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Welcome back to the show. Today, I'm going to talk about the four paths to

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mega money. And so in the year that I took off after the sale, I studied this

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intently because I wanted to figure out the best opportunity vehicle for me.

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And it turns out there are four and all four can make you mega rich and they all

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have pros and cons and let's start with the first one. So in the first path, you

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have other people's money being invested into your business. Now let's look at

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some of the business titans that followed this path. So here you can see three pie

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charts with 17% 10% and 4%. If I were to show you this and say, do you think the

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people who own these pies are very rich? You might think, well, no, they own so

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little of the pie. But if I then said, this is Tesla. This is Amazon. And this is

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NVIDIA. Would you all of a sudden then think, oh, wait, this is Jensen Wang, Elon,

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and Bezos, some of the richest people in the world who are all sense of billionaires

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and now at this point, multi-senti-billionaires. And so these incredibly successful

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people understood the first path of getting ultra wealthy, which is the combination

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of other people's money into your business. Now the way that it works is that you

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raise funds by selling a percentage of your company. So what this does is that it

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actually dilutes you as a founder, meaning you no longer own 100% of your company,

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but now you might own 80% of a company that now has an extra $20 million, for

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example, that you can then use to grow. Now, there are some businesses that this

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is the only strategy to successfully, realistically, accomplish the goal. And then

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there are some businesses that this would be a terrible idea to pursue. One thing

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that I think took me way too long to understand, as an entrepreneur, is that every

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single business incurs debt, the moment you start it. The question is what type of

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debt you're going to incur. And so for example, if you bootstrap a business as

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then you take no outside capital when you start it, you just fund it yourself

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and you own it and you grow it organically, then the debt that you take on is going

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to be that you're not going to have enough money to get the best talent in the

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door. And so you're going to have talent debt. You're probably not going to have

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enough money to get the right technological infrastructure in place to run the

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entire business. So you'll take on technological debt, right? And you can go down

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the line, starting about all the other, ancillary, non-financial versions of debt.

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Now, businesses that choose to take on financial debt, choose to take on that

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debt instead of the other types of debt, because of the nature of the

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competitive dynamics of the market they're in. And so those types of businesses

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typically are in businesses that take a tremendous amount of capital to start

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up and scale, or they are in winner take on markets where speed is the primary

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objective of the business so that they can capture the opportunity and then

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fundamentally become monopolies of a new type. So Facebook, for example,

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became a monopoly of attention to a large degree. Now, because there are other

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social media platforms, they get away with that, but they have created a big

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moat around all of the attention that exists in media. And so for them,

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there's only one real big social network that was going to exist. And so they

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then captured it. Of course, LinkedIn was like, well,

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is there a version of that we can do for business professionals? And then they

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captured that. Can you imagine now another professional social media

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platform being like, oh, we're, we're now starting up. It's like, there's no

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room for you, right? It's already done. That market is captured. There were

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other companies that were competing for the same market. And the people were

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able to to raise the most money, spend the most money, the fastest, attract

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the best talent. We're able to capture the fastest, then sealing their competitive

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mo to keeping that as a long-term cash cow over the long haul, which means

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that those businesses lose a tremendous amount of money for a short period of

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time. And then they're able to kind of get over the hump and then become cash

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machines. And so for example, Amazon was unprofitable for nine years

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famously. And there's an interview of Jeff Bezos getting grilled on the

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tonight's I think with Jay Leno. Is it Jay Leno? Yeah, with Jay Leno. And he's

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like, you guys don't make any money. And Jeff Bezos just gives it, he does

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this like weird laugh. And he's like, yeah, we don't, but we could. We just

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choose not to because we get better returns on our capital by continuing to

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expand our infrastructure so that we can eventually support literally

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delivering things the next day to every single customer in America. Not

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withstanding the fact that they have the single most successful subscription in

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history in Amazon Prime. And so when Bezos was making the investment of

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capital into the business, he asked the question, not, what do I think is going

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to change in the next 10 years? He said, what things won't change in the next

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10 years? And so he realized that there are some fundamentals that will never

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not be true. People will always want things to be faster. People always will

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want things to be easier. People always will want things to be risk free. And if

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you can create an outcome that is desirable, fast, easy and risk free, then you

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have an incredibly valuable business. And so this corresponds with the value

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equation in the $100 million offers book. And so time to lay speed, eases can be

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reference act price, perceive like it's even as your risk. And then the dream

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outcome is making sure that you're not just making things fast, easy and risk free

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that no one wants, right? And so that's the dream outcome component. And so getting

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things to your door, a lot of people want that. If you can do it faster, they like

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that more. If you can make it easy for them, they like that even better. And if you

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can make it so that the purchase they had is very likely to be good, aka the

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entire review system that Amazon pioneered. Reviews were not a thing. Think about

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how crazy this is. They were not a thing. And a lot of people were afraid and pushed

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against basis when he wanted to roll out reviews because they were afraid that

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sellers would hate it. But he bet on the fact that customers long term would

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want the transparency. So in Jeff basis is very first capital round that he

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raised. He sold 20% of the business for $1 million to around 50 investors. And so

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imagine the return on that today for that $1 million for 20% of Amazon. It's

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more than he still controls to this day for context. And he took that to buy the

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initial inventory, get the website established, hire the first developers to get

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this going. You take on debt. If you're going to take on financial debt, use other

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people's money into your business. If you have a market that must be captured

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quickly in order to get a network effect of some sort, or you have huge amounts

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of capital that are required to make the business start to begin with. So if I wanted

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to start call it a pharmaceutical business, then I would probably have to have

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capital for an extended period of time to start a new drug to do the research. And

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then maybe five years after we get the licensing, then have the ability to print

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money. But that capital would have to come from somewhere. And so unless you start

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as a billionaire to begin with, which you actually could do that hypothetically,

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but the vast majority of these businesses are not started by billionaires. They're

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started by everyday people who have a good idea. And then they go to people who

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left capital and say, hey, I'll give you a piece of this upside. This is the live

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fast, you know, die hard style of making money. The reason it is that way is

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because it will typically be very investor favorable, especially the earlier it

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is because they are taking on more risk. And so the big thing about these mega

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wealthy paths is that the underlying thing that occurs in all of this is one,

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return on invested capital. And two, the risk that you're taking in order to

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validate or justify that return. Some guy in 1995 says he's going to start a

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bookstore on the internet, whatever that is. And you give him a million dollars.

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It's like, I need 20% of this thing at least because no one's ever done this

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before. You've never started a business before. What's the internet? And are

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people even going to buy stuff on it? Right? So there are so many unknowns here

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that it makes sense that they had a tremendous amount of compensation for the

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veritable guarantee that they lose the money they were going to give. And that's

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probably part of the reason that Jeff Bezos didn't just raise it from his

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friends and family, despite the fact he was a Wall Street insider. So he could have

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easily gotten the million dollars from probably a handful of people, but he also

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probably knew that there was a very low chance of success, which I think he

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says in his early interviews, he figured that there was a low chance of

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actually making this work. And so when you follow this path, the other people's

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money into your business path, there's really only two big kind of potential

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outcomes. One is, as a founder, you're going to de-risk along the way, which

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means that sometimes you will get something called secondary. So when an investor

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puts money into a business, they're going to appraise the business based on how

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quickly it's growing, how likely it is to continue to occur. Well, for them, the

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ease of investment is high because they just have to make the investment, but

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still the fundamental value equation exists for them as an investor, where your

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business is the product itself. Let's say that we have a business before the

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money that is worth, we'll call it $10 million. And then they say, I want to put

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$2 million into your business. So if they put $2 million into your business,

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this business is now a $12 million business, where they now own 20% and then

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everyone else now owns 80. And so the founders and the original shareholders are

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going to get diluted. It means that they now own a smaller percentage, but now the

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business has more capital that can't help it grow. Now, a different path to this,

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if instead of putting $2 million into the business, they could have put, let's

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say, $1 million into the business and say, we're going to pay the founder over

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here into his personal bank account, $1 million. And so that's called secondary.

