Some thoughts on building wealth

Last week I gave a talk about wealth to students, and I thought that it would be worthwhile to share this here on my blog.

I’ve learned a lot about building wealth over the past 20 years (though am not wealthy yet!).  But, most of my learnings on wealth have come from observation of the people around me in just the last 5 years or so.

First off, I know that many people don’t care too much about money.  And that’s fine!  Many people have very noble missions in life.  But — wealth gives you power — the power to change things. To have influence. To put towards good causes. Whatever you want.

I’ve met so many people over the years who have said to me, “I don’t care about becoming rich – wealth doesn’t motivate me. What motivates me is ABC cause”.  And that may be true, but you need wealth to drive the things that do motivate you to really have an impact.

So, let’s talk about the general strategy to becoming wealthy. I think there are three stages:

  1. Saving money
  2. Investing in low-risk / low-return assets
  3. Investing in high-risk / high-return assets

Let’s dive into each of these stages.

Saving money

The first stage, I think, is obvious to many people.  When you don’t have any or much money, the best way to get started in building wealth is to save money. Some people are good at this. Other people are not good at this.  And people have different strategies on how to save money.  For example, my mom came to this country with just $25.  She and my grandparents were incredibly thrifty people.  One thing that both of my grandparents did was to have all their teeth extracted when they moved to America in order to reduce their dental expenses!  Other people have other strategies for amassing cash savings.  Some people get the highest paying job that they can. Other people don’t eat avocado toast. I think we all have different methods but in general, I think everyone understands that saving money is important in the very beginning.  

Investing in low-risk / low-return assets

The next stage of building wealth is about taking whatever savings you have and putting it into low-risk and low-returning assets. Because after all, you can’t really afford to lose your newly earned cash because you don’t have a lot of cushion.

Surprisingly, we don’t really learn anything in school about investing, which is an utter shame. Most people end up learning a little bit about investing from what they read online or places like Money magazine. Super low-risk and low-returning assets include things like government bonds, savings accounts, and even CDs.  For the most part, you won’t lose your money in these assets, but you won’t make any money either.   

A medium-risk / medium-return asset class that a lot of people know about are index funds — these are baskets of shares of public stocks.  Historically, index funds have returned about 2x over the course of a decade. In other words, if you put in $100 into the S&P 500, 10 years later, you might have about $200.  There is a lot of variation, however, in the returns depending on the year. For example, in 2018 alone, a typical index fund returned 20%. In other words, if you put $100 into an index fund in January 2018, by December, it was worth $120.  On the flip side, index funds also take a dive in value during recessions. In 2008/2009, the value of stocks dropped about 50% almost over night!  I call index funds medium-risk / medium-return asset classes, because unless the entire economy goes belly-up and the world ends, your money will likely not go completely to zero in the long run, because index funds are betting on the overall macro economy doing well.  And if that isn’t happening in the long run in the world, then we probably have much bigger problems on our hands — i.e. the world ending / we’re all going to die.

Investing in high-risk / high-return assets

I think the asset class that is talked about the least are the high-risk and high-return assets. There are a lot of these kinds of assets.  What I didn’t realize until my 30s was that the wealthiest people make their money on investments — these kinds of investments.  They don’t make money on their salary.  They don’t make money on their index funds.  This is something that most of mainstream America does not realize. 

There are many different types of high-risk / high-return assets, but what I want to focus on for this talk is the startup investment asset class.  There are many ways to invest in startups.  At the most hands-on level, you can build your own startup — invest your own time & money into your own company.  You can work for someone else’s startup or advise someone else’s startup.  You can invest directly into startups with just money.  You can invest in funds that invest in startups.  And at the most hands-off level, you can invest in funds that invest in funds that invest in startups.  All of these are risky — i.e. you may not see any return on your time or money at all.  Or, you can see a tremendous return.

