was a supplement company which is bootstrapped. I started at Allen which is software company, which is bootstrapped And so all this companies were bootstrapped today acquisition.com is Taking some of that capital Investing it into others people's businesses While also having some companies that we start to know of from our hold cap Which is kind of sell my bootstrapped and also kind of reinvesting our own capital So you can see how some of these these boxes merge now who is this right for? So if this is your first business I recommend starting with bootstrapping and the main reason is just that you want to pay off ignorance that the last thing you want to do is take your You know your friends and families money and then lose it because you don't know what you're doing That's my opinion everyone you know your results may vary you can stick to of the names on that list that I mentioned Jeff Bezos the people that he knew invested Bill Gates the people I think he had rich parents I'm sure they helped him out in the beginning I don't know the actual public documentation of that But I think he had a little bit of help in the beginning there But the thing thing here is that like I don't think you're going to want to go raise the ton of capital for everyone you know Maybe even VCs if it's your first shot again, you know your results will vary your life is unique But the main thing is that bootstrapped will typically be the slowest of the four paths and that is usually because it takes money to grow And if you have to make the money to grow It's almost like having a car factory built inside of the car It's very difficult to do humans do it. We have human factories inside of our humans weird stuff, right? But in in in business design It's much much more difficult right it's slower to build the capital reallocation machine While also building the machine that makes the capital begin with you kind of have to have both now the main advantage of this is that you keep the control and the equity So you have a whole you know bigger slice of the pie you decide the pace the strategy and ultimately you can exit on your own time Or I said or never exit at all right and the goal is that you design a compounding vehicle Which is either recurring or reoccurring within the business and then you let that over time do the heavy lifting That's the end goal now a lot of first businesses don't have any of those things But you you know buy dollar self or two and you make money. There's nothing wrong with that. Here's some of the trade-offs When you bootstrap you incur more debt than any other vehicle now you're like wait a second I thought I was you know using my own money to start this thing Yes, but you incur every other type of debt and oftentimes every other type of debt is harder to pay off than money is So what do I mean if you're starting with your own cash It's very difficult for you to attract like a star talent team of 10 people that all need a million dollars plus per year to work and Actually grow this thing if you were venture back you can do that with some stock and then also decent cash compensation And so that becomes harder to do so you incur lots of management and leadership debt if you like Can't get the high enough level of the softwares that you need in order to build your software company or whatever if you start low You're going to have some Technical debt that might incur as long the way same thing with your data debt So you're gonna have lots of debts that money could have otherwise solved for you But you don't have money as one of the things that you're in debt for now to be clear There are pros and cons there like the pro is that You can stay alive a lot longer because you typically keep your cross spaces a lot lower The downside is is that it goes slower and so your capital constraint will oftentimes limit the size of what you can pursue from day one if you wanted to Start an AI robotics business to go global it would be incredibly Unlikely that you would succeed because the amount of capital it would they would cost to just build one robot let alone Many robots as you scale and then you functionally probably lose money on building that first robot and then after you lost money That first robot you'd some have to get more money to then build more robots It's very hard to do without outside injections of cash and so this box does constrain to a degree What kinds of opportunities you can pursue and there's a reason that some of the biggest people in the world start here Which is a perfect segue to okay? So what is other people's money into your business? This is raising capital right? So you start and you run the company, but you raise capital from investors who buy a slice of equity to fund the fast growth Normal examples of this are tech platforms social networks marketplaces and manufacturing Pharmaceuticals where it takes years and years and years to get a drug pass and then it makes money typically anything that has huge amounts of upfront costs Then increasing margins or gross margins later and or winner-take-all dynamics meaning you have to lose money for a long time to get the whole market and then all of a sudden You have a network effect and then everyone buys from you Amazon famously lost money for like a decade plus before they really started turning a profit Facebook to lost money for a long time But they were mapping networks. So who should take this path? If you have a very big dream