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And then most people don't even say primary, but it's kind of almost assumed

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that money's going into the business when you're raising around, around a

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funding. And so some founders will de-risk along the way, because at some point,

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you know, when you have a billion dollar asset and you have $100,000 in your

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bank account, some investors will understand that the founder themselves will

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become a little bit volatile. And so they want to give them a little bit of

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money so that they're not constantly freaking out and actually can make better

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quality decisions. So it's not uncommon for founders to take a little bit of

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chips off the table as they continue to scale and raise funding. Now, this is

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along the way they're making this money. But they still have this monster asset

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that's worth billions of dollars or hundreds of millions of dollars. And so

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there's basically two paths from there for them to actually get paid. Path one

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is that a big private equity firm, which is now kind of a new thing, is that

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there are some firms that can buy billion dollar businesses and not have them

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be public. This is a new thing of probably the last call up seven to ten years

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where there's enough private funds and enough private money, sovereign wealth

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sometimes overseas that can take down companies of this size. When I say take

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down, I mean, put the capital in and buy it. So a simple example of this would be

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like a company like Kajabi, which is a learning platform where Tiger Capital

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came in and bought majority of the business and the founders basically now

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minority and they kind of had a full exit and almost all of that cash went to

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the founders and very little into the business. In that setting, it's like they

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had a lot of capital. They bought this company and so now they're, you know,

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what's their exit? And so most of these paths, especially when you're raising

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funding, most of the time is going to be some IPO. So an initial public

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offering that then allows those shares to be made public, which allows the

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person who owns the whole pie and all the shareholders to have liquidity, meaning

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they have access that they can either sell those shares or they can lend

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against those shares. Either way, they have a way of making money from the

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business, not counting distributions, which many businesses that are like this

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don't ever give distributions because they continue to reinvest the capital

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in the business because the returns from reinvesting the capital are superior

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to just getting a dividend. One of the difficulties with raising money is the

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nature of the money that you take on. All of these are completely unique deals,

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depending on the risk profile of the company, the risk appetite of the venture

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capital firm or whoever's making the investment and how, what their

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investment thesis or philosophy is. And if you look at a hundred different

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VCs, you'll have a hundred different investment philosophies in terms of what

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they're thinking about. Now, all of them just want a big company, of course, but

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how they're going to get there is different. So there are some firms that only

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take on one company in a specific space and they say, we're going all in on

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this company and we're going to provide all the help we possibly can help them

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grow. Right? There are some companies that say, we want exposure to this entire

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market and we're going to take a bet on 10 different companies in this market

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with the hopes that one of them will win. So they don't even care that they're

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competitive. They just like, we want to make sure that we're with the winner

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whenever whoever the winner is. If you're in the latter example, each of those

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VCs checks might say, well, we have to 10x this business in the next two years

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or it's going to massively lose valuation. And so they will force the

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founders to take aggressive growth measures that may sometimes be not in the

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long-term benefit of a the founder, but be the business, which might mean that

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they're overspending on advertising, they're overhiring on talent. They let

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the culture get diluted or suffer because they can't have enough filters in

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place because of the rate or the pace of growth that they are requiring. And a

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lot of this growth is almost artificial because they're just injecting

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so much cash into advertising oftentimes to get the business to grow that they

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actually didn't solve the core fundamentals of the business. So one of the

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dark sides of this that doesn't get told is that as you do more and more

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rounds, each VC or venture capitalist oftentimes gets a board seat or two board

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seats. And all of a sudden you might find out that you have a minority of your

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business and you no longer have voting power and you can get ousted from your

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own business from the investors that invested money in. And so a classic

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example of this was Steve Jobs. There was a period of time where he ended up

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getting kicked out of Apple for years before being able to come back. Now,

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mind you at that point, it was still a public company and it had a board of

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directors, but it works the same way with a private company. I have a good

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friend of mine who is who exited had had enough of an exit. It was a billion

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dollar valuation. He didn't get a billion dollars, but he had enough of an exit

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that he could retire. And he continued to work, but then they just said, we

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don't want you to work here anymore. And so he got fired. And then three years

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later, they asked him to come back. And so it's very common to think, oh, this

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founder doesn't really know what he's doing, but the thing is the founder always

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knows the heart and the pulse of the business because you're the one who knows

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each of the problems and why everything exists the way it does. In terms of

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wealth creation, when you take, let's say, a hundred of these bets, you can get

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supremely wealthy. So believe it or not, venture capital is the highest

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returning asset class of all asset classes. The problem is the amount of

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capital that you can allocate into that asset class typically is very close

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to very small because most of these funds and good companies are over

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subscribed. There's many investors who want to put money in when these deals

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are really good, or the likely that the business succeeds feels really high.

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What happens is you may take a hundred bets and the winner you have may offset

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the losses, but you're still never going to get richer than the guy who has a

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fully concentrated bet on the one business. And so there's 99 entrepreneurs who

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failed and didn't make money, but one of them who still gets even richer than

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the venture capital investors who put, who put money in. They use that one

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winner to offset their losses. Whereas if you were the only guy who went on a

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little net, you don't have losses to offset. You just went all in. And the reason

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you take path one is because you have a business model that requires you to grow

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quickly or have tremendous amount of capital for an extended period of time

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before it could become profitable. If you've ever heard of like XYZ company

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raises money at a $500 million valuation, they're not saying they sold the

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company for $500 million. They're saying that the founders deluded themselves

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and the other investors by some percentage. And it could be as little as one or

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two percent at that valuation. So for example, if you had a $500 million

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company and you sold 2% of that business, then you would have $10 million

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in cash that you could then put inside of the business to then help it grow.

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But you'd only sell 2% for that at that valuation. Hopefully this puts some

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relative numbers to some things that you've heard before. So let's say that

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you don't want all that risk. You have your money and your business. And so

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this is probably the most common path that entrepreneurs take. And I will say

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that a lot of the entrepreneurs that I aspire to and like to model tend to fall

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on this bucket within this model. I want to make a very big point clear, which

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is that many people who are bootstrapped or could otherwise be bootstrapped

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businesses as in the founder themselves funds everything and doesn't take

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outside money. They sometimes act as though they are venture backed and that

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they must grow at all cost. And they chase growth for the sake of growth.

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My first big thing that I'll share with you is that rush is imaginary. 99% of

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businesses don't need to have some aggressive growth timeline. Because whether

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you're starting a chicken shack or you're starting a lawn care business,

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there's no network effect that you're going to build up. You just have to

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keep out competing and doing a good job in the local area or in the service

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vertical that you're concentrated in in order to achieve good returns for

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the business. And so if you look at Chick-fil-A with Estruik Cathy, they had

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a competitor at earlier on in their career called Boston Market. Some of the

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older people in my audience might have remembered this. I used to go there

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after baseball games. And Boston Market was kind of like chicken and home style

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cooking and they were to recompatter with Chick-fil-A. Now they raised a

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gazillion dollars and went super, super fast and everyone told Chick-fil-A that

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they should do the same thing. But Estruik Cathy being a lot more prudent of a

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man who is not who didn't want to take that kind of debt on who didn't want to

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just chase some imaginary title for ego. He said, we just need to get better.

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And if we get better, our customers will demand that we get bigger. Fast forward

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10 years after Boston Market was kicking the tail off them and was a Wall Street

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darling, they eventually went bankrupt. Meanwhile, Chick-fil-A 75 years later has

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2,600 locations and they're all privately held and they have no debt. Now,

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you might think, well, I don't want to wait 75 years. It really depends what

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kind of vision you have as an entrepreneur because for me, my belief is like,

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if I could build something that outlasts me, I think that would be amazing.

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And sometimes the way to build something for the long term is to not build it

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for the short term, which is not fast and growing at all cost. Because sometimes

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you grow bigger by giving yourself the time to grow longer.

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Yeah. And I share the story because this is how I've started every company that

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I've found it. So I haven't found it a company and taken on capital.

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I have invested and co-founded. But if I'm the sole founder of the business,

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I have typically good strapped it, meaning I funded the original business.

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So when I had my online fitness business was my very first business.

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That was just me and I spent the $5,000 to start that up. My gym cost me,

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I think $37,000 in total to start my first gym and sign the lease and get it kind of

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outfitted. That was on me that fronted that capital.

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And when I opened up each additional location, it was the same thing.

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There's a key point there that I'm going to talk about return to invest in capital

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in a second. So stay tuned. The next thing I had was gym launch,

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which was started by me, prestige lab started by me,

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Alan started by me, acquisition, not counter started by me and funded.

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And so when you do that, you don't have any delusion,

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but you also have complete control. And so if you can think long, you can grow big.

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Now back to the return on invested capital, every business you want to have a

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compounding vehicle within it. So what I want to do is walk you through a little

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company example that will illustrate this. So let's say we have company A and we

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have company B. And let's say this is your one, your two, and your three.

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All right. So let's say your one company A sells 100 customers, company B sells

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100 customers. Next year for company A, they lose 100, but then they sell 200

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customers. So they're plus 200 and then minus 100. So they lost 100% of those

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customers. They still did 200 sales. Okay. This company gets plus 100 and then

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minus zero. So they're now at 200 in total, 100 from the first year,

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100 new customers from the second year. And let's say your three company A sells

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300 new customers and now also loses the 200 customers from the year before.

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And your three, they company B sells another 100 customers, but has the 100

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from your one and the 100 from your two. Both of these companies are going to have

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300 customers in that year, which business would you rather have?

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Hopefully, if you watch anything that I talk about, you would want company B.

