Source: Alex Hormozi — The 4 Proven Ways To Build Wealth In 2026 (25:13, published 2026-06-04)
Poor people stay poor because they want a fast way to get rich. The richest people pick one of these four paths, play it for a decade, and end up with more money than everyone chasing shortcuts. No president, no economy is going to make you rich — you have to do that for yourself.
The Core Framework — a 2×2
Two variables: whose money and whose business. Every wealth path is a permutation of those two.
| Your business | Other people’s businesses | |
|---|---|---|
| Your money | 1. Bootstrapping | 3. Investing |
| Other people’s money | 2. Raising capital | 4. Fund management |
Proof points — Forbes top 11
- Raised capital: Elon Musk, Larry Ellison, Mark Zuckerberg, Jeff Bezos, Larry Page, Sergey Brin, Jensen Huang
- Bootstrapped: Steve Ballmer (Microsoft), Michael Dell, the Waltons (Walmart)
- Investing: Warren Buffett
- Fund management: not in the top 11 — appears ~6 spots deeper
Hormozi has personally done all four. Each carries its own risk and trade-off.
Path 1 — Bootstrapping (your money + your business)
Definition: Fund the business from your own savings and cash flow. No outside investors. Grow by reinvesting your own profit. A website, a phone, and skills — trade them for money, take the excess, reinvest, repeat.
Typical examples: Low-cost-to-start businesses — agencies, home services, B2B/professional services, sometimes software now, education businesses, e-comm (drop shipping needs no upfront inventory; otherwise you front capital), local businesses. The scope keeps broadening as the cost of entering business drops.
Hormozi’s path here: Gym (first brick-and-mortar) → Prestige Labs (supplements) → ALAN (software) — all bootstrapped. acquisition.com today is semi-bootstrapped (reinvesting its own capital + starting companies de novo from the holdco).
Who it’s for: Your first business. The point is to pay off ignorance — don’t risk friends-and-family money before you know what you’re doing.
Advantages: You keep control and equity (a bigger slice of the pie). You decide the pace, the strategy, and when (or whether) to exit. The end goal is to design a compounding vehicle — recurring or reoccurring revenue — and let it do the heavy lifting.
Trade-offs: You actually incur more debt than any other vehicle — just not money debt. You take on management & leadership debt (hard to attract star talent who need $1M+/yr without stock + cash), technical debt, and data debt — all things money could have solved.
- Pro: you stay alive longer because your cost basis stays low.
- Con: it’s the slowest of the four — it takes money to grow, and you’re building the capital-reallocation machine while also building the machine that makes the capital (“a car factory inside the car”). Your capital constraint limits the size of opportunity you can pursue (e.g. global AI robotics is near-impossible to bootstrap).
Path 2 — Raising Capital (other people’s money + your business)
Definition: You start and run the company, but raise capital from investors who buy equity to fund fast growth.
Typical examples: Tech platforms, social networks, marketplaces, manufacturing, pharma — anything with huge upfront costs then increasing (gross) margins later, and/or winner-take-all dynamics where you lose money for a long time to capture the whole market. Amazon lost money for a decade+; Facebook lost money for a long time while mapping networks.
Hormozi’s path here: Skool is venture-backed — they raised capital to grow and offer absurdly low pricing (~$9/mo) to get as many would-be founders as possible the tools they need.
Who it’s for: You have a very big dream and there’s functionally no way to be profitable without other people’s money (you’ll lose money for 1–3 years to make it work).
Advantages: Start with a bigger thing, hire top talent, outspend competitors, run negative acquisition cost (lose money getting customers), build infrastructure faster, and incur far less personal debt. You pursue rarer opportunities, which prices most people out — so there are far fewer well-funded competitors. You build the car factory first, knowing you’ll lose money up front, then make $X profit on every car after.
Trade-offs:
- Two customers instead of one — the end customer and the investors/VCs. Two masters, often at odds.
- You dilute your equity. Terms are everything: Sherwin’s first exit was tens of millions, but liquidation preferences + ratchets meant investors were paid first (with extra) and founders got less than the headline.
