The Game with Alex Hormozi - The 4 Paths To Making Mega Money | Ep 801

Episode Date: January 6, 2025

Welcome to The Game w/ Alex Hormozi, hosted by entrepreneur, founder, investor, author, public speaker, and content creator Alex Hormozi. On this podcast you’ll hear how to get more customers, make more profit per customer, how to keep them longer, and the many failures and lessons Alex has learned and will learn on his path from $100M to $1B in net worth.Wanna scale your business? Click here.Follow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

Welcome back to the show. Today I'm going to talk about the four paths to mega money. And so in the year that I took off after the sale, I studied this intently because I wanted to figure out the best opportunity vehicle for me. And it turns out there are four and all four can make you mega rich. And they all have pros and cons. And let's start with the first one. So in the first path, you have other people's money being invested into your business. Now let's look at some of the business titans that followed this path. So here you can see three pie. charts with 17%, 10% and 4%. If I were to show you this and say, do you think the people who

own these pies are very rich? You might think, well, no, they own so little of the pie. But if I then said, this is Tesla, this is Amazon, and this is Navidia, would you all of a sudden then think, oh, wait, this is Jensen Huang, Elon, and Bezos, some of the richest people in the world, who are all centi billionaires and now at this point multi-scenti billionaires? And so these incredibly successful people understood the first path of getting ultra-wealthy, which is the combination of other people's money into your business. Now, the way that it works is that you raise funds by selling a percentage of your company. So what this does is that it actually dilutes you as a founder, meaning you no longer own 100% of your company, but now you might own 80% of a company

that now has an extra $20 million, for example, that you can then use to grow. Now, there are some businesses that this is the only strategy to successfully, realistically accomplish the goal. And then there are some businesses that this would be a terrible idea to pursue. One thing that I think took me way too long to understand as an entrepreneur is that every single business incurs debt, the moment you start it. The question is what type of debt you're going to incur? And so, for example, if you bootstrap a business, as in you take no outside capital when you start it, you just fund it yourself and you own it and you grow it organically, then the debt that you take on is going to be that you're not going to have enough money to get the best talent in the door.

And so you're going to have talent debt. You're probably not going to have enough money to get the right technological infrastructure in place to run the entire business. So you'll take on technological debt. And you can go down the line and start thinking about all the other ancillary non-financial versions of debt. Now businesses that choose to take on financial debt, choose to take on that debt instead of the other types of debt because of the nature of the competitive dynamics of the market they're in. And so those types of businesses typically are in businesses that take a tremendous amount of capital to start up and scale or they're in winner take all markets where speed is the primary objective of the business so that

they can capture the opportunity and then fundamentally become monopolies of a new type so facebook for example became a monopoly of attention to a large degree now because there are other social media platforms they get away with that but they have created a big moat around all of the attention that exists in media. And so for them, there's only one real big social network that was going to exist. And so they then captured it. Of course, LinkedIn was like, well, is there a version of that we can do for business professionals? And then they captured that. Can you imagine now another professional social media platform being like, oh, we're now starting up? It's like there's no room for you. Right? It's already done. That market is captured. There were other companies that

were competing for the same market. And the people who were able to raise the most money, spend the most money the fastest, attract the best talent, were able to capture it the fastest, sealing their competitive mode to keeping that as a long-term cash cow over the long haul, which means that those businesses lose a tremendous amount of money for a short period of time, and then they're able to kind of get over the hump and then become cash machines. And so, for example, Amazon was unprofitable for nine years, famously. And there's an interview of Jeff Bezos getting grilled on the Tonight Show, I think, with Jay Leno. Is it Jay Leno? Yeah, with Jay Leno. And he's like, you guys don't make any money.

And Jeff Bezos just gives it, he does this weird laugh. And he's like, yeah, we don't, but we could. We just choose not to because we get better returns on our capital by continuing to expand our infrastructure so that we can eventually support literally delivering things the next day to every single customer in America. Notwithstanding the fact that they have the single most successful subscription in history in Amazon Prime. And so when Bezos was making the investment of capital into the business, he asked the question, not what do I think is going to change in the next 10 years. he said, what things won't change in the next 10 years?

And so he realized that there are some fundamentals that will never not be true. People will always want things to be faster. People always will want things to be easier. People always will want things to be risk-free. And if you can create an outcome that is desirable, fast, easy, and risk-free, then you have an incredibly valuable business. And so this corresponds with the value equation in the $100 million offers book. And so time delay is speed, ease is going to be effort and sacrifice,

perceive like an achievement is your risk. And then the dream outcome is making sure that you're not just making things fast, easy, and risk-free that no one wants. And so that's the dream outcome component. And so getting things to your door, a lot of people want that. If you can do it faster, they like that more. If you can make it easy for them, they like that even better. And if you can make it so that the purchase they had is very likely to be good,

ak.a. the entire review system that Amazon pioneered. Reviews were not a thing. Think about how crazy this is. They were not a thing, and a lot of people were afraid and pushed against Bezos, when he wanted to roll out reviews because they were afraid that sellers would hate it. But he bet on the fact that customers long-term would want the transparency. So in Jeff Bezos's very first capital round that he raised, he sold 20% of the business for $1 million to around 50 investors.

And so imagine the return on that today for that $1 million for 20% of Amazon. It's more than he still controls to this day for context. And he took that to buy the initial inventory, get the, get the, website established, hire the first developers to get this going. You take on debt, if you're going to take on financial debt, use other people's money into your business. If you have a market that must be captured quickly in order to get a network effect of some sort,

or you have huge amounts of capital that are required to make the business start to begin with. So if I wanted to start, call it a pharmaceutical business, then I would probably have to have capital for an extended period of time to start a new drug to do the research, and then maybe five years after we get the licensing, then have the ability to print money. but that capital would have to come from somewhere. And so unless you start as a billionaire to begin with,

which you absolutely could do that, hypothetically, but the vast majority of these businesses are not started by billionaires. They're started by everyday people who have a good idea. And then they go to people who have capital and say, hey, I'll give you a piece of this upside. This is the live fast, you know, die hard style of making money. The reason it is that way is because it will typically be very investor favorable. especially the earlier it is, because they are taking on more risk.