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Why? Because this is a company that is stable, that will continue to grow

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year over year over year. And they don't need to necessarily grow.

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They don't need to grow faster. If they just do a good job and keep the customers

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they have, they will just consistently grow year over year. And I'll tell you

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this, knowing that no matter what happens, you will always get bigger is a very

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nice value proposition for an investor or for you as an entrepreneur.

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The key is that you want to have some sort of compounding vehicle within the

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business. And so to accomplish that, there are pretty much only two ways to do

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this. So one is you, so the first is that you sell stuff that people never

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stop buying. And so that can either be a recurring or reoccurring membership.

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So a reoccurring business might be something like Coca-Cola, right?

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Where you start drinking Coca-Cola and you go to Costco, you buy it,

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when you go to restaurants, you buy it and see you buy from a number of different

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places. Now, you're not on a subscription for Coca-Cola, but you might just buy it

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on a regular basis. And so because of that, once they acquire you as a customer,

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you keep paying them. Starbucks is the same way. Once someone goes to Starbucks,

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the average customer spends $14,000 in Starbucks. They just keep buying products

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from them, right? You're not on a subscription, but you do keep going back.

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The other version of this is something like Netflix where you have

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subscription, you have a membership of some sort, and people stay on and keep

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paying. And so in either of those situations, as you acquire customers,

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the business just keeps growing. And so every new customer you bring in and just

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grows this big bolus of people that over time makes you more and more money.

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The second scenario is where, and this happens all the time in like home

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services, solar, you know, roofing, a lot of real estate adjacent type stuff,

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where you have a business, I mean, even physical products can be this way,

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where you have a product that doesn't have a lot of return business.

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So if you buy a house and sell a house, it's like maybe somebody comes back to you

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three, four years later. There's nothing wrong with that,

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but you probably wouldn't describe that as a recurring or reoccurring business.

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And so instead, if you own a business like that, what you'd want is a growing

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network of people who never stop selling for you. So here you have customers who

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never stop buying and here you have a distribution base of people who never

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stop selling. And so for example, prestige labs, the someone company we had,

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people who go to the gym and try to lose weight, that's a very cyclical thing.

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People try to lose weight for a little bit and then they fall off. And that's

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common. Now that being said, what can make the company more stable is if I have

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a thousand locations that are consistently selling product every month.

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Now, the who they sell it to might change, but the fact that they are

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continuously selling becomes the node of kind of recurring revenue or

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reoccurring revenue, but just one level chunked up. And so this is a distribution

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base model, this is a customer base model, but both of these compound.

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And so when I look to invest in a business or start a business, I try and

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solve for this. Once you solve for this growth becomes inevitable. Right.

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And because of this, when I was 26 or seven years old, it was the first year

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that I made like a lot of, lot of money. And I took home, um, I think just

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under $17 million in profit, personally, uh, in income. And so, um,

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this stuff absolutely does work. Uh, so this is just like arm tier and

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theory that I'm just like talking about something I haven't done, which I

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can understand any skepticism around that because of a YouTube video on the

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internet. That being said, the key to growth in this path. So when you're in

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this box, it's your business and your money, your key or your path, the

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growth is something called return on invested capital. So it's ROIC. Now

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return to invested capital basically is how much money does it cost me to make

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more money? And so for example, there are multiple levels of this within a

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business. And so if I have a brick and mortar business, you're going to have

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the lowest level of this, which should be LTV lifetime value to CAC, which is

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how much does it cost me to get customer versus how much do I make from that

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customer over time? Right. That's the base unit of economic arbitrage in

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business. This is how you make money fundamentally. Now, level up from this, you

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have ROIC, which still talks about the same concept, return on invested capital.

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How much does it cost me the return? This is basically LTV capital is the cost,

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right? It's just one frame. So I'm trying to give you the real terms rather than

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just use some of the third grade, third term, terminology so that you can

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actually learn it. All right. So return to invested capital typically will

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describe the larger unit. So if my my massage business, for example, cost me

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$10 to get a customer worth $1,000, then that would be an amazing LTV

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to CAC. But the question is, how much does it cost me to open a massage studio?

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Well, I mean, this doesn't take into account the lobby, the build out, the

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licenses, the recruiting costs, administrative costs, tech costs, you know,

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construction, whatever. At this point, it's like, okay, maybe I have an amazing

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LTV to CAC, but my return on capital might be not as good or it might be

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amazing. Here is basically the bigger money multiplier within the business

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over the longer term. Let's say that we have a business that does $1 million

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top line and we own the whole thing, okay? Million dollar top line and let's say

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it makes $250,000 in profit. If we are entrepreneurs, then we have two options.

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We can reinvest that in our business or we can put into another business or

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another asset. But if we know that our returns on invested capital are very good,

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then it would behooves us to put it into our own business. And so let's say that

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my return invested capital in my brick and mortar chain, for example, let's say

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that it costs me to open this million dollar business. It costs me $50,000 to

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open a store. And within 12 months, it makes $250,000 back. And if you hear

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that and you're like, whoa, that's amazing. This happens all the time. This is not

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that uncommon. I mean, I told you about my gym cost me $37,000 and I was making

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$20,000 a month within six months. You absolutely can have these kind of these

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metrics, okay? So at this point, what would it make sense for me? Why should

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probably take my $250,000 and basically have this times five. And then this gives

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me this times five. In all of a sudden, the next year, I make $1.250,000,000. And

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what I do the next year, this is how compounding occurs. So then I split this

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up and what would this allow me to do? I would open up 25 locations. And then

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that would make me 5.25 million in net income, right? Now, of course, when you're

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at this point, the constraint will quickly be operational constraint. You'll

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actually have a people issue of trying to staff all these things, get all the

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location signed. And this is why some people turn to franchising and things

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like that so that they can expand a little faster. And that being said, it is

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the most expensive form of equity because you're giving away basically the

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entirety of your business for a percentage of the top line. But then you have

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to still service all of the locations almost as if you own them. And so I'm not

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the biggest fan of franchising. There are times where it does make the most

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sense. But most times, it's because founders are in a rush. If this is your first

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time business, hey guys, real quick, this podcast only grows from word of mouth.

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Quite literally, there's no other way to grow a podcast in word of mouth. If

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there's some element of this that you think somebody else should hear or be

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relevant to them, it would mean the world to me. If you shared this via text,

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via Instagram, via DM, via whatever way you like to share stuff with people you

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love. Thank you. I would strongly recommend doing your business and with your

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money because there's so many things that you don't know and you have to pay

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down your ignorance debt. You have to pay down the cost of not knowing what

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you're doing. And I'd rather you do that on your money than someone else's.

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If you do start to have this business that starts doing well and you start

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having this XX cash are $250,000 in the example I just gave. So the third

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path is that you can have your money with other people's businesses. So remember

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here we had our $250,000 in profit from this business that we created. Well,

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of course we could put into our own, but if we put it into someone else's,

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then we want to understand what our return profile is going to be. And so this

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is what I would consider the path of the investor. And so if the first,

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you know, category is the path of kind of like the venture backed entrepreneur,

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the second path is the bootstrapped entrepreneur. The third path is the path

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of the retail or just traditional investor. You have some extra cash and you

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want to put it into something else. So for example, you guys have probably seen

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the show Shark Tank where there's five sharks that are all wealthy people and

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entrepreneurs come to them and they invest in their companies where they give

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00:27:02.760 --> 00:27:07.240
is money and help. And when they get back is some percentage of the upside,

419
00:27:07.280 --> 00:27:11.080
depending on how the deal is structured. Those sharks tend to have less time.