- Board seats — multiple rounds mean more seats; you can be voted out of your own company (Steve Jobs). “10 for 90%” is brutal — devil’s in the details.
- Your ability to raise = your track record as a founder × the size & believability of the opportunity.
- VC is grand-slam money — they want you swinging for the fences and expect many strikeouts; the math works for them across a portfolio. But if you’re the loss, n = 1 — it’s 100% of your life. There’s a “sea of tombstones” of founders who gave 5–10+ years to a high-stress job and ended with nothing — and no big-success story. Far more common than the rare headlines.
Path 3 — Investing (your money + other people’s businesses)
Definition: Take cash you earn elsewhere and buy small pieces of other people’s companies. The equal-opposite of raising capital. Cash-flowing businesses, public stocks, real estate — you fund them, you don’t run them.
Hormozi’s path here: Split between Acquisition Ventures (venture arm for SMB tech — they invest only where they understand it) and PE-style investments with a service layer at ACQ (cash-flow plus enterprise value).
Roadmap plug (~12:16): acquisition.com/roadmap — a free 10-stage roadmap from 100M+, broken down by 8 business functions, that fewer than 1% of companies finish.
Who it’s for: Once you have meaningful excess cash and want upside without day-to-day operational responsibility.
Advantages: Diversification — many bets instead of one life-or-die company. But distributing also decreases your upside.
“Put all your eggs in one basket and then watch the basket.” — Dale Carnegie
The most successful investors are actually concentrated — five to eight significant bets where they believe they have alpha. Arguably the easiest lifestyle of the four: no boss, you’re effectively others’ boss, you write checks and inform direction (may not have majority — depends on terms). When Hormozi & Leila sold and ran a family office, it was the most chill period of his life.
Trade-offs: By far the slowest, and almost no one makes their money this way — they already have a high active income and then invest.
- Don’t benchmark against outliers: Buffett bought his first stock at age 7 (just after Pearl Harbor); Mozart had ~19 concertos by 30 because he started at 7.
- Buffett wasn’t widely known until ~60 and made the vast majority of his wealth between 80 and 95. Even he compounded ~50% early, then returns fell as capital grew.
- Real estate is the #1 most common path to millionaires — but not to billionaires. Great for building and storing wealth; unlikely to get you to the very top unless your time horizon is enormous (you basically have to live to ~95 like Buffett; Munger died at 99). This is a long, long game.
Path 4 — Fund Management (other people’s money + other people’s businesses)
Definition: Raise a pool of capital from LPs (limited partners) and use it to buy pieces or control of other people’s businesses — and you can layer on debt too. The highest-leverage scenario of the four.
The leverage math (illustrative)
- Raise a 5M; LPs contribute the other $95M.
- Add 300M of businesses. (Your 300M.)
- Base case at 20% annualized for 6 years → ~2.98× → the 900M**.
- Pay it back: ~100M interest → repay LPs’ 40M.
- Split what’s left (e.g. 50/50 GP/LP). The GP slice ≈ **5M start.
- Even owning 10% of that GP slice = 90M on a $5M investment. That’s leverage.
Who it’s for: Best version — you’ve built a track record, have proprietary deal flow only you see, and a real edge in picking and improving companies. Funds are usually organized around a single thesis.
“There is no lack of capital in the world, only a lack of good deals.” — find a good deal and capital appears.
The higher the return and the more private/niche the deal, the better the GP/LP profit split you can negotiate. Example: a walnut-tree fund — a black walnut takes 30 years to mature, cash-flows walnuts every year after year 3, then yields valuable wood when cut at year 30; staggered “vintages” of trees. He’d never source that deal himself — that’s the edge a fund provides.
Advantages: Maximum leverage, smallest personal checks, huge upside, plus fees (more track record → more fees; first-timers charge less to keep incentives aligned). The GP often ends up richer than any single LP.
Risks: Enormous responsibility and a very long feedback loop. You’re accountable to LPs, regulators, the entrepreneurs running the businesses, and to a degree their customers — many masters. You can be rich on paper yet feel like a slave. Your job becomes managing risk, reputation, people, and portfolios — you’re building the “company of the fund,” not one company.