I think many people think that to invest money into startups (whether directly or into a fund), you need to be super wealthy and as a result, they haven’t really thought about investing into this asset class.  For example, many years ago, a friend of mine was raising money for his fund.  He told me at a very high level about his new fund and wanted to understand my interest in learning more and potentially investing.  I immediately dismissed the idea. I didn’t even look into the opportunity, and I don’t even know what his strategy or thesis was.  This is because I believed I wasn’t wealthy enough to participate in such a high-risk, high-return asset class. I felt that I hadn’t accumulated enough cash to do this. Years later though, when I was raising money for Hustle Fund 1, I thought back on that memory and I realized that I had been wrong to immediately dismiss the opportunity.  It occurred to me that even though I don’t have a lot of wealth, there is always some amount that makes sense to participate with in a high-risk and high-return asset class.

For example, let’s say that hypothetically you have saved $100,000. And let’s say that you know you will not need to touch $25k of that money until after you retire but it’s not important to your retirement savings either.  In other words, you can afford to take quite a bit of risk with some subset of that $25k.  If you lost it all, that wouldn’t be fun, BUT is there an amount that you’d be willing to potentially lose entirely — to risk potentially achieving a 100x multiple on that investment?  E.g. would you be willing to risk $5K?  The likelihood of that $5k investment might go to zero but if in the off-chance it did well, it would turn into $500k. This is not some weird hypothetical.  As a concrete example, Uber has been in the news for their IPO.  A $5,000 investment into Uber at the seed stage would be worth $25M today! That’s life changing for most people, and it’s only a $5k risk. 


Image courtesy of Giphy

But, I don’t think most people think about their finances from a portfolio construction perspective.  I think most people fixate on saving money first and then *maybe* they buy a house or invest in index funds.  Most people never think about investing in high-risk / high-reward asset classes.  And these are the investments that are life changing and make people really wealthy.  Just to be clear, when I say “these”, I’m talking about high-risk / high-return assets, not necessarily angel investing, and there are all kinds of high-risk / high-return assets.  

Determining how much money to invest in a high-risk / high return asset class such as startups is really a matter of portfolio construction.  You would never want to risk all of your savings in this asset class. But there is some percentage that makes sense.  Maybe it’s just $1k.  Maybe it’s $5k.  Maybe it’s $25k.  Maybe it’s nothing right now but in 10 years, it could be $5k.  But most people just never think about this.  

This brings me to my next point. I think a lot of people think that angel investors deploy a lot of capital into startups.  Ten years ago, I used to think that angel investors typically invested $25k-$100k into each startup.  There are certainly angels at this level.  But what I’ve come to learn over the years that most people don’t talk about is that there are actually a LOT of angels who only deploy $1k or $5k or $10k into each company.  And if you think about it from that perspective, for most professionals, putting in $1K or $5K is actually not that big of a deal. Your bonus each year might cover your startup investing without needing to specifically save for investing in high risk / high return asset classes.

People ask me, “who are these startups who take $5k investments?”  It’s simple – most founders. But, you have to earn it. You have to be:

  • A fast decision maker — you are not putting in a lot of money, so your due diligence process has to be less than an investor with a larger check 
  • Not annoying / not a pain in the butt
  • Value add – there are lots of ways to be value-add even if you are not in the same industry nor know anything about startups; here are ways that anyone can help a company:
    • Provide feedback on a pitch deck
    • Provide feedback as a consumer on a user experience
    • Do introductions to other investors or potential hires

In fact, what most people don’t realize is that it’s generally easier to get into early stage fundraising rounds with just a small investment check.  If the round is oversubscribed, founders will consider adding a $5k investor if they think the person is worth it. It’s just an extra $5k of dilution.  No big deal. If you were investing $200k and the round is oversubscribed, you likely won’t get in because founders wouldn’t want to sell too much of their company.  If the round is undersubscribed, you can get into a round anyway at any amount.  