420
00:27:11.280 --> 00:27:15.240
And so what they're compensated for is risk. And so when you become an

421
00:27:15.240 --> 00:27:19.600
investor, the chief thing that you give is that you de-risk the founder and you

422
00:27:19.600 --> 00:27:23.560
incur some of that risk. You shoulder some of that risk, not in exchange for

423
00:27:23.560 --> 00:27:27.000
work or time, but in exchange for capital, which fundamentally means I took

424
00:27:27.000 --> 00:27:30.640
time somewhere else. I did work somewhere else and I'm going to throw that into

425
00:27:30.640 --> 00:27:34.520
your business so that I can offset your personal risk. Now,

426
00:27:34.520 --> 00:27:37.840
the benefit of investor is that you can diversify to a wide degree,

427
00:27:37.840 --> 00:27:40.520
meaning you can take 100 bets. You can take a thousand bets. So every single

428
00:27:40.520 --> 00:27:43.440
share that you own in a public security company is a small bet that you're

429
00:27:43.440 --> 00:27:46.920
making is an investor. And if we share that you own of a privately traded

430
00:27:46.920 --> 00:27:49.720
company works the same way. It's obviously not privately traded, but just off

431
00:27:49.720 --> 00:27:54.360
market. It works the same way. Now, investors in general tend not to be the

432
00:27:54.360 --> 00:27:59.080
wealthiest people in the world. And so this is why, in my opinion, real estate has

433
00:27:59.080 --> 00:28:03.120
created more millionaires than any other vehicle, but private equity has

434
00:28:03.120 --> 00:28:07.600
created more billionaires than any other vehicle. And so it's because of the

435
00:28:07.600 --> 00:28:11.680
nature of the concentration of risk and reward. When you are the business that

436
00:28:11.680 --> 00:28:16.080
goes all the way to the investor, you might represent one percent of their

437
00:28:16.080 --> 00:28:19.240
portfolio. So you might have a, they might have a huge win with this business,

438
00:28:19.240 --> 00:28:23.520
but it's only going to be 1%. But if it's your business in either of these

439
00:28:23.520 --> 00:28:26.920
scenarios, then you're probably going to have a big slice of that pie, which

440
00:28:26.920 --> 00:28:33.560
means that their 1% win might be a 20% win and 80% win for you. But what we

441
00:28:33.560 --> 00:28:37.920
don't see is the other 99 entrepreneurs who just go to zero. And so this is

442
00:28:37.960 --> 00:28:41.760
where I think that from a personal level, you have to know what you are

443
00:28:41.760 --> 00:28:46.320
shooting for. Because if you're like, I just want to get rich, then investing in

444
00:28:46.320 --> 00:28:49.440
sound assets that can give you a good return over a long period of time,

445
00:28:49.560 --> 00:28:54.040
there's probably no sure way to become wealthy, to become the richest person in

446
00:28:54.040 --> 00:28:57.440
the world, or the top 100 richest people in the world, you will almost

447
00:28:57.480 --> 00:29:00.720
invariably have to do one of the other two paths that I just described.

448
00:29:00.720 --> 00:29:04.880
The fourth path that I'll show you last is one that also gets you on the top

449
00:29:04.960 --> 00:29:08.720
100 list too. And I'll share how that works in a second. The beauty of being a

450
00:29:08.720 --> 00:29:11.920
traditional investor where you take your cash and you invest in businesses is

451
00:29:11.920 --> 00:29:16.040
that it's unlimited at scalability. It's for the most part passive with the

452
00:29:16.040 --> 00:29:18.840
exception of the active work that you have to do in finding, sourcing, negotiating

453
00:29:18.840 --> 00:29:22.680
the deals, which is work, but typically less than running a business. Since I am

454
00:29:22.680 --> 00:29:25.640
an active investor, why don't I share with you some of the things that I look

455
00:29:25.640 --> 00:29:29.440
for in businesses that I invest in? Now to be clear, this will be my investment

456
00:29:29.440 --> 00:29:34.120
thesis. There are many. So for me, I create content like this so that I can get

457
00:29:34.120 --> 00:29:37.040
exposure to entrepreneurs so that they can come towards acquisition.com and say,

458
00:29:37.040 --> 00:29:40.400
hey, I'd like to do a deal with you or I'd like your help to help a scale.

459
00:29:40.600 --> 00:29:43.480
And we happily do that. And this is how we get to know businesses at early

460
00:29:43.480 --> 00:29:46.840
stages so that we can be with them throughout their careers. I mean, the smallest

461
00:29:46.840 --> 00:29:49.640
company that we that we started work with had done $2 million a year before.

462
00:29:49.800 --> 00:29:53.000
And this year will probably finish around 110 million in revenue. And that's

463
00:29:53.000 --> 00:29:57.840
mind you over years, not like a couple months. Number one is that I try to

464
00:29:57.840 --> 00:30:02.200
invest in a high cash flow businesses that are profitable. So I like getting

465
00:30:02.200 --> 00:30:06.320
distributions every month because it offsets my principle. And it tells me that

466
00:30:06.320 --> 00:30:10.000
the business is doing well on a much faster feedback loop. So number one is I

467
00:30:10.000 --> 00:30:14.680
invest in high cash flow businesses. And mind you, this is in my active arm.

468
00:30:14.680 --> 00:30:17.000
Addict was not common. It's kind of our private equity portfolio.

469
00:30:17.280 --> 00:30:22.720
We have a venture arm, which is ACQ ventures, where we write smaller checks for

470
00:30:22.720 --> 00:30:27.200
smaller slices of businesses where we are not involved in our primary value

471
00:30:27.200 --> 00:30:32.520
that is risk and a light amount of help compared to what we do when we're

472
00:30:32.520 --> 00:30:35.960
heavily, you know, investing in a company we're taking, you know, 30, 40,

473
00:30:35.960 --> 00:30:40.520
50, you know, plus percent of the business. In those instances, we're going

474
00:30:40.520 --> 00:30:42.280
to be working. We're going to be recruiting. We're going to be working, you

475
00:30:42.280 --> 00:30:46.040
know, we're going to be leading the strategy that business versus just say, I

476
00:30:46.040 --> 00:30:48.760
believe in this entrepreneur and this team. I believe in this concept. And I'm

477
00:30:48.760 --> 00:30:52.040
willing to write a check and take on some risks. I'm going to expose to some

478
00:30:52.040 --> 00:30:55.880
upside. So this is my private equity thesis. The second is that I want

479
00:30:55.880 --> 00:30:59.920
something that can grow. And so fundamentally for growth, there's only two ways

480
00:30:59.920 --> 00:31:03.640
that a business can grow, right? We can increase the number of customers or we

481
00:31:03.640 --> 00:31:08.680
can increase lifetime gross profit or LTV per customer. So we can get more

482
00:31:08.680 --> 00:31:12.320
people or increase how much they're worth. And if we see a path that's very

483
00:31:12.320 --> 00:31:14.880
clear that we can say, oh, we know how we're going to get this company more

484
00:31:14.880 --> 00:31:18.000
customers, or we know how we're going to be able to double triple quadruple how

485
00:31:18.000 --> 00:31:21.120
much customers are worth, which one will immediately make us more money, but

486
00:31:21.120 --> 00:31:25.280
then also allows to spend more money to get more customers. So school, for

487
00:31:25.360 --> 00:31:31.120
example, is one of our largest investments. And that one breaks rule number one.

488
00:31:31.120 --> 00:31:34.840
And that's because at this point, I wanted to take a very big swing on something

489
00:31:34.840 --> 00:31:37.520
that I think could change an industry. And it's an industry that I understand

490
00:31:37.520 --> 00:31:42.600
very well, which is education and media. And I feel like very, I have edge

491
00:31:42.600 --> 00:31:46.280
there. I understand it. Now, could something happen? It could go wrong. Maybe,

492
00:31:46.280 --> 00:31:51.640
but in the last year, we, you know, six X the business. So it did, we had a good

493
00:31:51.640 --> 00:31:55.600
year with school. It was like, okay, do I clearly know how we could help

494
00:31:55.600 --> 00:31:58.520
it get more customers? Yes. And so that was fundamentally what we drove. Now,

495
00:31:58.520 --> 00:32:01.680
the lifetime risk profit is very much product-driven, which is not the role

496
00:32:01.680 --> 00:32:04.280
that we decided to take on for this particular investment. But I did know

497
00:32:04.280 --> 00:32:07.320
that I have a huge part of my audience that wants to start a business. And so I

498
00:32:07.320 --> 00:32:10.640
said, okay, well, I don't have something for people who want to start a business.

499
00:32:10.640 --> 00:32:13.440
All my stuff is really for business owners, but people who want to start

500
00:32:13.440 --> 00:32:16.400
businesses still want to learn about business before they start businesses. And

501
00:32:16.400 --> 00:32:20.440
so I wanted somewhere I could say, well, if you're not sure, go there. And if

502
00:32:20.440 --> 00:32:22.920
you're not even sure about that, just read some of these books so you can get a

503
00:32:22.920 --> 00:32:25.720
little bit more context on what you could potentially sell. The third thing that

504
00:32:25.720 --> 00:32:30.920
I look for is focus. And I talk about this a lot, which is is the founder, someone

505
00:32:30.920 --> 00:32:36.080
who can say no, whose focused on a specific avatar specific customer has lived

506
00:32:36.080 --> 00:32:40.000
the life or the problem of that customer. I don't want to have to niche slap

507
00:32:40.000 --> 00:32:43.200
a founder. All right. So niche slap is where they're like, I sir, I do everything

508
00:32:43.200 --> 00:32:46.800
for everyone, which really means nothing for no one. And so the benefit of being

509
00:32:46.800 --> 00:32:51.000
very focused on one specific customer avatar or ICP ideal customer profile,

510
00:32:51.000 --> 00:32:55.320
depending on what market you listen to. If you have that, you can solve people's

511
00:32:55.320 --> 00:32:59.160
problems far better because you can be more nuanced in the solutions you

512
00:32:59.160 --> 00:33:04.520
provide. You can also charge more because the actual value is higher. And you

513
00:33:04.520 --> 00:33:07.840
can tend to acquire customers cheaper because your messaging will be more

514
00:33:07.840 --> 00:33:11.160
targeted. And the target of your advertising itself can also be more targeted.