How Hormozi Walked All Four
Got rich bootstrapping his companies → took some cash and invested in other companies (compounding) → co-founded Skool (raising capital) → fund management via ACQ Real Estate, where they’re general partners in big buildings, having raised capital privately from high-level clients and portfolio companies.
Bottom line: Pick the path that’s right for you and your season — then play it for a decade.
Raw Transcript (Verbatim)
00:00:00
Poor people stay poor because they want a fast way to get rich and instead the richest people that I know pick one of these four paths, play it for a decade and then end up with more money than everyone else that is just chasing for shortcuts. And just as a fun reminder for you, no president, no economy is going to make you rich. You have to do that for yourself. So in this video I'm going to show you the four paths to mega money and I'll show you how to pick the right path at the right time for you.
00:00:22
Let's get into them. You've got your money and your business, you've got other people's money and other people's businesses and then permutations of those. And so your money, your business right, is a bootstrapped business. If you have other people's money and your business, now you're raising capital. If you have your money and other people's businesses, now you're investing. And then finally you have other people's money and other people's businesses,
00:00:47
which is fund management. Now to give you some proof points around this, I actually looked up the top 11 richest people currently on the Forbes list and I'm going to tell you where they are. So you've got Elon Musk, he's a raised capital guy. Almost every single company he's had he's raised outside capital and then he's continued to fund it and grow it. Larry Ellison, who's number two, raised capital. Mark Zuckerberg, raised capital. Jeff Bezos, raised capital. Larry Page, raised capital. Sergey Brin,
00:01:11
raised capital. Steve Ballmer, bootstrapped. Microsoft is bootstrapped. A lot of people don't know that. Underneath of that you got Jensen Huang, raised capital. Warren Buffett, investing. Michael Dell, bootstrapped. The Waltons, as in Walmart, bootstrapped. And so that's the top 11 wealthiest people in the world. Now you might have noticed that fund management wasn't there. If I go like six deeper, you'll find people who did fund management. Now one of the interesting things about each of these constructs is
00:01:33
there's a little bit of risk and there's a little bit of trade-off with each of them. And I personally have done one, two, three, and four, believe it or not. And so I'll actually walk you through my own examples and which one's right for you. So let's start with number one, bootstrapped. Bootstrapped just means that you fund the business from your own savings and cash flow. You have no outside uh investors and you grow through reinvesting your own profit. You have a website and you've got a cell phone, and
00:01:59
you've got skills, and you start trading one for the other, get a little excess money, take that excess money, and then continue to build. Now, typical examples for this are usually low-cost businesses to start. A lot of times that's services. So, agencies, home service businesses, B2B services, professional services, things like that. Sometimes nowadays you can actually do this with software. It didn't used to be that way, but now it kind of is. Education businesses, e-comm brands, if you do
00:02:21
drop shipping. If you don't do drop shipping, you have to front some capital in order to get the you know, first inventory started. Local businesses. Most normal companies. Now, to be fair, that scope has continued to broaden because the cost of entering business has going to continue to drop. Now, for me personally, my first brick-and-mortar business was a gym, and so that was bootstrapped. I used the profits from that to start Prestige Labs, which was a supplement company, which was bootstrapped. I
00:02:45
started Allen, which was a software company, which was bootstrapped. And so, all these companies were bootstrapped. Today, acquisition.com is taking some of that capital, investing it into other people's businesses, while also having some companies that we start de novo from our hold co, which is kind of semi-bootstrapped and also kind of reinvesting our own capital. So, you can see how some of these these these boxes merge. Now, who is this right for? So, if this is your first business, I recommend starting with bootstrapping.