of what you want to build and there's functionally no way to make your thing profitable Without using other people's money like as I like you will just you know you're going to lose money for a year two years three years in order to actually have this thing work Then you have kind of like a predefined path that you're going to have to raise capital So I've experienced with this because school is venture backed right and so we raise capital at school to continue to Grow the company and we're able to give pricing which is absolutely absurd like $9 a month Which by the way is very little with inflation It's basically free in order to get as many people who want to start a business the all the tools they need to do it now The main advantage of this is that you start with a bigger thing You can hire the top talent you can outspend competitors You can be negative in your acquisition cost I mean you can lose money getting customers right you can build infrastructure faster than you could with your own cash alone and on a personal level You can incur way less personal debt because you know there be no way that you would be able to fund a lot of this Out of your own pocket now if you can if you're already rich then you can take on raising capital style big opportunities and then Fund it with your own cash and that's really an amazing combination but not available to most people But this allows you to pursue narrower opportunities and one of the advantages of that is that it actually prices a lot of people out of the market So to agree there is an element of risk with raising capital because typically the opportunities that people pursue are high risk High return opportunities, but there's typically far fewer competitors And so you know you can count to the number of competitors who are well-funded even in a space maybe on two hands If I said how many social media marketing agencies are there you're gonna need a lot more fingers And so within our car analogy example you actually just start by building the car factory and then even though you know You're gonna lose money up front once the car factories built you know that every single car you're gonna make X dollars a profit right and that is how you end up recouping it and justifying the return to the investors some of the trade-offs here are significant You now have two customers instead of one in bootstrapped your customer is just the end customer right when you have Raising capital your customer is both the end customer and the investors or venture capitalists and so that's one element Is that I have to serve two masters which can oftentimes be at odds which is a bit of a pain The second kind of big downside is that you're gonna dilute your own equity here You have a hundred percent of the pie right whatever you make is yours and that's your pie Now you can give profit shares you can give equity slices to key teammates or partners or whatever But they're usually in the business. They're actually helping you succeed within the business Whereas when you're raising capital a lot of it's gonna depend on the terms Shira on my partner tells a story about his first exit ever he learned what a ratchet was Which is that he had a very large exit in his first company that he started in his teens that then I think he exit around age 25 it was many tens of millions of dollars But because there were liquidation preferences and ratchets on those liquidation preferences that investors got paid out first and With some access and so when he saw this very big number the amount that he and the the other founders were left with was less, now to be fair, he did fine. But it was less than what he thought he was going to get. Now, as you continue to scale this, typically if you use multiple rounds, each person who's gonna put money in also wants to seat at the table, quite literally a board seat, which means that over time you can absolutely get voted out of your own business, which happened to Steve Jobs, right? And so like these are real risks that happen, like you can lose control of your own company. And a lot of this is gonna depend on the terms of other people's money. If someone gives you a trillion dollars for one percent equity in your business, that's an amazing thing. If someone gives you ten dollars for 90 percent equity, that's gonna be kind of tough. And so this one is very much the devil's in the details, and the durability to raise is in the combination of two things. Your ability and track record is a founder, and the size of the opportunity that the investors believe are going after and the likelihood that they believe that you can actually hit it. And I'll say the last downside here is that typically venture money is kind of grand slam money. It's like they just want you to swing for the fences and know that they're gonna have a lot of people strike out. But the economics of having somebody get a thousand tax on their money allows them to have many losses. But if you're the person who takes the loss and equals one is and it's 100% of your life, that is where there's a sea of tombstones, of failed ventures and founders who gave five, 10 plus years of their life, and pretty much work to job, but with way more stress for a long period of time, and then end up having nothing to show for it, which is tough. And they don't even have the story of the big success at the end. So this is actually far more common than the big headlines that we see. And the reason those