515
00:33:11.160 --> 00:33:15.320
So both the words, the offer, the deliverable, the pricing, all of this is a

516
00:33:15.320 --> 00:33:18.200
strategic question, which is why I want to make sure the strategy of the

517
00:33:18.200 --> 00:33:22.280
business makes sense. And then fourth, and this is probably the biggest one of

518
00:33:22.280 --> 00:33:26.080
all of them if we're being very real, is jockey over everything. I'll put one

519
00:33:26.080 --> 00:33:30.000
caveat out, which is I'm not going to try and enter a market that I think is

520
00:33:30.000 --> 00:33:34.320
going to die. So if someone's like, Hey, I have a new gas powered car, that

521
00:33:34.320 --> 00:33:37.680
probably wouldn't be the bet that I would make. If someone says, Hey, I have this

522
00:33:37.680 --> 00:33:41.000
brand new print newspaper that I want to start, probably wouldn't be the bet

523
00:33:41.000 --> 00:33:43.880
that I would make. But if they're in a market that I don't foresee is going to

524
00:33:43.880 --> 00:33:47.320
disappear tomorrow, then all of my emphasis is going to be on the jockey, which

525
00:33:47.320 --> 00:33:51.600
is how good is the person, the founding team for the business? Because the

526
00:33:51.600 --> 00:33:55.360
thing is that the founding team is going to encounter innumerable problems as

527
00:33:55.360 --> 00:33:58.240
they try and scale this thing. And you have to trust their ability to solve

528
00:33:58.240 --> 00:34:01.640
problems. Because it doesn't matter how good the idea is, your ability to

529
00:34:01.640 --> 00:34:06.280
consistently solve problems in a cash efficient manner is how you can grow a

530
00:34:06.280 --> 00:34:10.280
business over the long term. And so you want someone and I, I'll use Uncle

531
00:34:10.320 --> 00:34:13.800
Warren's free big values is you want someone who's incredibly industrious and

532
00:34:13.800 --> 00:34:17.920
hardworking. You want someone who has very strong ethics and someone who's

533
00:34:17.920 --> 00:34:21.680
competent and intelligent. You have competence, you have work ethic, and you

534
00:34:21.680 --> 00:34:26.560
have integrity. And so he famously says, well, you know, if you have just

535
00:34:26.560 --> 00:34:29.700
competence and work ethic, but you don't have integrity, you've got a

536
00:34:29.700 --> 00:34:33.000
crook who's working really hard against you. He's like, very bad. He said, so

537
00:34:33.000 --> 00:34:35.480
if you are going to have that, you'd rather have somebody who's really

538
00:34:35.480 --> 00:34:39.320
competent but lazy and disintegrous because at least that way he's not going

539
00:34:39.360 --> 00:34:41.880
to do you as much damage. So you want to have all three. Now, what's

540
00:34:41.880 --> 00:34:44.960
difficult about this is that even one of those three things is hard to find.

541
00:34:45.280 --> 00:34:48.160
Somebody who's truly has character, even when the chips are stacked against

542
00:34:48.160 --> 00:34:50.480
them, because it's the only time that it matters. Or someone who has

543
00:34:50.480 --> 00:34:53.800
tremendous work ethic, especially, especially when it matters month in the

544
00:34:53.800 --> 00:34:56.360
business, when, when things are tough or you're going through a growth

545
00:34:56.360 --> 00:34:58.840
period that's just like, it's just requiring you to work 20 hours a day

546
00:34:58.840 --> 00:35:01.960
because you just, you just, there's, there's not enough people, but you need

547
00:35:01.960 --> 00:35:04.360
the business requires it right now. Or you just have someone who's

548
00:35:04.360 --> 00:35:08.280
exceptional product or prospect knowledge that they, that

549
00:35:08.280 --> 00:35:10.880
integrally gives them, that gives them tremendous edge over their

550
00:35:10.880 --> 00:35:15.080
competition because they, they understand everything down to, I love this

551
00:35:15.400 --> 00:35:19.200
analogy that a VC who invested in a regal, which is now, you know, in a

552
00:35:19.200 --> 00:35:22.080
pretty tough situation, but for years was a cash cow business, regal

553
00:35:22.080 --> 00:35:24.800
cinemas. He said, when he talked to the founder, he said, that guy

554
00:35:24.800 --> 00:35:27.880
understood the cost, everything down to the kernel of popcorn. He said, he

555
00:35:27.880 --> 00:35:30.680
just knew everything about the business. He said, he's like, and there

556
00:35:30.680 --> 00:35:33.840
was really no reason that I should get into cinemas. He's like, but when I

557
00:35:33.840 --> 00:35:37.960
saw this guy talk about it, he was like, he was so energetic and so

558
00:35:37.960 --> 00:35:41.520
passionate about it and clearly had good character and he just understood

559
00:35:41.520 --> 00:35:43.760
the business so well, he was like, there's no way this guy's not going to

560
00:35:43.760 --> 00:35:47.840
make money in it. And he did. And that, and that is a great example of a

561
00:35:47.840 --> 00:35:50.400
business that required a ton of capital start opening a movie theaters

562
00:35:50.400 --> 00:35:53.640
cost a ton of capital. And so it makes sense that that business owner, even

563
00:35:53.640 --> 00:35:55.600
though he knew everything about it, probably been there for a long

564
00:35:55.600 --> 00:35:59.160
time, he still asked for investors rather than saying, you know, I'm going

565
00:35:59.160 --> 00:36:01.960
to take another 10 years to say all the money on my own, just to start

566
00:36:02.000 --> 00:36:05.480
one, when he's like, you know what, I could leverage other people's lifetimes

567
00:36:05.480 --> 00:36:09.800
of work so that I could basically be at your 10 at your one and have a

568
00:36:09.800 --> 00:36:13.000
smaller slice of the much bigger pie. And so fundamentally, betting on the

569
00:36:13.000 --> 00:36:16.000
jockeys that is the highest leverage bet you can make because you're betting

570
00:36:16.000 --> 00:36:18.440
on someone's ability to solve problems in a dynamic environment and

571
00:36:18.440 --> 00:36:22.200
businesses, if anything, it is dynamic. So the environment may change, the

572
00:36:22.200 --> 00:36:25.360
market may shift, some of the variables or assumptions that you thought

573
00:36:25.360 --> 00:36:27.960
were going to be there aren't. And some of the most famous founders were

574
00:36:27.960 --> 00:36:31.480
companies that started not even with that intention. Like Slack was a

575
00:36:31.480 --> 00:36:34.880
video game company that eventually just had this engineering messaging

576
00:36:34.880 --> 00:36:37.760
tool that ended up being good and then they shifted to that right because

577
00:36:37.760 --> 00:36:39.760
they just had exceptional founders who were able to pivot and be

578
00:36:39.760 --> 00:36:43.600
adaptable. In some ways, betting on the right jockeys, almost like insurance

579
00:36:43.600 --> 00:36:47.760
for an investor is like, I just think this guy is brilliant and hard working.

580
00:36:47.760 --> 00:36:50.840
And I think when something happens, he will figure it out. And so when we're

581
00:36:50.840 --> 00:36:53.920
looking at all four of these things, it's a high cash flow business. It has

582
00:36:53.920 --> 00:36:58.200
high growth potential. There's a focused founder and they they they they

583
00:36:58.200 --> 00:37:03.200
exhibit high character, high work ethic and high competence. Then it's like,

584
00:37:03.200 --> 00:37:06.200
okay, well, there's companies that meet all of these criteria, which is still

585
00:37:06.200 --> 00:37:10.240
rare. What makes you pick one versus another? And so for us, we operate under

586
00:37:10.240 --> 00:37:13.560
adacquisition.com, one thesis, which is the theory of constraints, which is

587
00:37:13.560 --> 00:37:15.680
that a system will grow until it's constrained and then it will grow

588
00:37:15.680 --> 00:37:19.080
further. And so once we find what the constraint of the businesses, then we

589
00:37:19.080 --> 00:37:21.760
attack that constraint with all the resources and all the brainpower and all

590
00:37:21.760 --> 00:37:25.520
the money we have to try and solve that constraint to that unlock the next

591
00:37:25.560 --> 00:37:28.960
level of growth until the next constraint. And so to give a simple example, if

592
00:37:28.960 --> 00:37:32.680
we were to simply 10x advertising for a, you know, a lawn care business, if

593
00:37:32.680 --> 00:37:35.800
they don't have 10 times of salespeople to take those leads, the next

594
00:37:35.800 --> 00:37:38.280
constraint, like us just blowing the doors off the front end is just going to

595
00:37:38.280 --> 00:37:41.040
lead to the next constraint, then we have to hire more salesguys. But even if

596
00:37:41.040 --> 00:37:43.760
we did the marketing and then we did the sales, then we'd have to hire more

597
00:37:43.760 --> 00:37:47.160
guys to do the, the, the, to mow the lawns, right? And so the constraint will

598
00:37:47.160 --> 00:37:50.200
continue to move down the, the pipeline until the entire business could

599
00:37:50.240 --> 00:37:55.560
deconstruct and then you will realize the throughput increase of having this huge

600
00:37:55.560 --> 00:38:00.600
influx. And so for us, if we understand the business well, so it has all of

601
00:38:00.600 --> 00:38:03.840
these things, it happens to be in a space that we feel like we understand better

602
00:38:03.840 --> 00:38:06.640
than other people, then that's where we will be more likely to take our bet.