00:03:10
And the main reason is just that you want to pay off ignorance. That the last thing you want to do is take your, you know, your friends and family's money and then lose it cuz you don't know what you're doing. That's my opinion. Everyone, you know, your results may vary. You can take your Of the names on that list that I mentioned, Jeff Bezos, the people that he knew invested, Bill Gates, the people I think he had rich parents. I'm sure they helped him out in the beginning. I don't know the the
00:03:28
actual public documentation of that, but I think he had a little bit of help in the beginning there. But the thing thing here is that like I don't think you're going to want to go raise a ton of capital from everyone you know, maybe even VCs, if it's your first shot. Again, you know, your results will vary. Your life is unique. But the main thing is that bootstrapped will typically be the slowest of the four paths. And that is usually because it takes money to grow. And if you have to make the money
00:03:51
to grow, it's almost like having a car factory built inside of the car. It's very difficult to do. Humans do it. We have human factories inside of our humans, weird stuff, right? Um but in in in business design, it's much much more difficult, right? It's slower to build the capital reallocation machine while also building the machine that makes the capital begin with. You kind of have to have both. Now, the main advantage of this is that you keep the control and the equity, so you have a whole, you
00:04:15
know, bigger slice of the pie. You decide the pace, the strategy, and ultimately you can exit on your own time or never exit at all, right? And the goal is that you design a compounding vehicle, which is either recurring or reoccurring um within the business. And then you let that over time do the heavy lifting. That's the end goal. Now, a lot of first businesses don't have any of those things, but you, you know, buy a dollar sell for two and you make money. There's nothing wrong with that. Here's some of
00:04:38
the tradeoffs. When you bootstrap, you incur more debt than any other vehicle. Now, you're like, "Wait a second. I thought I was, you know, using my own money to start this thing." Yes, but you incur every other type of debt. And oftentimes every other type of debt is harder to pay off than money is. So, what do I mean? If you're starting with your own cash, it's very difficult for you to attract like a star talent team of 10 people that all need a million dollars plus per year to
00:05:04
work and actually grow this thing. If you are venture-backed, you can do that with some stock and then also decent cash compensation. And so that becomes harder to do. So, you incur lots of management and leadership debt. If you like can't get the high enough level of the softwares that you need in order to build your software company or whatever, if you start low, you're going to have some technical debt that might incur as along the way. Same thing with your data debt. So, you're going to have lots of
00:05:31
debts that money could have otherwise solved for you, but you don't have money as one of the things that you're in debt for. Now, to be clear, there are pros and cons there. Like the pro is that you can stay alive a lot longer because you typically keep your cost basis a lot lower. Uh the the downside is is that it goes slower. And so, your capital constraint will oftentimes limit the size of what you can pursue from day one. If you wanted to start an AI robotics business to go global, it would
00:05:59
be incredibly unlikely that you would succeed because the amount of capital it would it would cost to just build one robot, let alone many robots as you scale, and then you functionally probably lose money on building that first robot. And then after you lost money on that first robot, you somehow have to get more money to then build more robots. It's very hard to do without outside injections of cash. And so, this box does constrain to a degree what kinds of opportunities you can pursue. And there's a reason that some
00:06:24
of the biggest people in the world start here. Which is a perfect segue to, okay, so what is other people's money into your business? This is raising capital, right? So, you start and you run the company, but you raise capital from investors who buy a slice of equity to fund the fast growth. Normal examples of this are tech platforms, social networks, marketplaces, manufacturing, pharmaceuticals, where it takes years and years and years to get a drug past them and then it makes money. Typically,
00:06:47
anything that has huge amounts of upfront costs, then increasing margins or gross margins later and or winner-take-all dynamics, meaning you have to lose money for a long time to get the whole market, and then all of a sudden, you have a network effect, and then everyone buys from you. Amazon famously lost money for like a decade plus before they really started turning a profit. Facebook, too, lost money for a long time, but they were mapping networks. So, who should take this path? If you have a very big dream of what you
00:07:12
want to build, and there's functionally no way to make your thing profitable without using other people's money, like as in like you will just you know you're going to lose money for a year, two years, three years in order to actually have this thing work, then you have kind of like a predefined path that you're going to have to raise capital. So, I have experience with this because School is venture-backed, right? And so, we raise capital at School to continue to grow the company, and we're able to give