Now sometimes, there are minimum thresholds for investing.  For direct startup investing, this is often flexible, especially if the round is not oversubscribed.  But for funds, this isn’t true.  Part of the reason for this is that both startups and funds can only take on 99 accredited investors per SEC rules.  This means that if a VC fund is raising $100M dollars, the average investment check for each investor has to be over $1M each.  But, I wouldn’t let potential minimums deter you from looking into an opportunity whether it be startup investing or other high-risk / high-return assets.  

Investments beget investments

Once you start investing in startups in some fashion, there are all kinds of other benefits. You get to mingle with other investors.  These people are well-connected and can show you better deals, introduce you to other influential people, and help you out in so many ways.  Many angel investors fund other angel investors’ businesses.  This is partly why I know so many entrepreneurs who invest as small angels — even if they don’t have a lot of money — $1k or $5k investments here and there buy not only an investment but also a network.  The act of investing itself allows you to build rapport with other investors in an easy way.  And it doesn’t matter how much you’re investing. No one goes around saying how much they invested into a company. Just being an investor gives you benefits.

Rich people get richer

The last point is something that bothers me a little bit.  These days, there is a lot of talk about salaries – about how women, for example, don’t get paid as much as men for the same role. And I certainly think that’s an important problem to solve.  But what isn’t talked about at all, is that there are so few women investors. Making money on investments — above and beyond — makes way more money than any salary. But women are getting left behind because as a vast generalization, they don’t invest in high-risk / high-reward asset classes. If you had invested in Google at the seed round, you wouldn’t even care about working there. Investing can be life-changing as we’ve seen from the numbers above with the Uber IPO example.

When we started Hustle Fund, we pitched many of our friends, asking them to invest in our fund. It was a very eye opening experience. For many of our male friends whom we pitched, they saw Hustle Fund as a great opportunity. They saw all the upside potential of this fund and invested. When we tried to pitch female friends, almost all of them turned us down — in fact, most didn’t even want to hear the pitch! Now keep in mind, all of these people — both men and women — all worked in similar jobs and made similar amounts of money and had similar educational backgrounds.  But what was fascinating is that our  female friends didn’t see opportunity. They saw risk. They thought about all the things that could go wrong. They thought about losing their money. The differential between the number of male investors and female investors in our first fund is so huge that at our first LP meeting, one of my (few) female friends who invested commented “Where are all the women?”.  I didn’t have a good answer.

That made me think back to when my friend offered me the opportunity to invest in his fund and I didn’t even look at it. In retrospect, I absolutely should have looked at it and heard the pitch. And if I liked it, there would have been some amount that I would have offered to invest.  It may not have hit his minimum, but I should have looked into it.  This is a mindset shift that I’ve had over the years and one that I strongly believe that everyone should go through regardless of gender and demographic background.  For those of us who didn’t grow up in families that think in this way, it’s a hard mindshift, but one that I think is especially important for people who are not exposed to wealth.

People who do well on a high-risk / high-reward investments often take a good portion of those earnings and pour it into many more high-risk / high-reward investments, and the rich become richer.  A number of my friends who started out as small $5k angels here and there have gone on to make good money and pour that back into more investing.  And in just a short 10 years, they have done really well for themselves and are more than set for life.  Meanwhile, I’ve observed that my other friends who don’t do any of this high-risk / high-reward investing will likely get to the same point as these angel friends of mine in about another 40-80 years.  There are many different kinds of high-risk / high-reward assets, and I use startup investing as one example (that may or may not work for everyone), but I wanted to illuminate this overall asset profile (high-risk / high-return).  The difference between the group of people who invest in high-risk / high-return asset classes and those who don’t isn’t intelligence.  And it isn’t job function or salary.  It’s specific education around investing in high-risk / high-reward asset classes.  You will, of course, need to do your homework around specific opportunities in the latter and decide what makes sense, but thinking about your own portfolio management and how you bucket your money is the critical point.