603
00:38:06.640 --> 00:38:09.920
And the better we understand it, the bigger the bet will make. And so to give

604
00:38:09.920 --> 00:38:14.400
you context on this, the company founders within our portfolio, not

605
00:38:14.400 --> 00:38:17.040
including school, because this metric would be stupid if I put school in

606
00:38:17.080 --> 00:38:21.120
another. The average founder in our private equity portfolio has had a 13

607
00:38:21.120 --> 00:38:25.240
extra turn on equity. Think about like this, if your company was worth 10

608
00:38:25.240 --> 00:38:29.640
million dollars when it started, your slice, I'd have to, the, the circle would

609
00:38:29.640 --> 00:38:33.560
be much bigger than this page, your slice of equity, let's just not draw into

610
00:38:33.560 --> 00:38:38.680
size, right? Your slice of equity later would be worth 130 million.

611
00:38:38.960 --> 00:38:42.320
Independent of how much they quote sold to us, they are significantly

612
00:38:42.320 --> 00:38:45.480
wealthy they were before. And I think we may be the only private equity fund

613
00:38:45.520 --> 00:38:48.360
that even tracks what the return on founder equity is. And that's because

614
00:38:48.360 --> 00:38:52.600
long term, I believe that me getting great deal flow from founders who want

615
00:38:52.600 --> 00:38:56.680
to do business with me is the long term strategy that is going to make

616
00:38:56.680 --> 00:39:01.720
acquisition.com into a powerhouse with a new model of private equity.

617
00:39:01.880 --> 00:39:05.680
As an investor, you can think through these things and invest in companies

618
00:39:05.680 --> 00:39:08.520
that meet these requirements. And ideally, are in companies that you have

619
00:39:08.520 --> 00:39:11.720
some sort of edge in that you understand better than other people.

620
00:39:11.720 --> 00:39:16.720
The final way of getting ultra wealthy is other people's money and other

621
00:39:16.720 --> 00:39:19.960
people's businesses. You're like, wait a second. Okay. So we've got other

622
00:39:19.960 --> 00:39:23.000
people's money in your business. That's raising up funding. You've got your

623
00:39:23.000 --> 00:39:26.120
money in your business that's bootstrapping it. You've got your money and other

624
00:39:26.120 --> 00:39:28.720
people's business here in investor. And then you've got other people's money

625
00:39:28.720 --> 00:39:32.800
and other people's businesses, which makes you a fund manager. So let me explain.

626
00:39:32.800 --> 00:39:38.440
So for example, when I sold gym launch and prestige labs, I sold those to

627
00:39:38.440 --> 00:39:44.200
American Pacific Group in 2021. They are a $500 million fund, which now has a

628
00:39:44.200 --> 00:39:47.400
second fund that's another seven or so they have $1.2 billion in her

629
00:39:47.400 --> 00:39:51.880
management. Now they bought gym launch and prestige labs together as a package

630
00:39:51.880 --> 00:39:58.200
for $46.2 million. Now that check they did to me represented a small amount of

631
00:39:58.200 --> 00:40:02.120
the overall funds that they had. And so let me show you exactly why people who

632
00:40:02.120 --> 00:40:08.520
run funds make a huge amount of money. So APG bought my company, other people's

633
00:40:08.520 --> 00:40:12.360
businesses, using other people's money like the teachers and

634
00:40:12.360 --> 00:40:17.800
governments, the police fund, the fireman fund, the Yale, Princeton, Harvard, the

635
00:40:17.800 --> 00:40:21.720
endowments that they have. They have these massive war chests of money that they

636
00:40:21.720 --> 00:40:26.280
give to these fund managers as a small allocation of their overall investment

637
00:40:26.280 --> 00:40:30.200
or their university or for their limited for their for their investees, if you

638
00:40:30.200 --> 00:40:33.560
will, to get a return. The key point that I think is very interesting here is that

639
00:40:33.560 --> 00:40:40.200
the fund manager of a fund like this will often make more money than any of the

640
00:40:40.200 --> 00:40:44.040
founders of the businesses that they buy. When I when I saw that I was like, oh this

641
00:40:44.040 --> 00:40:48.840
is a very high leverage vehicle. And so this is what kind of kicked off my

642
00:40:48.840 --> 00:40:52.520
journey to thinking through what are all the ways to make make a money.

643
00:40:52.520 --> 00:40:57.320
And that was the point of this video. So a typical fund manager, typically not

644
00:40:57.320 --> 00:41:01.960
always, but it is common for if you wanted to raise call it a hundred million

645
00:41:01.960 --> 00:41:05.800
dollars, okay? Let's say that that's the amount of funding that you wanted to raise.

646
00:41:05.800 --> 00:41:09.880
A fund manager, which would then be typically the general partner, the GP,

647
00:41:09.880 --> 00:41:13.320
would put something like five percent in. So they would contribute five

648
00:41:13.320 --> 00:41:16.120
million dollars of their own capital. And sometimes it's between multiple

649
00:41:16.120 --> 00:41:20.040
partners to fund the hundred million. Because most investors want to make

650
00:41:20.040 --> 00:41:22.440
sure that you have some skin in the game that you care. That means they're

651
00:41:22.440 --> 00:41:26.120
going to get ninety five million dollars from other people's money.

652
00:41:26.120 --> 00:41:30.200
Okay, stay on track with me. Now, the question is, what is a hundred

653
00:41:30.200 --> 00:41:33.960
million dollars by me? Well, in private equity, a hundred million dollars.

654
00:41:33.960 --> 00:41:39.080
So you can leverage this and get two hundred million dollars in debt to buy

655
00:41:39.080 --> 00:41:43.720
three hundred million dollars worth of businesses. So think about the leverage here.

656
00:41:43.720 --> 00:41:47.640
You put five million dollars in and you're able to buy three hundred

657
00:41:47.640 --> 00:41:50.840
million dollars for the businesses. So then the question is, okay,

658
00:41:50.920 --> 00:41:54.280
but then what do these guys get for taking this risk? Great question.

659
00:41:54.280 --> 00:41:59.000
So the typical front structure has a two and 20 structure. This kind of industry

660
00:41:59.000 --> 00:42:01.000
average, there's obviously some that are different than that, but this is the

661
00:42:01.000 --> 00:42:04.520
most common structure. And so two percent, the first number,

662
00:42:04.520 --> 00:42:07.080
that people say it's like, what's the structure? If you hear someone say two and

663
00:42:07.080 --> 00:42:10.600
twenty one in one in twenty five, whatever, what they're referencing is the

664
00:42:10.600 --> 00:42:15.160
management fee, which is charged off of funds raised every year.

665
00:42:15.160 --> 00:42:19.480
And then the twenty percent is off of the profit that's generated at the

666
00:42:19.480 --> 00:42:23.400
ultimate conclusion of the fund. All right, so let's say ten years from now,

667
00:42:23.400 --> 00:42:26.840
we've exited all of the positions that we had and we turned this three hundred

668
00:42:26.840 --> 00:42:31.000
million dollars of companies into nine hundred million dollars. So over ten

669
00:42:31.000 --> 00:42:33.640
years, let's say we triple the money in general. We triple the

670
00:42:33.640 --> 00:42:38.520
triple the value of the companies, okay? Now, well, what do we have to do?

671
00:42:38.520 --> 00:42:42.120
Well, over, let's say this is ten years, over the ten years,

672
00:42:42.120 --> 00:42:47.000
that two percent equals, so this is management fee equals 20 million dollars.