00:07:38
pricing, which is absolutely absurd, like $9 a month, which by the way is very little with inflation. Uh it's basically free uh in order to get as many people who want to start a business that the all the tools they need to do it. Now, the main advantage of this is that you start with a bigger thing, you can hire the top talent, you can outspend competitors, you can be negative in your acquisition cost. I mean, you can lose money getting customers, right? Uh you can build infrastructure faster than you could
00:08:01
with your own cash alone. And on a personal level, you can incur way less personal debt because, you know, there'd be no way that you would be able to fund a lot of this out of your own pocket. Now, if you can, if you're already rich, then you can take on raising capital style big opportunities and then fund it with your own cash, and that's really an amazing combination, but not available to most people. But, this allows you to pursue rarer opportunities. And one of the advantages of that is that it
00:08:23
actually prices a lot of people out of the market. So, to agree, there is an element of risk with raising capital because typically the opportunities that people pursue are high-risk, high-return opportunities. But, there's typically far fewer competitors. And so, you know, you can count the number of competitors who are well-funded even in a space maybe on two hands. If I said, "How many social media marketing agencies are there?" you're going to need a lot more fingers. And so, within our car analogy
00:08:46
example, you actually just start by building the car factory. And then, even though you know you're going to lose money up front, once the car factory is built, you know that every single car you're going to make X dollars of profit, right? And that is how you end up recouping it and justifying the return to the investors. Some of the tradeoffs here are significant. You now have two customers instead of one. In bootstrap, your customer is just the end customer, right? When you have raising
00:09:09
capital, your customer is both the end customer and the investors or venture capitalists. And so, that's one element is that I have to serve two masters, which can oftentimes be at odds, which is a bit of a pain. The second kind of big downside is that you're going to dilute your own equity. Here, you have 100% of the pie, right? Whatever you make is yours, and that's your pie. Now, you can give profit shares, you can give equity slices to key teammates or partners or whatever, um but they're usually in the business.
00:09:34
They're actually helping you succeed within the business. Whereas, when you're raising capital, a lot of it's going to depend on the terms. Sherwin, my partner, tells a story about his first exit ever, he learned what a ratchet was, which is that he had a a very large exit in his first company that he started in his teens that then I think he exited around age 25. It was many tens of millions of dollars, but because there were liquidation preferences and ratchets on those liquidation
00:09:58
preferences, the investors got paid out first and with some access. And so when he saw this very big number, the amount that he and the other founders were left with was less. Now, to be fair, he did fine, but it was less than what he thought he was going to get. Now, as you continue to scale this, typically if you do multiple rounds, each person who's going to put money in also wants a seat at the table, quite literally, a board seat, which means that over time you can absolutely get voted out of your own
00:10:20
business, which happened to Steve Jobs, right? And so like these are real risks that happen. Like you can lose control of your own company. And a lot of this is going to depend on the terms of other people's money. If someone gives you a trillion dollars for 1% equity in your business, that's an amazing thing. If someone gives you $10 for 90% equity, that's going to be kind of tough. And so this one is very much the devil's in the details and your ability to raise is a combination of two things. Your ability
00:10:44
and track record as a founder and the size of the opportunity that the investors believe you're going after and the likelihood that they believe that you can actually hit it. And I'll say the last downside here is that typically venture money is kind of grand slam money. It's like they just want you to swing for the fences and know that they're going to have a lot of people strike out, but the economics of having somebody get a thousand X on their money allows them to have many losses. But if you're the
00:11:07
person who takes the loss and n equals one as in it's a 100% of your life, that is where the there's a sea of tombstones of failed ventures and founders who gave five, 10 plus years of their life and pretty much worked a job, but with way more stress for a long period of time and then ended up having nothing to show for it, which is tough. And they don't even have the story of the big success at the end. So this is actually far more common than the big headlines that we see. And the
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reason those things make big headlines is because they're rare. Which brings me the third way of making mega money, which is investing. Now, this is the one that probably a lot of people have more familiarity with, right? It's your money and you're investing into other people's businesses, right? So, you take the cash you earn actively from other places and then you buy pieces, tiny chunks of other people's companies. Kind of the equal opposite of raising capital. Now, you don't have to buy into venture type
