The 4 Paths To Mega Money | Ep 975

0:00Poor people stay poor because they want a fast way to get rich. And instead, the richest people that I know 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 going to make you rich. You have to do that for yourself. So in this video, I'm going to show you the four paths to mega money. And I'll show you how to pick the right path at the right time for you. Let's get into them. You've got your money and your business. You've got other people's money and other people's businesses and then permutations of those.

0:28And 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 going to tell you where they are. So you've got Elon Musk. He's a raised capital guy. Almost every single company he's had, he's raised outside capital, and then he's continued to fund it and grow it.

1:04Larry Elson, who's number two, raised capital. Mark Zuckerberg, raised capital. Jeff Bezos, raised capital. Larry Page, raised capital. Sergey Brin, raised capital. Steve Ballmer, bootstrap. Microsoft is bootstrap. A lot of people don't know that. Underneath of that, you've got Jensen Wang, raised capital. Warren Buffett, investing. Michael Dell, bootstrapped. The Waltons, 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 contracts is there's a little bit of risk and there's a little bit of trade-off with each of them.

1:36And 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 cashflow. 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.

2:08A lot of times that's services. So agencies, home service businesses, B2B services, professional services, things like that. Sometimes nowadays you can actually do this with software. It didn't used to be that way, but now it kind of is. Education businesses, e-com brands, if you do dropshipping. If you don't do dropshipping, You'll have to front some capital in order to get the first inventory started. Local businesses, most normal companies. Now, to be fair, that scope has continued to broaden because the cost of entering business is going to continue to drop. Now, for me personally, my first brick and mortar business was a gym.

2:37And so that was bootstrapped. I used the profits from that to start Prestige Labs, which was a supplement company, which was bootstrapped. I started Allen, which is a software company, which is bootstrapped. And so all those companies were bootstrapped. Today, acquisition.com is taking some of that capital, investing it into other people's businesses, while also having some companies that we start de novo from our hold cap, which is kind of semi-bootstrapped and also kind of reinvesting our own capital. So you can see how some of these boxes merge. Now, who is this right for? So if this is your first business, I recommend starting with bootstrapping.

3:09And the main reason is just that you want to pay off ignorance. The last thing you want to do is take your friends' and family's 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 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 here is that like, I don't think you're going to want to go raise a ton of capital for everyone you know, maybe even VCs, if it's your first shot.

3:38Again, 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 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 to begin with.

4:07You 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 bigger slice of the pie. You decide the pace, the strategy, and ultimately you can exit on your own time horizon or never exit at all. 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 buy a dollar, sell for two, and you make money. There's nothing wrong with that.

4:35Here's some of the tradeoffs. When you bootstrap, you incur more debt than any other vehicle. Now you're like, wait a second, I thought I was 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're venture-backed, you can do that with some stock and then also decent cash compensation.

5:08And 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 along the way. Same thing with your data debt. So you're going to 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 cost basis a lot lower.

5:41The downside 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 cost to just build one robot, let alone many robots as you scale. And then you'd functionally probably lose money on building that first robot. And then after you lost money in the first robot, you somehow have to get more money to then build more robots. It's very hard to do without outside injections of cash.

6:14And 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, manufacturing, pharmaceuticals, where it takes years and years and years to get a drug pass, and then it makes money.

6:42Typically, 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, too, 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 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.

7:24So 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, 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 costs. I mean, you can lose money getting customers, right?

7:55You 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'd 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 rarer opportunities. And one of the advantages of that is that it actually prices a lot of people out of the market.

8:21So 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 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 going to 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 going to lose money up front, once the car factory is built, you know that every single car you're going to make X dollars of profit.

8:51Right? And that is how you end up recouping it and justifying the return to the investors. Some of the tradeoffs here are significant. You now have two customers instead of one. In Bootstrap, 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 you 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 going to dilute your own equity. Here, you have 100 % of the pie, right? Whatever you make is yours, and that's your pie.

9:24Now, 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 going to depend on the terms. Sharon, 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. Then I think he exited around age 25. It was many tens of millions of dollars. But because there were liquidation preferences and ratchets on those liquidation preferences, the investors got paid out first and with some excess.

9:57And so when he saw this very big number, the amount that he and 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 do multiple rounds, each person who's going to put money in also wants a 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. And so these are real risks that happen. You can lose control of your own company. And a lot of this is going to depend on the terms of other people's money.

10:25If someone gives you a trillion dollars for 1 % equity in your business, that's an amazing thing. If someone gives you$10 for 90 % equity, that's going to be kind of tough. And so this one is very much the devil's in the details. And your ability to raise is going to be a combination of two things. Your ability and track record as a founder and the size of the opportunity that the investors believe you're 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 going to have a lot of people strike out.

10:57But the economics of having somebody get 1 ,000x on their money allows them to have many losses. But if you're the person who takes the loss and N equals 1, as in it's 100 % of your life, that is where there's a sea of tombstones of failed ventures and founders who gave 5, 10 plus years of their life and pretty much worked a job but with way more stress for a long period of time and then ended 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 to the third way of making mega money, which is investing.

11:34Now, 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, kind of the equal opposite of raising capital. Now, you don't have to buy into venture type products. You can just buy cash flowing 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.

12:00So 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 because we have a whole service layer at ACQ. And so those are typically more cashflow investment businesses, but also obviously of 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.

12:32And 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. 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.

12:58Yeah. 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 shut down, it's because we ran out. But as long as the link still works, there's books. Well, once you have meaningful excess 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 die bet with a single company. But whenever you distribute your bets, you also decrease your upside, right? So Dale Carnegie had a famous quote, which is, put all your eggs in one basket and then watch the basket.

13:33And so that's him talking about this, right? Bootstrapping or 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 then 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.

14:09And 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 when 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 already have a high active income.

14:39And 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 or 11-year-old, whatever it was, to make your first bet? Probably not. Because you're like, oh, I want to be like Mozart. You're age 30 and you want to start investing. It's like, well, here he had like 19 concertos by this point because he started at age seven.

15:05So 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 to be clear, Warren Buffett's 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 think how crazy that is. So if you're like, I'm in this for the very, 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.

15:40then it's like, great. And if you get better and better at that game, you'll have more and more, and then you'll 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%, 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.

16:10but 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 Buffett 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 compounding that happened after.

16:45So 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 it in other people's businesses. You raise a pool of capital for investors, which the fancy word of 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.

17:19Now, 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 because we're going to use$200 million in debt to buy these businesses.

17:54And so think about the leverage that you get from your$5 million able to buy$300 million worth of 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've got to pay the debtors back.

18:31Now, they have some interest in some other stuff there too, right? Then we've got to pay our LPs back. All right, so we've 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 6 % to 8%, somewhere in there. And then whatever is left over here, you then have a split with them, LPs, and then GPU. So let's see what happens when you actually invest this money and then wait 5 % to 7 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.

19:05Like no one wants to get a public equity return and they have their money locked up for, you know, 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, your$300 million, right, that you bought now becomes$900 million. Ooh.

19:24More. 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 promise 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 just depends purely on the nature of the asset class and what you're investing in and your kind of proprietary blend of whatever.

20:06There's going to 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.

20:33Remember we started with$5 million? This is how you get mega rich. Now, to be clear, all of 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.