673
00:42:47.000 --> 00:42:50.200
So you get twenty million dollars in management fees just for that ten

674
00:42:50.200 --> 00:42:53.320
that ten year period of time. Now mind you, you have employees, you have

675
00:42:53.320 --> 00:42:56.680
costs, and so fundamentally the management fees are supposed to help you run the

676
00:42:56.680 --> 00:42:59.320
actual fund without having to put more stress on the

677
00:42:59.320 --> 00:43:01.880
companies that you're buying. The twenty percent, so this is called the

678
00:43:01.880 --> 00:43:05.560
carry, the cool thing with carried interest, which is kind of the profit part

679
00:43:05.560 --> 00:43:08.760
for the fund manager, is that it gets taxed the capital gains.

680
00:43:08.760 --> 00:43:13.480
And so basically they can make their income in a in a tax efficient manner.

681
00:43:13.480 --> 00:43:19.320
So let's say that we sell our all the companies, and so we have to take out

682
00:43:19.320 --> 00:43:22.760
the debt that we owe, right? So we have two hundred dollars of debt that we owe,

683
00:43:22.760 --> 00:43:25.320
and then we have to return the hundred, I'm just going to say round numbers. We

684
00:43:25.320 --> 00:43:28.040
have to put the hundred million dollars back into the investor's pockets.

685
00:43:28.040 --> 00:43:30.920
All right, so we have six hundred million dollars back. Now there's going to be

686
00:43:30.920 --> 00:43:34.040
some interest costs here, so maybe it's, if it was over a ten year period,

687
00:43:34.040 --> 00:43:37.960
we'll say a hundred million dollars in interest payments that we had to pay

688
00:43:37.960 --> 00:43:41.320
to also carry this debt, okay? Let's just say hypothetical.

689
00:43:41.320 --> 00:43:44.840
All right, so we've got five hundred million dollars left over. Now we have our twenty

690
00:43:44.840 --> 00:43:49.800
percent carried, which means that we're going to get one hundred million dollars for doing this.

691
00:43:49.800 --> 00:43:54.920
So we took our five, we got paid twenty, and a hundred in that ten year period,

692
00:43:54.920 --> 00:43:59.640
and this hundred also post tax is eighty million dollars. And so all in all,

693
00:43:59.640 --> 00:44:03.240
you're making a hundred million dollars plus with a five million dollar slug.

694
00:44:03.240 --> 00:44:06.040
Mind you, this is when you start with five million dollars.

695
00:44:07.000 --> 00:44:09.960
What happens when you capitalize a fund and you put a hundred million dollars in,

696
00:44:09.960 --> 00:44:13.960
and you raise a two billion dollar fund? Well, I'll just multiply these numbers by twenty.

697
00:44:13.960 --> 00:44:19.240
It gets really big, really fast. And so fund managers employ one of the key principles of wealth,

698
00:44:19.240 --> 00:44:23.880
and I'll have a follow-up video on the principles of wealth, but one of the key principles is leverage.

699
00:44:24.440 --> 00:44:27.480
And so they have multiple forms of leverage that they're able to multiply.

700
00:44:27.480 --> 00:44:31.800
It's why acquisition.com is too, like in my opinion, the two strongest forces in business are

701
00:44:31.800 --> 00:44:36.040
leverage and supply and demand. And so supply and demand is these two little curves here,

702
00:44:36.040 --> 00:44:40.680
and then leverage here is this fulcrum. They first leverage their five million dollars to get

703
00:44:40.680 --> 00:44:44.360
ninety five million dollars from investors. Then they leverage the entirety of that hundred million

704
00:44:44.360 --> 00:44:48.440
dollars to buy companies, which then they use the companies they leverage the companies to get the

705
00:44:48.440 --> 00:44:53.960
debt off of these initial cash checks that they can write. And then all of a sudden that five

706
00:44:53.960 --> 00:44:58.840
becomes sixty times bigger in terms of the assets that you can control. Obviously, APG ran

707
00:44:58.840 --> 00:45:03.640
this exact model, and they had a five hundred million dollar fund. If acquisition.com,

708
00:45:03.640 --> 00:45:08.840
one day in the future wanted to have a fund saying, hey, I'll put money in, and if you guys want

709
00:45:08.840 --> 00:45:13.000
access to the deals that I have access to, and what my team will work on for you, basically,

710
00:45:13.000 --> 00:45:18.040
then we would have some fund structure in place that would allow everyone else to participate.

711
00:45:18.040 --> 00:45:22.280
A fund typically should get structured because you have one of two key things. In my opinion,

712
00:45:22.280 --> 00:45:27.640
this is now just me talking Alex's opinion. You should have access to deal flow that other people

713
00:45:27.640 --> 00:45:32.840
don't have. So proprietary deal flow. The recent proprietary deal flow is super valuable as two

714
00:45:32.840 --> 00:45:38.680
things. Number one is that you will get better negotiated terms on the deals, meaning that you could

715
00:45:38.680 --> 00:45:43.400
buy assets for maybe less than intrinsic value or less than a competitive process might yield.

716
00:45:43.400 --> 00:45:46.760
Like if you're in an auction, you will pay more than if you're just making a 101 deal,

717
00:45:46.760 --> 00:45:50.600
which is why when you sell a house, you're like, I hope a lot of people bid, right? That's really good

718
00:45:50.600 --> 00:45:54.280
if you're a seller, really bad if you're a buyer. And so you want to have deals that you can just be

719
00:45:54.280 --> 00:45:58.360
the only person bidding on it. So that's the thing one. So for example, what that looks like is

720
00:45:58.360 --> 00:46:02.520
for acquisition.com. It'd be businesses that are applying on the site at acquisition.com saying,

721
00:46:02.520 --> 00:46:06.680
yes, I'd be interested in selling a business, right? Like you guys to help me, you know, help invest

722
00:46:06.680 --> 00:46:11.160
in the business to help it scale. That's what that would be. Now, the reason that it's proprietary is

723
00:46:11.160 --> 00:46:14.920
they're not typically going to other people. They're not saying, I want investment. I'm going to

724
00:46:14.920 --> 00:46:19.320
pick acquisition.com of 10 people. They're saying, I want to work with Alex's team because of their

725
00:46:19.320 --> 00:46:23.960
proven track record. The second thing that you want, in my opinion, as investment thesis is some sort

726
00:46:23.960 --> 00:46:28.760
of edge. You want some sort of insider knowledge, not insider trading to be clear, insider knowledge

727
00:46:28.760 --> 00:46:34.760
on the industry or prospect that a company serves. And so you will find that there are some private

728
00:46:34.760 --> 00:46:39.400
equity firms, for example, that just specialize in manufacturing. They're just really good in heavy

729
00:46:39.400 --> 00:46:46.040
manufacturing businesses. Some private equity firms are really good at CPG. So consumer package goods,

730
00:46:46.040 --> 00:46:51.720
direct to consumer, physical products, e-commerce, right? There's whole fields of great private equity

731
00:46:51.720 --> 00:46:55.800
firms around that. And they typically have founders or ex-founders who funded that with their own

732
00:46:55.800 --> 00:47:00.680
exits and then basically redo the playbook with more leverage. There are some funds that just

733
00:47:00.680 --> 00:47:04.760
specialize in software, right? There are some funds that just specialize in professional services.

734
00:47:04.760 --> 00:47:09.480
There are some funds that just specialize in media. You want both proprietary deal flow so that you

735
00:47:09.480 --> 00:47:13.560
have deals that no one else has access to. These are off-market deals that they only want to do

736
00:47:13.560 --> 00:47:17.640
business with you so you can get better more attractive prices in terms. And then you want to have

737
00:47:17.640 --> 00:47:24.120
a way to accelerate value. So if you want to think about investing as a business, right,

738
00:47:24.120 --> 00:47:30.280
we have LTV to CAC2. These things completely apply to investing business. So the CAC is if I

739
00:47:30.280 --> 00:47:35.400
have proprietary deal flow, then I'm going to be able to acquire customers or acquire deals for

740
00:47:35.400 --> 00:47:40.840
lower prices on better terms. And if I have a way to grow those businesses, then I will have

741
00:47:40.840 --> 00:47:46.360
higher lifetime deal value than somebody who doesn't. And so when you combine those two things,

742
00:47:46.360 --> 00:47:52.120
you get better returns. So you have more value on the buy and more exit value on the sale.

