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 Mentioned in this episode:Get access to the free $100M Scaling Roadmap at www.acquisition.com/roadmap
Chapter 1: What are the four paths to making mega money?
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 Nvidia, 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 centibillionaires, and now at this point, multi-centibillionaires. 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 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 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 are 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?
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Chapter 2: How can other people's money lead to wealth?
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 actually 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 will give you a piece of this upside. This is the live fast, 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 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 an investor, where your business is the product itself.
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Chapter 3: What types of debt do businesses incur?
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.
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I would strongly recommend doing your business 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. What they give is money and help and what 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.
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