So wrapping this all up, if there’s only a couple of things that you took away from this talk:

  • You make money from investing – not salaries. You don’t have to be a professional investor, but you should take cash from your job to invest in order to amass a lot of wealth.
  • Think about your own liquidity needs and start to move towards some riskier and higher reward investments as you amass more cash than you need.  Everyone will have a different amount that makes sense, but this is how you should be thinking about investing.
  • Start early — even as early as today.
  • If you don’t have an investment mindset, change it — regardless of what profession you are in. Your salary doesn’t make you wealthy.

And so as you go into the world and start to look for your first job and get to that first stage of amassing wealth, think about your plan for getting to the third stage.  Because amassing wealth gives you freedom and power to accomplish the mission that you actually want to tackle.

Go become wealthy and change the world!  Thank you for having me!

Disclaimer: This talk / blog post is not investment advice.  In case you are so inspired to run out and buy lottery tickets of any form – figuratively or literally, I encourage you to consult your financial advisor, your friends, your family, your dog and anyone else you trust on financial matters instead of relying on random blog posts such as this to make life changing decisions.  Thank you.

Thank you to Stonly Baptiste for his suggestions and feedback on this post!

16 thoughts on “Some thoughts on building wealth”

  1. my favorite quote on wealth comes from genius, chris rock:

    “Wealth is not about having a lot of money; it’s about having a lot of options.”

    … and a lot of it can give you a lot of options!

  2. I remember reading somewhere that female fund managers (stock funds) on average had higher returns than male managers. That was because men tended to invest in higher risk stocks, and during that stretch of time, higher risk stocks had lower returns. So sometimes, safer investments work out better.

    But investing in startups is inherently risky. Even later rounds are risky compared to public companies. And humans in general hate risk. So to get the opportunity for outsized returns, you have quiet those alarm bells in your head. It’s definitely easier for some people than others.

  3. What about being accredited? Can’t you and the startup get in trouble potentially for taking money from an investor that is not accredited (which I believe comes back to having a certain amount of wealth)?

    1. That depends on the asset class. (all high risk / high reward assets are different) For startups, in particular, actually you can invest directly into startups as a non-accredited investor. Most startups just *don’t want* to take non-accredited investors into their round for fear of being sued later by someone who didn’t know what he/she was doing. But it is legal for both sides.

      And then there are opportunities where you must be accredited. Just presenting the facts here — I’m not endorsing this and everyone should check with their own counsel / financial sage — most people I know who are investing but are not accredited pair up with someone who is accredited and have an agreement with that person. The investment is then done under that person’s name. I’m not a lawyer and don’t know if that is legal or a good idea, but this is what many people I’ve run into are doing…

  4. When I launched my first tech startup, the first thing my “what I thought was the woman I would grow old with” did was dump me and scream on the way out of the door “Thanks for trying to ruin my life…” It was a long time ago and I still miss her…

    There is a personal cost to high risk high reward activities, and there is no easy way to do so without emotional back up. Almost all successful high return entrepreneurs also started up with a parent being there as “lender of last resort.” That is the self perpetuating part of the equation.

    The net effect of that is that startups end up being the exclusive domain of <30 years of age male entrepreneurs. The "I will give it one try and then settle down" crowd… The chances of success increase with experience, one time is not sufficient to master high risk activities.

    Since biology is what it is, with a woman's chances of procreating decreasing by 10% per year past 32, for women its a matter of either or. No point ignoring this, its a choice.

    And yet, the best maturity/experience/technical knowhow is to be found in the 30-40 year old crowd. That is also the time when you understand the difference between speculating and investing.

    THANKS for the post! I enjoyed reading it.

    1. They asked a lot of questions about VC – how it works (everything from raising the fund) to the mechanics to the economics and returns required, etc…

  5. I’d never thought that I could start investing at a mere $1k—thanks for piquing my interest! Is there data somewhere on how many investments on average are needed over how much time to see a reward? I’d love for your next post to detail your advice for angel investing.

Leave a Reply