And so the big thing about these mega wealthy paths is that the underlying thing that occurs in all of this is, one, return on invested capital, and two, the risk that you're taking in order to validate or justify that return. Some guy in 1995 says he's going to start a bookstore on the internet, whatever that is, and you give him a million dollars, it's like, I need 20% of this thing at least because no one's ever done this before, you've never started a business before, what's the internet, and are people even going to buy stuff on it? Right. So there are so many unknowns here that it makes sense that they had a tremendous amount of compensation for the veritable guarantee that they would lose

the money they were going to give. And that's probably part of the reason that Jeff Bezos didn't just raise it from his friends and family, despite the fact he was a Wall Street and insider. So he could have easily gotten the million dollars from probably a handful of people, but he also probably knew that there was a very low chance of success, which I think he says in his early interviews, he figured that there was a low chance of actually making this work. And so when you follow this path, the other people's money into your business path, there's really only two big kind of potential outcomes. One is, as a founder, you're going to de-risk along the way, which means that sometimes you will get something called secondary. So when an investor puts money

into a business, they're going to appraise the business based on how quickly it's growing, how likely it is to continue to occur. Well, for them, the ease of investment is high because they just have to make the investment, but still the fundamental value equation exists for them as investor, where your business is the product itself. Let's say that we have a business

before the money that is worth, we'll call it $10 million. And then they say, I want to put $2 million into your business. So if they put $2 million into your business, this business is now a $12 million business where they now own 20%, and then everyone else now owns 80.

And so the founders, the original shareholders, are going to get diluted. It means that they now own a smaller percentage, but now the business has more capital that can help it grow. Now, a different path to this is instead of putting $2 million into the business, they could have put, let's say, $1 million into the business,

and say, we're going to pay the founder over here into his personal bank account $1 million. And so that's called secondary, and then most people don't even say primary, but it's kind of almost assumed that money is going into the business when you're raising a round of funding. And so some founders will de-risk along the way because at some point, you know, when you have a billion-dollar asset and you have $100,000 in your bank account, some investors will understand that the founder themselves will become a little bit volatile. And so they want to give them a little bit of money so that they're not constantly freaking out and actually can make better quality decisions.

So it's not uncommon for founders to take a little bit of chips off the table as they continue to scale and raise money. funding. Now, this is along the way they're making this money, but they still have this monster asset that's worth billions of dollars or hundreds of millions of dollars. And so there's basically two paths from there for them to actually get paid. Path one is that a big private equity firm, which is now kind of a new thing, is that there are some firms that can buy billion dollar businesses and not have them be public. This is a new thing of probably the last, call it, seven to ten years, where there's enough private funds and enough private money, sovereign wealth sometimes overseas, that can take down companies of this size.

When I say take down, I mean put the capital in and buy it. So a simple example of this would be like a company like Kajabi, which is a learning platform where Tiger Capital came in and bought majority of the business and the founders basically now a minority and they kind of had a full exit. And almost all of that cash went to the founders and very little into the business. In that setting, it's like they had a lot of capital. They bought this company.

and so now they're, you know, what's their exit? And so most of these paths, especially when you're raising funding, most of the time, is going to be some IPO. So an initial public offering that then allows those shares to be made public, which allows the person who owns the whole pie and all the shareholders to have liquidity, meaning they have access that they can either sell those shares or they can lend against those shares. Either way, they have a way of making money from the business, not counting distributions, which many businesses that are like this don't ever give distribution, because they continue to reinvest the capital in the business because the returns from reinvesting the capital are superior to just getting a dividend. One of the difficulties with raising

money is the nature of the money that you take on. All of these are completely unique deals depending on the risk profile of the company, the risk appetite of the venture capital firm or whoever is making the investment and what their investment thesis or philosophy is. And if you look at 100 different VCs, you'll have 100 different investment philosophies in terms of what they're thinking about. Now, all of them just want a big company. of course, but how they're going to get there is different. So there are some firms that only take on one company in a specific space and they say we're going all in on this company and we're going to provide all the help we possibly can to help them grow. Right. There are some companies that say,

we want exposure to this entire market and we're going to take a bet on 10 different companies in this market with the hopes that one of them will win. So they don't even care that they're competitive. They just like, we want to make sure that we're with the winner or whoever the winner is. If you're in the latter example, each of those VC checks may say, well, we have to 10x this business in the next two years, or it's going to massively lose valuation. And so they will force the founders to take aggressive growth measures that may sometimes be not in the long-term benefit of A, the founder, but B, the business, which might mean that they're overspending on advertising, they're over-hiring on talent, they let the culture, you know,

get diluted or suffer because they can't have enough filters in place because of the rate or the pace of growth that they are requiring. And a lot of this growth is almost artificial because they're just injecting so much cash into advertising oftentimes to get the business to grow, that they actually didn't solve the core fundamentals of the business. So one of the dark sides of this that doesn't get told is that as you do more and more rounds, each VC or venture capitalists oftentimes gets a board seat or two board seats,

and all of a sudden you might find out that you have a minority of your business and you no longer have voting power, and you can get ousted from your own business from the investors that invested money in. And so a classic example of this was Steve Jobs. There was a period of time where he ended up getting kicked out of Apple for years, before being able to come back. Now, mind you, at that point,

it was still a public company, and it had a board of directors, but it works the same way with a private company. I have a good friend of mine who exited, had enough of an exit. It was a billion dollar valuation. He didn't get a billion dollars,

but he had enough of an exit that he could retire, and he continued to work, but then they just said, we don't want you to work here anymore. And so he got fired. And then three years later, they asked him to come back.