00:11:55
uh products. You can just buy cash flowing businesses, you can buy public stocks, uh you can buy real estate. There's a lot of different things that you can buy with money. Now, the clear thing here is that you don't run them, you fund them. So, me personally, I buy kind of I'm split in my investing. So, I have Acquisition Ventures, which is our venture arm, so that's where we we are basically the raising capital partners for SMB tech. And so, that's exclusively where we invest in because we understand
00:12:17
it well. And then on the other side, we have kind of the private equity style investments that we do, but we also add some sort of service cuz we have a whole service layer at ACQ. And so, those are typically more cash flow investment businesses, but also obviously have enterprise value. And so, who should take this path? Real quick, I'm going to show you the exact 10-stage roadmap from zero to 100 million plus that less than 1% of companies finish I've now done multiple times. And so, I can say with a
00:12:40
lot of confidence that these are the stages as head count increases that you need to get through and I broke each of these down by eight different functions of the business, what the constraint feels like, like what are the symptoms of it when you're going through it, and then what steps we actually took to graduate. And we've done this across software, physical products, uh service businesses, brick and mortar, all of this and it works. And it's my gift to you, it's absolutely free. And so, the
00:13:03
link's in the description, but you just go acquisition.com/roadmap. Just enter your info and it'll spit it right back to you, all free. Well, once you have meaningful excess cash and you want the upside without the day-to-day operational responsibility, then this is an interesting path. And so, the main advantages are that you have diversification, so you're able to make many bets instead of kind of a life or die bet with a single company. But whenever you uh distribute your your you
00:13:26
also decrease your upside, right? So, Dale Carnegie had a famous quote, which is "Put all your eggs in one basket and then watch the basket." And so, that's him talking about this, right? Bootstrapping or you're raising capital for your own business, that's you putting all your eggs in one basket and trying like hell to make that thing work. With investing, you're kind of you're spreading it out. But, when we look at the most successful investors, they typically aren't nearly as
00:13:46
diversified. They're typically way more concentrated, which then allows them to make maybe make five, seven, eight significant bets that they believe they have alpha or or upside on above the market. And so, with investing, I think that of the four of these, arguably the easiest lifestyle kind of decision because you have no boss and you're technically other people's boss. And so, you just write checks. You can inform what you want the person to do. To be clear, you might not have a
00:14:14
majority, that's going to depend on the terms. But, when Leila and I sold the company and we were just a family office, this is all we did. And I'll say, of my entire life, the most chill period. And sometimes I think to myself like, what was I doing? Why am I back doing this when I don't need to do it anymore? Um but, I want to make a key point here is that this is by far the slowest, number one. And number two, almost no one makes their money this way. They have already have a high active income and then they
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begin investing. And if you're like, "Well, I'm going to be like Warren Buffett." Well, did you buy your first stock 2 weeks after Pearl Harbor when you were age 7? No? And did you do it in a world where there wasn't a Robinhood and you actually had to figure out how to do mail-in ballots and call someone as a 7-year-old or their 11-year-old whatever it was to make your first bet? Probably not. Because you're like, "Oh, I want to be like Mozart." You're age 30 and you
00:15:02
want to start investing. It's like, "Well, he already had like 19 concertos by this point because he started age 7." So, I wouldn't say, "Oh, let me look at what the top person in this field did if you're not that person." And so, the whole point of this video is to figure out what path is right for you. And to be clear, Warren Buffett is very famous now, but like until he was 60, I don't think many people even knew his name. 60. Right? And he's made the vast majority
00:15:23
of his wealth from like age 80 to 95. Think how crazy that is. So, if you're like, "I'm in this for the very, very, very, very, very, very, very, very long haul, then this is a good path for you." And especially if you're somebody who wants a little bit more of a lifestyle, um where you're like, "Okay, I just have to get my my passive to exceed my active costs." Then it's like, "Great." And if you get better and better at that game, you'll have more and more, and then
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you'll have nothing else to do, and you'll just keep playing the game just for the love of the game. But it does take time. It's unlikely that you're going to get these 50, you know, 50% 100% plus annual returns. Even Warren, for a very long time, didn't get those types of returns. And even in the beginning, he was still compounding, I think, 50-ish percent. Um but he was the best in the world. And then once he had more capital, the his returns decreased. And a great note on this is that in in I