things make big headlines is because they're rare. Which brings me the third way of making mega money, which is investing. Now this is the one that probably a lot of people have more familiarity with, right? It's your money and you're investing into other people's businesses, right? So you take the cash you earn actively from other places and you buy pieces, tiny chunks of other people's companies. It's kind of the equal opposite of raising capital. Now you don't have to buy into venture type products. You can just buy cash-felling businesses, you can buy public stocks, you can buy real estate. There's a lot of different things that you can buy with money. Now the clear thing here is that you don't run them, you fund them. So me personally, I buy kind of, I'm split in my investing. So I have ACQ Ventures, which is our venture arm. So that's where we are basically the raising capital partners for SMB tech. And so that's exclusively what we invest in because we understand it well. And then on the other side, we have kind of the private equity style investments that we do, but we also add some sort of service 'cause we have a whole service layer at ACQ. And so those are typically more cash flow investment businesses but also obviously have enterprise value. And so who should take this path? Hey guys, real quick. Many of you guys are getting started in business and don't know, but other entrepreneurs have already tried to help. And so 3.6 million copies were donated by other entrepreneurs in my book launch and I'm donating these books as well. And so if you're starting in business and you would like the ultimate business backpack, all three books, this one shows you how to figure out what to sell, this shows you how to get people to find out about it and this one shows you how to make money from it. And when you have all three, you can actually get started. All right, on top of that, if 30 days of school that you can get absolutely free, and all of this, including the books, including school, including shipping is 16 bucks. Yeah, like we lose money on this. So go grab it. It's the ultimate thing I can give you, my gift. Enjoy. If you go there and it's shut down, it's because we ran out. But as long as the link still works, there's books. Well, once you have meaningful access cash and you want the upside without the day-to-day operational responsibility, then this is an interesting path. And so the main advantages are that you have diversification. So you're able to make many bets instead of kind of a life or a die bet with a single company. But whenever you distribute your bets, you also decrease your upside. So Dale Carnegie had a famous quote, which is, put all your eggs in one basket and then watch the basket. And so that's him talking about this. Boost wrapping, you're raising capital for your own business. That's you putting all your eggs in one basket and trying like hell to make that thing work. With investing, you're kind of, you're spreading it out. But when we look at the most successful investors, they typically aren't nearly as diversified. They're typically way more concentrated, which allows them to maybe make five, seven, eight significant bets that they believe they have alpha or upside on above the market. And so with investing, I think that of the four of these, arguably the easiest lifestyle kind of decision because you have no boss. And you're technically other people's boss. And so you just write checks. You can inform what you want the person to do. To be clear, you might not have a majority. That's going to depend on the terms. But when Layla and I sold the company and we were just a family office, this is all we did. And I'll say of my entire life, the most chill period. And sometimes I think to myself, like, what was I doing? Why am I back doing this? Well, I don't need to do it anymore. But I want to make a key point here is that this is by far the slowest, number one. And number two, almost no one makes their money this way. They have already have a high active income. And then they begin investing. And if you're like, well, I'm going to be like Warren Buffett. Well, did you buy your first stock two weeks after Pearl Harbor when you were age seven? No. And did you do it in a world where there wasn't a Robin Hood? And you actually had to figure out how to do mail-in ballots and call someone as a seven-year-old, dare a 11-year-old, whatever it was, to make your first bet, probably not. Because you're like, oh, I want to be like Mozart in your age 30. And you want to start investing. It's like, well, here you had like 19 concertos by this point because he started age seven. So I wouldn't say, oh, let me look at what the top person in this field did if you were not that person. And so the whole point of this video is to figure out what path is right for you. And it'd be clear Warren Buffett is very famous now. But like, until he was 60, I don't think many people even knew his name, 60, right? And he's made the vast majority of his wealth from like, age 80 to 95. So I think how crazy it is. So if you're like, I'm in this for the very, very, very, very, very, very, very long haul, then this is a good path for you. And especially if you're somebody who wants a little bit more of a lifestyle, where you're like, okay, I just have to get my passive to exceed my active costs. Then it's like, great. And if you get better and better at that game, you'll have more and more, and they