And so it's very common to think, oh, this founder doesn't really know what he's doing, but the thing is the founder always knows the heart and the pulse of the business, because you're the one who knows each of the problems and why everything exists the way it does. In terms of wealth creation,

when you take, let's say, a hundred of these bets, you can get supremely wealthy. So, believe it or not, venture capital is the highest returning asset class of all asset classes. The problem is the amount of capital that you can allocate into that asset class typically is very closed or very small because most of these funds and good companies are oversubscribed. There's many investors who want to put money in when these deals are really good, or the likely that the business succeeds feels really high. What happens is you may take 100 bets and the winner you have may offset the losses, but you're still never going to get richer than the guy who has a fully concentrated bet on the one business. And so there's 99 entrepreneurs who failed and didn't

make money, but one of them who still gets even richer than the venture capital investors who put money in. They use that one winner to offset their losses, whereas if you were the only guy who went all in on that, you don't have losses to offset. You just went all in. And the reason you would take Path One is because you have a business model that requires you to grow quickly or have tremendous amount of capital for an extended period of time before it could become profitable. If you've ever heard of like XYZ company raises money at a $500 million valuation, they're not saying they sold the company for $500 million. They're saying that the founders diluted themselves and the other investors by some

percentage, and it could be as little as one or two percent at that valuation. So for example, if you had a $500 million company and you sold 2% of that business, then you would have $10 million in cash. that you could then put inside of the business to then help it grow. But you'd only sell 2% for that at that valuation. Hopefully this puts some relative numbers to some things that you've heard before.

So let's say that you don't want all that risk. You have your money and your business. And so this is probably the most common path that entrepreneurs take. And I will say that a lot of the entrepreneurs that I aspire to and like to model tend to fall in this bucket. Within this model, I want to make a very big point clear,

which is that many people who, are bootstrapped or could otherwise be bootstrapped businesses, as in the founder themselves funds everything and doesn't take outside money, they sometimes act as though they are venture-backed and that they must grow at all cost. And they chase growth for the sake of growth. My first big thing that I will share with you is that rush is imaginary. 99% of businesses don't need to have some aggressive growth timeline. Because whether you're starting a chicken shack or you're starting a lawn care business, there's no network effect that you're going to build up. You just have to keep out competing and doing a good job in the local area or in the service vertical that you're

concentrated in in order to achieve good returns for the business. And so if you look at Chick-fil-A with Estuary at Kathy, they had a competitor at earlier on in their career called Boston Market. Some of the older people in my audience might have remembered this. I used to go there after baseball games. And Boston Market was kind of like chicken and home-style cooking, and they were direct competitor with Chick-fil-A. Now, they raised a gazillion dollars and went super, super fast, and everyone told Chick-fil-A that they should do the same thing. But Esther or Kathy being a lot more prudent of a man who was not, who didn't want to take that kind of debt on, who didn't want to just chase some imaginary title for ego, he said, we just need to get better. And if we get

better, our customers will demand that we get bigger. Fast forward 10 years after Boss of Market was kicking the tail off them and was a Wall Street darling, they eventually went bankrupt. Meanwhile, Chick-fil-A, 75 years later, has 2,600 locations, and they're all privately held, and they have no debt. Now, you might think, well, I don't want to wait 75 years. It really depends on what kind of vision you have as an entrepreneur, because, you know, for me, my belief is, like, if I could build something that outlasts me, I think that would be amazing. And sometimes the way to build something for the long term is to not build it for the short term, which is not fast and growing at all cost. Because sometimes you grow bigger by giving yourself the time to grow longer. Yeah, and I share the story because this is how I've started every company that I've founded.

So I haven't founded a company and taken on capital. I have invested and co-founded. But if I'm the sole founder of the business, I have typically bootstrapped it, meaning I funded the original business. So when I had my online fitness business was my very first business, that was just me,

and I spent the $5,000 to start that up. My gym cost me, I think, $37,000 in total to start my first gym and sign the lease and get it kind of outfitted. That was all me that fronted that capital. and when I even opened up each additional location, it was the same thing. There's a key point there that I'm going to talk about return to invested capital in a second. So stay tuned.

The next thing I had was Jim Launch, which was started by me, prestige lab, started by me, Allen, started by me, acquisition.com, started by me, and funded. And so when you do that, you don't have any dilution, but you also have complete control. And so if you can think long, you can grow big. Now, back to the return on invested capital. Every business, you want to have a compounding vehicle within it. So what I want to do is walk you through a little company example that will illustrate this. So let's say we have company A and we have company B.

And let's say this is year one, year two, and year three. All right? So let's say year one, company A sells 100 customers. Company B sells 100 customers. Next year for company A, they lose 100, but then they sell 200 customers. So they're plus 200 and then minus 100. So they lost 100% in those customers, they still did 200 sales. Okay?

this company gets plus 100 and then minus zero. So they're now at 200 in total. 100 from the first year, 100 new customers from the second year. And let's say year three, company A sells 300 new customers and now also loses the 200 customers from the year before. And year three, company B, sells another 100 customers but has the 100 from year one and the 100 from year two. Both of these companies are going to have 300 customers in that year.

Which business would you rather have? Hopefully, if you watch anything that I talk about, you would want company B. Why? Because this is a company that is stable, that will continue to grow year over year every year, and they don't need to necessarily grow, they don't need to grow faster. If they just do a good job and keep the customers they have, they will just consistently grow year over year. And I'll tell you this, knowing that no matter what happens, you will always get bigger, is a very nice value proposition for an investor or for you as an entrepreneur.

The key is that you want to have some sort of compounding vehicle within the business. And so to accomplish that, there are pretty much only two ways to do this. So one is you, so the first is that you sell stuff that people never stop buying. And so that can either be a recurring or reoccurring membership. So a reoccurring business might be something like Coca-Cola, right? Where you start drinking Coca-Cola and you go to Costco and you buy it. When you go to restaurants, you buy it. And so you buy it from a number of different places.