743
00:47:52.120 --> 00:47:57.560
And that discrepancy is what creates the outsized alpha, which beats the market. And so fundamentally,

744
00:47:57.560 --> 00:48:01.400
this is what this has been my thesis for Acquisition.com. Now I haven't talked about this in

745
00:48:01.400 --> 00:48:05.560
much publicly, mostly because it applies to fewer people than the vast majority of my content. But

746
00:48:05.560 --> 00:48:11.720
our team decided, you know what? Let's talk about what we do. So within the private investing world,

747
00:48:11.720 --> 00:48:16.200
the fund world, there's typically kind of two big buckets. You've got private equity,

748
00:48:16.200 --> 00:48:20.200
which means that they are buying equities that are private or off market, which is about a 60 or

749
00:48:20.200 --> 00:48:24.680
70 year old industry. And then you've got VC or venture capital. And within venture capital,

750
00:48:24.680 --> 00:48:29.640
you have growth funds, you have seed stage funds, you have series A, series B. And these will

751
00:48:29.640 --> 00:48:33.640
typically be defined by their check size. An interesting tidbit for you is I was talking to David

752
00:48:33.640 --> 00:48:40.200
Weisberg who runs 10X Capital, unaffiliated with Cardone. He just actually owns 10X Capital,

753
00:48:40.200 --> 00:48:45.880
kind of funny. He exclusively talks to LPs. So big endowments that have many, many, many,

754
00:48:45.880 --> 00:48:49.480
many billions of dollars. And that's like his entire network. Good podcast. If you want to check

755
00:48:49.480 --> 00:48:54.520
it out, if you like really like high high level investing. And so they did a meta study and they

756
00:48:54.520 --> 00:49:01.240
found out that VC or venture capital assets, so think software companies in general,

757
00:49:01.800 --> 00:49:06.920
have the highest return of any asset class. So they average about 14% per year, which is I think

758
00:49:06.920 --> 00:49:11.160
the second highest one is REITS. So real estate investment trusts. I think average is about 12%

759
00:49:11.160 --> 00:49:16.280
a year. And then you've got the public public securities. So normal stocks is something like nine

760
00:49:16.280 --> 00:49:21.720
and change. They kind of go down the gamut of different asset classes. Now mind you, this is just

761
00:49:21.720 --> 00:49:26.440
the class of assets, not just a specific stock. Obviously in every one of those categories, there's

762
00:49:26.440 --> 00:49:31.320
some real estate buildings that have 100X and there's probably not 100X. But have gone up a lot.

763
00:49:31.320 --> 00:49:35.400
There's software companies that have definitely 100X and even individual stocks that are not

764
00:49:35.400 --> 00:49:41.320
software that have also 100X. And most of these still follow that kind of two and 20 structure.

765
00:49:41.320 --> 00:49:47.160
There are some like there's a there's a famous one that's 0 and 35. So like it's really about how

766
00:49:47.160 --> 00:49:52.760
you want to shift risk with your limited partners. Private equity tends to manage tends to manage

767
00:49:52.760 --> 00:49:57.560
bigger amounts of money. So if you look at Blackstone has about a trillion dollars of assets

768
00:49:57.560 --> 00:50:04.760
under management. Apollo has about 600 billion under management. KKR has 500 billion dollars

769
00:50:04.760 --> 00:50:11.320
under management. So monstrous sums of money. And there's a reason why private equity has created

770
00:50:11.320 --> 00:50:16.040
some of the wealthiest people in the world. The fund managers of these groups are all deck of

771
00:50:16.040 --> 00:50:20.040
you know, deck of billionaires and above. Stephen Schwartzman I think is a 40-ish billion just

772
00:50:20.040 --> 00:50:23.640
an absurd amount of money. And they do that because of all the levers that I explained earlier.

773
00:50:23.640 --> 00:50:29.400
Now venture capital tends to not always but tends to. So if you like a 16z which is Andrews and

774
00:50:29.400 --> 00:50:34.280
Horowitz has about 50 billion dollars under management. Sequoia one of the most well-known

775
00:50:34.280 --> 00:50:38.200
funds in the world has about 56 billion. So they're about the same in terms of size. So you can

776
00:50:38.200 --> 00:50:42.520
notice there's an order of magnitude difference in terms of the size. But they're usually making

777
00:50:42.520 --> 00:50:47.080
bets on what the next Facebook is going to be. Whereas these guys tend to buy more traditional

778
00:50:47.080 --> 00:50:51.480
businesses that are already monstrous. And they do a little bit more of the financial arbitrage.

779
00:50:51.480 --> 00:50:55.160
Meaning they're it's more about how they can buy it. One price sell it at another price or

780
00:50:55.160 --> 00:50:59.000
combine assets in a way that makes it a creative. So the fancy word for just value additive

781
00:50:59.000 --> 00:51:04.200
to the overall enterprise value. Whereas these guys tend to do zero mergers and acquisitions

782
00:51:04.200 --> 00:51:09.400
and bet on the organic or viral growth of the companies that they take shares in. And so these guys

783
00:51:09.400 --> 00:51:15.880
typically focus on inorganic growth. And these guys focus on organic growth meaning the company

784
00:51:15.880 --> 00:51:20.520
itself grows. And these tend to grow by lobbying in multiple things together to make the overall

785
00:51:20.520 --> 00:51:26.120
entity bigger. And so that's where like for example if I were to buy an auto repair shop I might

786
00:51:26.120 --> 00:51:31.400
be able to buy the auto repair shop at a five times multiple and then get debt for half of that.

787
00:51:31.400 --> 00:51:37.000
So I put two and a half times their income into the deal and then buy five other ones with that.

788
00:51:37.000 --> 00:51:42.760
And then altogether sell them for 10. And I can triple my money in that period of time without

789
00:51:42.760 --> 00:51:48.120
actually having grown any of the companies. That's where it gets wild. In this game all they want

790
00:51:48.120 --> 00:51:52.040
to do is see this company just keep hockey sticking. Now if you're like okay well where does

791
00:51:52.040 --> 00:51:57.880
acquisition.com sit within this world. So we kind of sit in the middle. So obviously we have

792
00:51:57.880 --> 00:52:03.480
HQ Ventures which is just traditional VC. But our actual private equity side we do little M&A.

793
00:52:03.480 --> 00:52:08.200
We do like we do if it's if it makes sense. And typically it's because it's like an adjacent

794
00:52:08.200 --> 00:52:12.120
purchase of a business that we're referring a lot of business over to and it makes sense for us to

795
00:52:12.120 --> 00:52:16.920
just kind of bring them in more than we're like actively seeking out 10 follow on investments to

796
00:52:16.920 --> 00:52:22.600
glob together. So we do less financial arbitrage and more value add in terms of our ability to help

797
00:52:22.600 --> 00:52:28.280
businesses scale. And for us that's less capital intensive and I would rather this is me personally

798
00:52:28.280 --> 00:52:33.640
I would rather allocate my team's effort to growing something organic because is the most efficient

799
00:52:33.640 --> 00:52:39.640
form of growth in terms of return on capital. Not the easiest necessarily but is the most efficient.

800
00:52:39.640 --> 00:52:44.280
So if you can do it you do that but most people can't do it and so they just do financial arbitrage

801
00:52:44.280 --> 00:52:47.480
but there's nothing wrong with it's just a different way to play the game. And so private equity for

802
00:52:47.480 --> 00:52:52.600
example will have traditionally somewhere in the airbred between five and 10 investments for a fund.

803
00:52:53.240 --> 00:52:57.480
So if you have a $500 million fund you're going to have five to 10 investments and so the

804
00:52:57.480 --> 00:53:01.880
fund size will typically dictate the size of the investment or check that they're going to be writing.

805
00:53:03.000 --> 00:53:08.360
Venture Capital and many times they have multiple funds within one kind of fund company

806
00:53:08.360 --> 00:53:12.760
that will be talked once for seed companies, once for series A's, once for growth equity.

807
00:53:12.920 --> 00:53:17.800
So it just depends on what stage of growth they're investing in but these companies can sometimes

808
00:53:17.800 --> 00:53:23.480
have 50 to 100 investments per fund because of that they are significantly more hands off and more

809
00:53:23.480 --> 00:53:28.520
betting on the few that go big knowing that they're going to have 99 losers and one Facebook that's

810
00:53:28.520 --> 00:53:33.720
going to make up for the whole fund. Here you really can't afford to lose very much. So here they're

811
00:53:33.720 --> 00:53:39.160
looking for the very consistent triples and quadruples and five X's. Here they're looking for 100 or

812
00:53:39.160 --> 00:53:43.800
thousand X and then a bunch of losers. They're obviously looking for losers. They're hoping for more

813
00:53:43.800 --> 00:53:47.800
winners but fundamentally that is the difference in terms of the investment thesis. If you are

814
00:53:47.800 --> 00:53:52.040
accepting a venture check you have to understand that those are the odds that they are playing within

815
00:53:52.040 --> 00:53:58.040
that they're betting with on you. Like the thing is for them you are a 1% bet. For you you're a 100%

816
00:53:58.040 --> 00:54:04.680
bet and so for the investors they can distribute their outcome and diversify which decreases their

817
00:54:04.680 --> 00:54:09.720
risk but also decreases their upside and if you happen to be Mark Zuckerberg then you will make more

818
00:54:09.720 --> 00:54:15.240
than everyone else to invest in but you got to be Mark Zuckerberg.