don't have nothing else to do. And you'll just keep playing the game just for the love of the game. But it does take time. It's unlikely that you're going to get these 50, you know, 50%, 100%, plus annual returns. Even Warren, for a very long time, didn't get those types of returns. And even in the beginning, he was still combating, I think 50-ish percent. But he was the best in the world. And then once he had more capital, his returns decreased. And a great note on this is that in, I would say, Main Street. Real estate is the number one most common path for creating millionaires. But not the most common path for creating billionaires. And to me, that is kind of like a great kind of cherry on top for this little bucket, which is that it is a great way to build and store wealth. It's being smart with your money and allocating it appropriately. It's unlikely to be the thing that gets you all the way to the top, unless you have a very, very long time horizon. And let's be real. You have to live to 95, like Warren Buffet to hit the list. Like that's real. Like Charlie Munger was 99 when he died. And so like in a very real way, like they had, like if they had died at 74, I don't know if we talk about them as much, because they wouldn't have had all the company that happened after. So like this is a long, long game. Finally, that leads us to number four, which is fund management. So this is, you take other people's money and you invest in other people's businesses. You raise a pool of capital for investors, which the fancy were to that is LPs or limited partners. And then you use that money to buy pieces or control of other people's businesses. Now, depending on the way that you do it, you can also use debt there too. So let me give you a visual of, this is potentially one of the highest leverage scenarios. It's like this on steroids, basically. And so let's say that you want to raise $100 million. Now I'm going to use big numbers, because I want you to think bigger anyways, rather than thinking in small numbers. All right, so in order for you to raise a fund with $100 million, it's typical that the person who raises the fund puts about 5% of the total funds raised in. So you put $5 million in. You raise $95 million of LP capital. That means limited partner capital. So other people put their money in. And then this is where it gets even crazier. So this is $100 million in total, right? But then you say, you know what, we're going to buy $300 million of businesses, which is we're going to use $200 million in debt to buy these businesses. And so think about the leverage that you get from your $5 million, able to buy $300 million for the stuff. Now, when this $300 million, let's say it just grows at 10% a year. Let's say you're not amazing. You're just matching the S&P. All right, in seven years, you'll double, right? So this is now $600 million, seven years later. Now, if you had a 10% return for private equity, that'd be bad. But I'm just going to give you like the base case of like, you're not that good at this. Okay? So that means that you have a $300 million Delta. So we got to pay back, right? We got to pay back the debt. So we have to take our $200 million out because we got to pay the debtors back. Now they have some interest in some other stuff there too, right? Then we got to pay our LP's back. All right, so we got to take this back. Now, sometimes there's a hurdle rate, which is a minimum return. You give these guys saying, I don't get paid until X happens. That depends, but typically in private equity, it's six to eight percent somewhere in there. And then whatever is left over here, you then have a split with them, LP's, and then GPU. So let's see what happens when you actually invest this money and then wait five to seven years. Now, let's say because you're in private equity and you're investing in non-public markets, you get a better than public market return, which is basically the baseline. Like, no one wants to get a public equity return and they have their money locked up for five to seven years. So if you got a 20% annualized return for six years, you would have 2.98 on the money. So, functionally, you're 300 million, right? That you bought. Now, it becomes 900 million. Ooh. More. All right, so we got to pay back our debt. So we have our 200 million that we got to pay back in debt. Now, there's going to be some interest on that. Let's say that we got to pay them back $100 million in debt payments. Okay, so we have that too. Now, we also have our LPs $95 million that they put in. So we got to pay them back that. And then there's some minimum return that we promised them before we participate, which for us is going to be about $40 million if we have a 6% prefer hurdle that goes back to them. So that is all guaranteed to them. Now, after that, it's your time. just depends purely on the nature of the asset class and what you're investing in and you work kind of proprietary blend of whatever. There's gonna be some split of the profits here that goes to you, the GP, the general partner, that's the operating partner, the person who runs the whole fund, and then some that goes to the LP or limited partner. And so let's say that you had a 50/50 split here. Let's just call it, okay? That means that after we add all of this stuff up, this slice here is $465 million. Remember we started with $5 million? This is how you get mega rich. Now, to be clear, all this isn't yours. Maybe two thirds of