Now you're not on a subscription for Coca-Cola, but you might just buy it on a regular basis. And so because of that, once they acquire you as a customer, you can, you can buy it from a number. keep paying them. Starbucks is the same way. Once someone goes to Starbucks, the average customer spends $14,000 in Starbucks. They just keep buying products from them. You're not on a subscription, but you do keep going back. The other version of this is something like Netflix, where you have subscription, you have a membership of some sort, and people stay on and keep paying. And so in either of those situations, as you acquire customers, the business just keeps growing. And so every new customer you bring in, just grows this big bolus of people that over time makes you more and more

money. The second scenario is where, and this happens all the time in like home services, solar, you know, roofing, a lot of real estate adjacent type stuff where you have a business, I mean, even physical products can be this way, where you have a product that doesn't have a lot of return business. So if you buy a house and sell a house, it's like maybe somebody comes back to you three, four years later. There's nothing wrong with that, but you probably wouldn't describe that as a recurring or reoccurring business. And so instead, if you own a business like that, What you'd want is a growing network of people who never stopped selling for you. So here you have customers who never stop buying, and here you have a distribution base of people who never stopped selling.

And so, for example, Prestige Labs, the supplement company we had, people who go to the gym and try to lose weight, that's a very cyclical thing. People try and lose weight for a little bit, and then they fall off, and that's common. Now, that being said, what can make the company more stable is if I have a thousand locations that are consistently selling product every month. Now, the who they sell it to might change. but the fact that they are continuously selling becomes the node of kind of recurring revenue or reoccurring revenue, but just one level chunked up. And so this is a distribution-based model,

this is a customer-based model, but both of these compound. And so when I look to invest in a business, or start a business, I try and solve for this. Once you solve for this, growth becomes inevitable. Right, and because of this, when I was 26 or 7 years old,

it was the first year that I made like a lot of money, and I took home, I think, just under $17 million in profit personally, in income. And so this stuff absolutely does work. So this is just like arbitrate theory and then I'm just like talking about something I haven't done, which I can understand any skepticism around that because of a YouTube video on the internet. That being said, the key to growth in this path, so when you're in this box, it's your business and your money, your key or your path to growth is something called Return on Investor Capital. So it's R-O-I-C. Now, return to invest a capital basically is how much money does it

cost me to make more money. And so, for example, there are multiple levels of this within a business. And so if I have a brick and mortar business, you're going to have the lowest level of this, which should be LTV, lifetime value, to CAAC, which is how much does it cost me to get a customer versus how much do I make from that customer over time? Right, that's the base unit of economic arbitrage in a business. This is how you make money fundamentally. Now, leveled up from this, you have ROIC, which still talks about the same concept, return on invested capital, how much is it cost me, the return, this is basically LTV, capital is the cost, right? It's just one frame. So I'm trying to give you the real terms rather than just use some of the third grade terminology so that you can

actually learn it. All right, so return to invest in capital typically will describe the larger unit. So if my massage business, for example, cost me $10 to get a customer worth $1,000, then that would be an amazing LTV to KAC. But the question is, how much does it cost me to open a massage studio? Well, I mean, this doesn't take into account the lobby, the buildout, the licenses, the recruiting costs, administrative costs, tech costs, you know, construction, whatever. At this point, it's like, okay, maybe I have an amazing LTVTAC, but my return on capital might be not as good, or it might be amazing. Here is basically the bigger money multiplier within the business over the longer term.

Let's say that we have a business that does $1 million top line, and we own the whole thing, okay? Million dollars top line, and let's say it makes $250,000 in profit. If we are entrepreneurs, then we have two options. We can reinvest that in our business or we can put into another business or another asset. But if we know that our returns on invested capital are very good, then it would behoove us to put it into our own business. And so let's say that my return on invested capital in my brick and mortar chain, for example, let's say that it costs me to open this million dollar business. It cost me $50,000 to open a store, and within 12 months it makes $250,000 back.

And if you hear that and you're like, whoa, that's amazing. This happens all the time. not that uncommon. I mean, I told you about my gym cost me 37,000, and I was making 20,000 a month within six months. You absolutely can have these kind of, these metrics, okay? So at this point, what would it make sense for me? Well, I should probably take my 250 and basically have this times five, and then this gives me this times five, and all of a sudden the next year, I make 1.250 million. And what I do the next year? This is how compounding occurs. So then I split this up, and what would this allow me to do? I would open up 25 locations, and then

that would make me 5.25 million in net income, right? Now, of course, when you're at this point, the constraint will quickly be operational constraint. You'll actually have a people issue of trying to staff all these things, get all the locations signed, and this is why some people turn to franchising and things like that so that they can expand a little faster. And that being said, it is the most expensive form of equity

because you're giving away basically the entirety of your business for a percentage of the top line, but then you have to still service all of the locations almost as if you own them. And so I'm not the biggest fan of franchising. There are times where it does make the most sense, but most times it's because founders are in a rush. If this is your first time business, Hey guys, real quick, this podcast only grows from word of mouth, quite literally.

There's no other way to grow a podcast than word of mouth. If there's some element of this that you think somebody else should hear or would be relevant to them, it would mean the world to me if you shared this via text, via Instagram, via DM, via whatever way you like to share stuff with the people you love. Thank you. I would strongly recommend doing your business and with your money because there's so many things that you don't know and you have to pay down your ignorance debt. You have to pay down the cost of not knowing what you're doing.