00:16:05
would say Main Street, real estate is the number one most common path for creating millionaires, but not the most common path for creating billionaires. And to me, that is kind of like a great kind of cherry on top for this little bucket, which is that it is a great way to build and store wealth. It's being smart with your money and allocating it appropriately. It's unlikely to be the thing that gets you all the way to the top unless you have a very, very long time horizon. And let's be real, you
00:16:30
have to live to 95 like Warren Buffett to hit the list. Like, that's real. Like, Charlie Munger was 99 when he died. And so, like, in a very real way, like, they had like, if they had died at 74, I don't know if we talk about them as much because they wouldn't have had all the compounding that happened after. So, like, this is a long, long game. Finally, that leads us to number four, which is fund management. So, this is you take other people's money and you invest in other people's
00:16:57
businesses. You raise a pool of capital for investors, which the fancy word for that is LPs or limited partners, and then you use that money to buy pieces or control of other people's businesses. Now, depending on the way that you do it, you can also use debt there, too. So, let me give you a visual of like, this is potentially one of the highest leverage scenarios. It's like this on steroids, basically. And so, let's say that you want to you want to raise $100 million. Now, I'm going to use big
00:17:22
numbers cuz I want you to think bigger anyways rather than thinking in small numbers. All right? So, in order for you to raise a fund with $100 million, it's typical that the person who raises the fund puts about 5% of the total funds raised in. So, you put $5 million in. You raise $95 million of LP capital. That means limited partner capital. So, other people put their money in. And then, this is where it gets even crazier. So, this is $100 million in total, right? But then you say, "You know what? We're
00:17:49
going to go buy I don't have enough space on this thing, so just bear with me. Uh we're going to buy $300 million of businesses because we're going to use $200 million in debt to buy these businesses. And so, think about the leverage that you get from your 5 million able to buy $300 million worth of stuff. Now, when this $300 million, let's say it just grows at 10% a year. Let's say you're not amazing. You're just matching the S&P. All right? In 7 years, you'll
00:18:21
double, right? So, this is now $600 million 7 years later. Now, if you had a 10% return for private equity, that'd be bad. But, I'm just going to give you like the base case of like you're not that good at this. Okay? So, that means that you have a $300 million delta. So, we got to pay back, right? We got to pay back the debt. So, we have to take our $200 million out cuz you got to pay the debtors back. Now, they have some interest and some other stuff there, too, right? Then we got to
00:18:45
pay our LPs back, right? I'm just making the box a little bit smaller so I can throw the rest of it. All right? So, we got to take we got to take this back. Now, sometimes there's a hurdle rate, which is a minimum return you give these guys saying, "I don't get paid until X happens." That depends, but typically in private equity, it's 6 to 8% somewhere in there. And then whatever is left over here, you then have a split with them, LPs, and then GP, you. So, let's see what
00:19:08
happens when you actually invest this money and then wait 5 to 7 years. Now, let's say because you're in private equity and you're investing in non-public markets, you get a better than public market return, which is basically the baseline. Like no one wants to get a public equity return and then have their money locked up for, you know, 5 to 7 years. So, if you got a 20% annualized return for 6 years, you would have 2.98 on the money. So, functionally, your 300 million, right, that you bought,
00:19:33
now becomes 900 million. Ooh. More. All right. So, we got to pay back our debt. So, we have our 200 million that we got to pay back in debt. Now, there's going to be some interest on that. Let's say that we got to pay them back um 100 million dollars in debt payments. Okay. So, we have that debt, too. Now, we also have our LPs' 95 million dollars that they put in. So, we got to pay them back that. And then there's some minimum return that we promised them before we participate, which for us is going to be about 40
00:20:05
million dollars if we have a 6% pref or hurdle that goes back to them. So, that is all guaranteed to them. Now, after that, it just depends purely on the nature of the the asset class and what you're investing in and your kind of proprietary blend of whatever. There's going to be some split of the profits here that goes to you, the GP, the general partner, that's the operating partner, the person who runs the whole fund, and then some that goes to the LP or limited partner. And so, let's say that you had a
00:20:35
50/50 split here. Let's just call it, okay? That means that after we add all of this stuff up, this slice here is 465 million dollars. Remember we started with 5 million? This is how you get mega rich. Now, to be clear, all of this isn't yours. Maybe 2/3 of that isn't yours. But either way, even if you had 10% of that and you got 46.5 million dollars, you did pretty good on your $5 million investment, right? If you got 20% now you're looking at $90 million. Even better on your $5 million investment.