that isn't yours. But either way, even if you had 10% of that, and you got $46.5 million. You did pretty good on your $5 million investment, right? If you got 20%, now you're looking at $90 million. Even better on your $5 million investment. You see how this stuff adds up, and that's because this is leverage. Now, when we look back at our original kind of sheet here, with each of these four paths, you have to decide on what's best for you. If you have some proprietary way that you know how to source deals, and you have a good way of finding capital, which by the way, if you're like, "I don't know how to raise capital." You absolutely do know how to raise capital, if you have good deals. One of the best pieces of advice I got from Mentor of Mine is that there is no lack of capital in the world, only a lack of good deals. And so if you find a good deal, capital will appear. If you come to me and say, "I have a guaranteed way," which of course don't use those words, because that's a great way to get good money to run away. But if you were like, there's an incredibly high likelihood chance that I have of five X-ing money in this way, and here's the six different ways that I mitigate the risk, and let's say those are believable. And if we have that, then I'd be like, "Okay, well, how much money do you need?" And that's how any good investor's gonna ask the question, because when you do identify good opportunities, you just wanna back up the truck. Now in that setting, the higher, believe it or not, the higher the return and the more private the type of deal that you're doing, that's more niche and specific to what you know, typically the better the splits that you can negotiate on the GPLP split of the profits after some certain point. And so who should do this? I think the best version of this is where you build a track record, you figure out proprietary deal flies and deal with it only comes to you that no one else has, and you have some sort of real edge in picking and improving those companies. So oftentimes funds are organized around us, a singular thesis. So for example, at the very beginning of Backwards in Nakam, I got approached by a walnut tree fund. I was like, I don't even know this exists, but they explained how it worked, which is like, it takes 30 years to grow a black walnut tree all the way to like full size, but every year after year three, it creates walnuts, and so it cash flows every single year, and then the end of the 30 years, you cut the walnut tree down and you get this amazing walnut wood that you can then sell. And the cost is really just the seed in the time. And that was their entire business model, and they'd done this number of times, and they had these kind of staggered tree ventages, if you want me to use the wrong word, but like the vintage of trees every year, they had another cohort, and I was like, this is a really interesting business, and they had a fund around it, because I don't want to know where the Venice Whale and Tree Farmers are, I don't have those connections, I don't know how to sell walnuts at scale. Can I figure it out? Maybe is it worth my time? Probably not. Is it worth my money? If it doesn't take my time, maybe. And so the beauty of this one is that you have maximum leverage, and you have the smallest personal checks. You have huge potentials for upside. There's also fees that you can put onto this. Typically, the better and the more trackered you have, more you can add fees in. I'd say your first time oftentimes, you have less fees, just 'cause you want people to come in, and not think you're gonna get rich on the fees, they wanna have as aligned incentives as possible with the investor. Now, oftentimes, the GP ends up richer than any single LP, obviously depends on how much capital it's put in, that they take from. Now, the risks. You have enormous responsibility, and a very long feedback loop. And you're accountable to the LPs, and to regulators, and to the entrepreneurs who are running the businesses, and to some degree, the customers that those businesses serve. And so you have a lot of masters to serve in this time period, and you can be rich on paper, but the entire time you almost feel like a slave, which sucks. And so your job becomes managing risk and reputation, and people and portfolios, not just building one company. And if anything, you're almost building the company of the fund. So I got rich bootstrapping my companies. I took some of my cash and invested in other people's companies. That cash continued to compound. And I was able to invest and then co-found school where we raise capital. I obviously promote school as well, which if you are getting into business, you should check it out as nine bucks a month. I also have a really cool offer for you. Also, I had a bunch of entrepreneurs donate those books. So this is also one of my ways of fulfilling that promise. Now, I've raised capital, and then finally, it's in fund management. So we've raised capital for some of the real estate deals that we've done when we buy big buildings, which we do through ACQ real estate. We've only done that privately. Some of our high level clients and portfolio companies. We are functionally general partners in some big real estate buildings, which you can check out. Act was not a real estate. But yeah, these are the four ways to make mega money. Pick the path that's right for you, and make the odds be ever in your favor. (upbeat music) [BLANK_AUDIO]