And I'd rather you do that on your money than someone else's. If you do start to have this business that starts doing well and you start having this excess cash, our $250,000 in the example I just gave. So the third path is that you can have your money with other people's businesses. So remember here we had our $250,000 in profit from this business that we created. Well, of course we could put it into our own, but if we put it into someone else's, then we want to understand what our return profile is going to be. And so this is what I would consider the path of the investor. And so if the first category is the path of kind of like the venture-backed entrepreneur,

the second path is the bootstrapped entrepreneur, the third path is the path of the retail or just traditional investor. You have some extra cash, and you want to put it into something else. So, for example, you guys have probably seen the show Shark Tank, where there's five sharks that are all wealthy people and entrepreneurs come to them and they invest in their companies. Where they give is money and help and when they get back is some percentage of the upside depending on how the deal is structured. Those sharks tend to have less time and so what they're compensated for is risk. And so when you become an investor, the chief thing that you give

is that you de-risk the founder and you incur some of that risk, you shoulder some of that risk, not in exchange for work or time, but in exchange for capital, which fundamentally means I took time somewhere else, I did work somewhere else, and I'm going to throw that into your business so that I can offset your personal risk. Now, the benefit of an investor is that you can diversify to a wide degree, meaning you can take 100 bets. You can take 1,000 bets. So every single share that you own in a public traded company is a small bet that you're making as an investor. And every share that you own of a privately traded company works the same way. It's obviously not privately traded, but just off market. It works the same way. Now, investors in general

tend not to be the wealthiest people in the world. And so this is why, in my opinion, real estate has created more millionaires than any other vehicle, but private equity has created more billionaires than any other vehicle. And so it's because of the nature of the concentration of risk and reward.

When you are the business that goes all the way, to the investor, you might represent 1% of their portfolio. So they might have a huge win with this business, but it's only going to be 1%. But if it's your business, in either of these scenarios, then you're probably going to have a big slice of that pie, which means that their 1% win might be a 20% win, an 80% win for you. But what we don't see is the other 99 entrepreneurs who just go to zero.

And so this is where I think that from a personal level, you have to know what you are shooting for. Because if you're like, I just want to get rich, then investing in sound assets that can give you a good return over a long period of time, there's probably no sure way to become wealthy. the richest person in the world or the top 100 richest people in the world, you will almost invariably have to do one of the other two paths that I just described. The fourth path that I'll show you last is one that also gets you on the top 100 list too. And I'll share how that works in a second. The beauty of being a traditional investor where you take your cash and you invest in businesses is that it's unlimited and its scalability. It's for the most

part passive with the exception of the active work that you have to do in finding, sourcing negotiating the deals, which is work, but typically less than running a business. Since I am an active investor, why don't I share with you some of the things that I look for in businesses that I invest in? Now, to be clear, this will be my investment thesis. There are many. So for me, I create content like this so that I can get exposure to entrepreneurs so that they can come towards Acquisition.com and say, hey, I'd like to do a deal with you, or I'd like your help to help scale. And we happily do that. And this is how we get to know businesses at early stages, so that we can be with them throughout their careers. I mean, the smallest company that we,

that we started working with had done $2 million the year before, and this year will probably finish around 110 million in revenue. And that's, mind you, over years, not like a couple months. Number one is that I try to invest in high cash flow businesses that are profitable. So I like getting distributions every month because it offsets my principle. And it tells me that the business is doing well on a much faster feedback loop. So number one is I invest in high cash flow businesses. And mind you, this is in my active arm at Equip Wizard.com, which is kind of our private equity portfolio. We have a venture arm, which is ACQ Ventures. We have a venture arm, where we write smaller checks for smaller slices of businesses,

where we are not involved in our primary value ad is risk and a light amount of help compared to what we do when we're heavily investing in a company where we're taking 30, 40, 50 plus percent of the business. In those instances, we're gonna be working, we're gonna be recruiting, we're gonna be working, we're gonna be leading the strategy that business versus just saying, I believe in this entrepreneur,

and this team, I believe in this concept, and I'm willing to write a check and take on some risks I can get exposed to some upside. So this is my private equity thesis. The second is that I want something that can grow. And so fundamentally for growth, there's only two ways that a business can grow, right? We can increase the number of customers, or we can increase lifetime gross profit or LTV per customer. So we can get more people or increase how much they're worth. And if we see a path that's very clear that we can say, oh, we know how we're going to get this company more customers or we know how we're going to be able to double, triple, quadruple how much customers are

worth, which one will immediately make us more money, but then also allows to spend more money to get more customers. So school, for example, is one of our largest investments, and that one breaks rule number one, and that's because at this point I wanted to take a very big swing on something that I think could change in industry, and it's an industry that I understand very well, which is education and media, and I feel like very, I have edge there. I understand it. Now, could something happen, it could go wrong, maybe, but in the last year, we, you know, six-axed the business, so it did, we had a good year. With school, it was like, okay, do I clearly know how we could help it get more customers? Yes, and so that was fundamentally what we drove. Now,

the lifetime gross profit is very much product driven, which is not the role that we decided take on for this particular investment. But I did know that I have a huge part of my audience that wants to start a business. And so I said, okay, well, I don't have something for people who want to start a business. All my stuff is really for business owners, but people who want to start businesses still want to learn about business before they start businesses. And so I wanted somewhere I could say, well, if you're not sure, go there. And if you're not even sure about that, just read some of these books so you can get a little bit more context on what you could potentially sell. The third thing that I look for is focus. And I talk about this a lot, which is, is the founder

someone who can say no, who's focused on a specific avatar, a specific customer, has lived the life or the problem of that customer. I don't want to have to niche slap a founder. All right? So a niche slap is where they're like, I, sir, I do everything for everyone, which really means nothing for no one. And so the benefit of being very focused on one specific customer avatar, or ICP, ideal customer profile, depending on what market you listen to, if you have that, you can solve people's problems far better because you can be more nuanced in the solutions you provide. You can also charge more because the actual value is higher. And you can tend to acquire customers cheaper because your messaging will be more targeted,

and the target of your advertising itself can also be more targeted. So both the words, the offer, the deliverable, the pricing, all of this is a strategic question, which is why I want to make sure the strategy of the business makes sense. And then fourth, and this is probably the biggest one of all of them, if we're being very real, is jockey over everything. I'll put one caveat out, which is I'm not going to try and enter a market that I think is going to die. So if someone's like, hey, I have a new gas-powered car, that probably wouldn't be the bet that I would make. If someone says, hey, I have this brand-new print newspaper that I want to start,