00:21:16
You see how this stuff adds up? And that's because this is leverage. Now when we look back at our original kind of sheet here, with each of these four paths, you have to decide on what's best for you. If you have some proprietary way that you know how to source deals and you have a good way of finding capital, which by the way, if you're like, "I don't know how to raise capital." You absolutely do know how to raise capital if you have good deals. One of the best piece of
00:21:39
advice I got from a mentor of mine is that there is no lack of capital in the world, only a lack of good deals. And so if you find a good deal, capital will appear. Right? If you come to me and say, "I have a guaranteed way," which of course don't use those words, uh because that's a great way to get get good money to run away. But if you were like, "There's an incredibly high likelihood chance that I have of 5x-ing money in this way and here's the six different ways that I've mitigated the risk." And
00:22:01
let's say those are believable. And if we have that, then I'd be like, "Okay, well, how much money do you need?" And that's how any good investor's going to ask the question because when you do identify good opportunities, you just want to back up the truck. Now in that setting, the higher, believe it or not, the higher the return and the more private the type of deal that you're doing that's more niche and specific to what you know, typically the better the splits that you can negotiate on the GP
00:22:26
LP split of the profits after some certain point. And so who should do this? I think the best like version of this is where you build a track record. You figure out proprietary deal flows and deal flows that only come to you that no one else has. And you have some sort of real edge in picking and improving those companies. So oftentimes funds are are organized around a a singular thesis. So for example, in the very beginning of acquisition.com, I got approached by a walnut tree fund. I was like, "I don't even know this exists."
00:22:53
But they explained how it worked, which is like it takes 30 years to grow a black walnut tree all the way to like full size, but every year after year three, it creates walnuts and so it cash flows every single year. And then at the end of the 30 years, you cut the walnut tree down, and you get this amazing walnut wood that you can then sell. And then the cost is really just the seed and the time. And that was their entire business model. They've done this a number of times, and they had these kind
00:23:15
of staggered uh tree vintages, if you will. I'm using the wrong word, but like the vintage of trees. Every year they'd another cohort. And I was like, "This is a really interesting business." And they had a fund around it. Because I don't want to know where the Venezuelan tree farmers are. I don't have those connections. I don't know how to sell walnuts at scale. Could I figure it out? Maybe. Is it worth my time? Probably not. Is it worth my money if it doesn't
00:23:36
take my time? Maybe. And so the beauty of this one is that you have maximum leverage, and you can have the smallest personal checks. You have huge potentials for upside. Um there's also fees that you can put onto this. Typically, uh the better and the more track record you have, more you can add fees in. I'd say your first time often times you're less fees uh just cuz you want people to come in and not think you're going to get rich on the fees. They want to have as as aligned incentives as possible with the
00:23:59
investor. Now, often times the GP ends up richer than any single LP. Obviously, depends on how much capital gets put in um that they that they take from. Now, the risks. You have enormous responsibility and a very long feedback loop. And you're accountable to the LPs and to regulators and to the entrepreneurs who are running the businesses and to some degree the customers that those businesses serve. And so you have a lot of masters to serve in this time period. Um and you can be rich on paper, but the
00:24:27
entire time you almost feel like a slave, which sucks. And so your job becomes managing risk and reputation and people and portfolios, not just building one company. And if anything, you're almost building the company of the fund. So I got rich bootstrapping my companies. I took some of my cash and invested in other people's companies. That cash continued to compound, um and I was able to invest and then co-found School, where we raise capital. I obviously promote School as well. And then finally, it's in fund management.
00:24:53
So uh we've raised capital for some of the real estate deals that we've done when we buy big buildings, uh which we do through ACQ uh real estate. We've only done that privately some of our high-level clients and portfolio companies. We are functionally general partners in some big real estate buildings, which you can check out acquisition.com real estate. But yeah, these are the four ways to make mega money. Pick the path that's right for you, and may the odds be ever in your favor.
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