probably wouldn't be the bet that I would make. But if they're in a market that I don't foresee is going to disappear tomorrow, then all of my emphasis is going to be on the jockey, which is how good is the person, the founding team, for the business. Because the thing is that the founding team is going to encounter innumerable problems as they try and scale this thing, and you have to trust their ability to solve problems. Because it doesn't matter how good the idea is,

your ability to consistently solve problems in a cash-efficient manner is how you can grow a business over the long term. And so you want someone, and I'll use Uncle Warren's three big values, is you want someone who's incredibly industrious and hardworking. You want someone who has very strong ethics and someone who's competent and intelligent. You have competence, you have work ethic, and you have integrity. And so he famously says, well, you know, if you have just competence and work ethic, but you don't have integrity, you've got a crook who's working really hard against you. He's like very bad. He said,

so if you are going to have that, you'd rather have somebody who's really competent, but lazy, and disintegrous, because at least that way he's not going to be. going to do you as much damage. So you want to have all three. Now, what's difficult about this is that even one of those three things is hard to find. Somebody who truly has character, even when the chips are stacked against them, because it's the only time that it matters. Or someone who has tremendous work ethic, especially when it matters most in the business, when things are tough, or you're going through a growth period that's just like, it's just requiring you to work 20 hours a day because you just, there's not enough people, but you need, the business requires it right now.

Or you just have someone who's exceptional product or prospect knowledge that they, that interagly gives them that gives them tremendous edge over their competition because they understand everything down to, I love this analogy that a VC who invested in a regal, which is now in a pretty tough situation, but for years was a cash cow business, Regal Cinemas. He said when he talked to the founder, he said that guy understood the cost everything down to the kernel of popcorn. He said he just knew everything about the business. He said he's like, and there was really no reason that I should get into cinemas. He's like, but when I saw this guy talk about it, He was like he was so energetic and so passionate about it and clearly had good character and he just

understood the business so well. He was like, there's no way this guy's not going to make money in it. And he did. And that is a great example of a business that required a ton of capital to start. Opening up movie theaters cost a ton of capital. And so it makes sense that that business owner, even though he knew everything about it, probably been there for a long time, he still asked for investors rather than saying, you know what, I'm going to take another 10 years to save all the money on my own just to start one when he's like, you know what, I could leverage other people's lifetimes of work so that I could basically be at year 10 at year one and have a smaller slice of a much bigger pie. And so fundamentally, betting on the jockey is the highest leverage bet you can make because you're betting on

someone's ability to solve problems in a dynamic environment. And businesses, if anything, it is dynamic. So the environment may change, the market may shift. Some of the variables or assumptions that you thought were going to be there aren't. And some of the most famous founders were companies that started not even with that intention. Like Slack was a video game company that eventually just had this engineering messaging tool that ended up being good, and then they shifted to that, right, because they just had exceptional founders who were able to pivot and be adaptable. In some ways, betting on the right jockey is almost like insurance for an investor. It's like, I just think this guy's brilliant and hardworking, and I think when something happens, he will

figure it out. And so when we're looking at all four of these things, it's like high cash flow business, it has high growth potential, there's a focused founder, and they they exhibit high character, high work ethic and high competence, then it's like, okay, well, if there's companies that meet all of these criteria, which is still rare, what makes you pick one versus another? And so for us, we operate under at Acquisition.com one thesis, which is the theory of constraints, which is that a system will grow until it is constrained, and then it will grow no further. And so once we find what the constraint of the businesses, then we attack that constraint with all the resources and all the brainpower and all the money we have to try and solve that constraint to then unlock the next level of growth until the next constraint.

And so to give a simple example, if we were to simply 10x advertising for a lawn care business, if they don't have 10 times of salespeople to take those leads, the next constraint, like us just blowing the doors off the front end is just going to lead to the next constraint. Then we have to hire more sales guys. But even if we did the marketing and then we did the sales, then we'd have to hire more guys to do the, to mow the lawns, right? And so the constraint will continue to move down the pipeline until the entire business is decontrain,

and then you will realize the throughput increase of having this huge influx. And so for us, if we understand the business well, so it has all of these things, it happens to be in a space that we feel like we understand better than other people, then that's where we will be more likely to take our bet. And the better we understand it, the bigger the bet will make. And so to give you context on this, the company founders within our portfolio, not including school, because this metric would be stupid if I put school in there. The average founder in our private equity portfolio has had a 13 extra return on equity. Think about like this. If your company was worth $10 million, when it started, your slice, I'd have to, the circle would be much bigger than this page, your slice of equity, let's just not drawn to size, right? Your slice of equity later would be worth $130 million. Independent of how much they quote sold to us,

they are significantly wealthy than they were before. And I think we may be the only private equity fund that even tracks what the return on founder equity is. And that's because long term, I believe that me getting great deal flow from founders who want to do business with me is the long-term strategy that is going to make Acquisition.com into a powerhouse with a new model of private equity. As an investor, you can think through these things and invest in companies that meet these requirements. And

ideally, are in companies that you have some sort of edge in, that you understand better than other people. The final way of getting ultra wealthy is other people's money and other people's businesses. You're like, wait a second. Okay, so we've got other people's money in your business, that's raising funding. You've got your money in your business that's bootstrapping it. You've got your money in other people's business, you're an investor. And then you've got other people's money and other people's businesses, which makes you a fund manager. So let me explain. So for example, when I sold Jim Launch and Prestige Labs, I sold those to American Pacific Group in 2021. They are a $500 million fund, which now has a second fund that's another $700, so they have $1.2 billion

under management. Now, they bought Jim Launch and Prestige Labs together as a package for $46.2 million. Now, that check they did to me represented a small amount of the overall funds that they had. And so let me show you exactly why people who run funds make a huge amount of money. So APG bought my company, other people's businesses, using other people's money, like the teachers endowments, the police fund, the firemen fund, the Yale, Princeton, Harvard, the endowments that they have. They have these massive war chests of money that they give to these fund managers. as a small allocation of their overall investment for their university or for their limited

for their for their investees if you will to get a return the key point that I think is very interesting here is that the fund manager of a fund like this will often make more money than any of the founders of the businesses that they buy when I when I saw that I was like oh this is a very high leverage vehicle and so this is what kind of kicked off my journey to thinking through what are all the ways to make mega money and And that was the point of this video. So a typical fund manager, typically, not always, but it is common for, if you wanted to raise, call it $100 million. Okay, let's say that that's the amount of funding that you wanted to raise. A fund manager, which would then be typically the general partner, the GP, would put something like 5% in. So they would contribute $5 million of their own capital, and sometimes it's between multiple partners, to fund the $100 million. Because most investors want to make sure that you have some skin in the game that you care. That means. that they're going to get $95 million from other people's money. Okay, stay on track with me. Now, the question is, what does $100 million buy me? Well, in private equity, $100 million,

so you can leverage this and get $200 million in debt to buy $300 million worth of businesses. So think about the leverage here. You put $5 million in, and you're able to buy $300 million for the businesses. So then the question is, okay, but then what do these guys get for? for taking this risk. Great question. So the typical fund structure has a two and 20 structure. This kind of industry average, there's obviously some that are different than that,

but this is the most common structure. And so 2%, the first number, that people say, it's like what's the structure, if you hear someone say two and 20, one in, one in 25, whatever. What they're referencing is the management fee, which is charged off of funds raised every year. And then the 20% is off of the profit that's generated at the ultimate conclusion of the fund.

All right, so let's say, 10 years from now, we've exited all of the positions that we had, and we turned this $300 million of companies into $900 million. So over 10 years, let's say we triple the money in general. We triple the value of the companies. Okay. Now, well, what do we have to do? Well, over, let's say this is 10 years, over the 10 years, that 2% equals, so this is management fee, equals 20 million dollars. So you get $20 million in management fees just for that 10 year period of time. Now, mind you. You have employees, you have costs. And so fundamentally, the management fees are supposed to help you run the actual fund without having to put more stress on the companies that you're buying.

The 20%, so this is called the carry. The cool thing with carried interest, which is kind of the profit part for the fund manager, is that it gets taxed the capital gains. And so basically, they can make their income in a tax efficient manner. So let's say that we sell our, all the companies, and so we have to take out the debt that we owe, right? So we have $200. of debt that we owe, and then we have to return the hundred, I'm just going to say round numbers, we have to put the $100 million back into the investors' pockets. All right, so we have $600 million back. Now, there's going to be some interest costs here, so maybe it's, if it was over a 10-year period, we'll say $100 million in interest payments that we had to pay to also carry this

debt, okay? Let's just say hypothetically. All right, so we've got $500 million left over. Now, we have our 20% carried, which means that we're going to get $100 million for doing this. So we took our five, we got paid 20 and 100 in that 10-year period. And this 100, also post-tax, is $80 million. And so all in all, you're making $100 million plus with a $5 million slug. Mind you, this is when you start with $5 million. What happens when you capitalize a fund and you put $100 million in and you raise a $2 billion fund? Well, just multiply these numbers by 20.

It gets really big, really fast. And so fund managers employ one of the key principles of wealth, and I'll have a follow-up video on the principles involved. But one of the key principles is leverage. And so they have multiple forms of leverage that they're able to multiply. It's why Acquisition.com is two, like, in my opinion, the two strongest forces in business

are leverage and supply and demand. And so supply and demand is these two little curves here. And then leverage here is this fulcrum. They first leverage their $5 million to get $95 million from investors. Then they leverage the entirety of that $100 million to buy companies, which then they use the companies, they levered the companies to get the debt off of these initial cash checks that they can write. And then all of a sudden, that five becomes 60 times bigger in terms of the assets that you can control.

Obviously, APG ran this exact model, and they had a $500 million fund. If Acquisition.com one day in the future wanted to have a fund saying, hey, I'll put money in. And if you guys want access to deals that I have access to and want my team to work on for you, basically, then we would have some fund structure in place that would allow, everyone else to participate. A fund typically should get structured because you have one of two key things, in my opinion. This is now just me talking Alex's opinion. You should have access to deal flow that other people don't have, so proprietary deal flow. The recent proprietary deal flow is super valuable is two things. Number one is that you will get better negotiated terms on the deals,

meaning that you could buy assets for maybe less than intrinsic value or less than a competitive process might yield. Like if you're in an auction, you will pay more than if you're just making a one-on-one deal, which is why when you sell a house, you're like, I hope a lot of people bid, right? That's really good if you're a seller, really bad if you're a buyer, right? And so you want to have deals that you can just be the only person bidding on it. So that's the thing one. So, for example, what that looks like is for Acquisition.com, it'd be businesses that are applying on the site at Acquisition.com saying, yes, I'd be interested in selling a business, where I'd like you guys to help me, you know, help invest in the business, to help at scale.

That's what that would be. Now, the reason that it's proprietary is they're not typically going to other people. They're not saying, I want investment. I'm going to pick Acquisition.com of 10 people, they're saying, I want to work with Alex and his team because of their proven track record. The second thing that you want, in my opinion, as investment thesis, is some sort of edge. You want some sort of insider knowledge, not insider trading, to be clear, insider knowledge on the industry or prospect that a company serves. And so you will find that there are some private equity firms, for example, that just specialize in manufacturing. They're just really good in heavy manufacturing businesses.

Some private equity firms are really good at CPG, so consumer package goods, direct-to-consumer, physical products, e-commerce. Right, there's whole fields of great private equity firms around that. And they typically have founders or ex-founders who funded that with their own exits and then basically redo the playbook with more leverage. There are some funds that just specialize in software, right? There are some funds that just specialize in professional services.

There are some funds that just specialize in media. You want both proprietary deal flow so that you have deals that no one else has access to. These are off-market deals, right, that they only want to do business with you so you can get better, more attractive prices and terms. And then you want to have a way to accelerate value. So if you want to think about investing as a business, right?

We have LTV to KAC too. These things completely apply to investing business. So the KAC is if I have proprietary deal flow, then I'm going to be able to acquire customers or acquire deals for lower prices and on better terms. And if I have a way to grow those businesses, then I will have higher lifetime deal value than somebody who doesn't. And so when you combine those two things, you get better returns.

So you have more value on the buy and more exit value on the sale. And that discrepancy is what creates the outsized alpha, which beats the market. And so fundamentally, this has been my thesis for Acquisition.com. Now, I haven't talked about this as much publicly, mostly because it applies to fewer people than the vast majority of my content. But our team decided, you know what, let's talk about what we do. So within the private investing world, the fund world, there's typically kind of two big, big buckets. You've got private equity, which means that they are buying equities that are private or off market, which is about a 60 or 70 year old industry. And then you've got VC or venture

capital. And within venture capital, you have growth funds. You have seed stage funds. You have series A, series B. And these will typically be defined by their check size. An interesting tidbit for you is I was talking to David Weisberg who runs 10x capital, unaffiliated with Cardone. He just actually owns 10x capital. Kind of funny. He exclusively talks to LPs. So big and that have many, many, many, many billions of dollars, and that's like his entire network. Good podcast, if you want to check it out, if you really like high, high level investing. And so they did a meta study, and they found out that VC or venture capital assets, so think software companies in general, have the highest return of any asset class.

So they average about 14% per year, which is, I think the second highest one is REITs, so real estate investment trusts. I think it averages like about 12% a year. And then you've got, you know, the public security, so normal stocks is something like nine and change. And they kind of go down the gamut of different asset classes. Now, mind you, this is just the class of assets, not just a specific stock. Obviously, in every one of those categories, there's some, you know, real estate buildings that have, you know, 100x, and there's probably not 100x, but have gone up a lot. There's software companies that have definitely 100xed, and even individual stocks that are not software that have also 100xed.

And most of these still follow that kind of two and 20 structure. There are some, like there's a famous one, that's zero and 35. So like, it's really about how you want to shift risk with your limited partners. Private equity tends to manage, tends to manage bigger amounts of money. So if you look at Blackstone has about a trillion dollars

of assets under management, Apollo has about 600 billion under management, KKR has 500 billion dollars under management. So monstrous sums of money. And there's a reason why private equity has created some of the wealthiest people in the world. The fund managers of these groups are all deca, you know, deca billionaires and above. Stephen Schwartzman, I think, is a 40-ish billion, just an absurd amount of money.

And they do that because of all the leverage that I explained earlier. Now venture capital tends to, not always, but tends to. So if you have like A16 Z, which is Andresen Horowitz, has about $50 billion under management. Sequoia, one of the most well-known funds in the world, has about $56 billion. So they're about the same in terms of size. So you can notice there's an order of magnitude difference in terms of the size. but they're usually making bets on what the next Facebook is going to be, whereas these guys tend to buy more traditional businesses that are already monstrous,

and they do a little bit more of the financial arbitrage, meaning it's more about how they can buy it at one price, sell it at another price, or combine assets in a way that makes it accretive, so the fancy word for just value additive, to the overall enterprise value. Whereas these guys tend to do zero mergers and acquisitions and bet on the organic or viral growth of the companies that they take shares in. And so these guys typically focus on inorganic growth,

and these guys focus on organic growth, meaning the company itself grows, and these tend to grow by globbing in multiple things together to make the overall entity bigger. And so that's where, for example, if I were to buy an auto repair shop, I might be able to buy the auto repair shop at a five times multiple,

and then get debt for half of that. So I put two and a half times their income into the deal, and then buy five other ones with that, and then altogether, to sell them for 10, and I can triple my money in that period of time without actually having grown any of the companies. That's where it gets wild. In this game, all they want to do is see this company just keep hockey sticking.

Now, if you're like, okay, well, where does acquisition.com sit within this world? So we kind of sit in the middle. So obviously we have ACQ Ventures, which is just traditional VC. But our actual private equity side, we do little M&A. We do if it makes sense. And typically it's because it's like an adjacent. purchase of a business that we're referring a lot of business over to, and it makes sense for us to just kind of bring them in, more than we're like actively seeking out 10 follow-on investments

to glob together. So we do less financial arbitrage and more value-add in terms of our ability to help businesses scale. And for us, that's less capital-intensive. And I would rather, this is me personally, I would rather allocate my team's effort to growing something we're going to because is the most efficient form of growth in terms of return on capital. Not the easiest, necessarily. but it's the most efficient. So if you can do it, you do that. But most people can't do it, and so they just do financial arbitrage.

But there's nothing wrong with. It's just a different way to play with you. And so private equity, for example, will have traditionally somewhere in the air between five and ten investments for a fund. So if you have a $500 million fund, you're gonna have five to 10 investments. And so the fund size will typically dictate

the size of the investment or check that they're going to be writing. Venture capital, and many times they have multiple funds within one kind of fund company, that will be tart ones for seed companies, ones for Series A's, ones for growth equity. So it just depends on what stage of growth they're investing in. But these companies can sometimes have 50 to 100 investments per fund.

Because of that, they're significantly more hands-off and more betting on the few that go big knowing that they're going to have 99 losers and one Facebook that's going to make up for the whole fund. Here, you really can't afford to lose very much. So here they're looking for the very consistent triples and quadruples and five-xes. Here they're looking for 100 or 1,000 X and then a bunch of losers.

They aren't obviously looking for losers. They're hoping for more winners. But fundamentally, that is the difference in terms of the investment thesis. If you are accepting a venture check, you have to understand that those are the odds that they are playing with and that they're betting with on you. The thing is, for them, you're a 1% bet. For you, you're 100% bet. And so for the investors, they can distribute their outcome and diversify, which decreases

their risk, but also decreases their upside. And if you happen to be Mark Zuckerberg, then you will make more than everyone else who invest it. But you got to be Mark Zuckerberg.