3 Types Of Money: Cash Flow, Net Worth, & Enterprise Value

This is a fundamental shift in the way that you think about your business, that if you decide to make it, it will completely change the future of your business and your long term net worth. And it comes down to the three types of money. Let me explain. I gave a keynote presentation last year about these three types of cash flow, wealth and enterprise value. And I talked about how most entrepreneurs pursue them in that order. They focus on cash flow so they can make investments and then one day they'll build a company that has enterprise value. But the big takeaway that a lot of people in the audience had was when I shared that if you switch them, the process happens much faster. If you build a company with enterprise value, you can sell it and invest it and never worry about cash flow ever again. One of those approaches takes 30 years. Another one takes three to five years. But it's a very different strategic approach and it's one that most entrepreneurs are not willing to change. I want to share with you some insights that I wish that I had known a few years ago, both as I was building companies and as I was preparing to exit a company that made me the majority of my wealth, at least at the time. And I didn't know that when I was starting a company that I might be able to sell it for a whack ton of money. And I didn't know that when I I went to sell a company that I had the leverage that I had because there was so much money out there in the private equity world. There were so many people whose business was about buying companies. In the YouTube world, the podcast world, the online entrepreneur world, the focus is all about cash flow. It's all about scaling fast. It's about making money really quickly, it is about living a really lavish lifestyle and it's about getting to the goal as quick, quickly as possible. And this is alluring to a lot of entrepreneurs. This is sexy, this is attractive. And it also creates a industry that has absolutely no understanding of how business actually works or how wealth is generated over the long term. And that's why I want to share with you the concept that there are three types of money. Cash flow, I hope you know what that is. This will not be a presentation about the definitions of cash flow, but this is the money you can spend at the end of the month due to the operations of your business. Then there is wealth. This is what compounds because you put your money into investments that you don't control. These are your long term stock investments, real estate investments, private investments, whatever you invest in, and the Third is enterprise value. That is what your company can sell for if you ever go to market and you have a buyer for that business. Now, most entrepreneurs in this crazy world that we all live in focus on them in that order. They think about cash flow in my business, making enough money so that I can pay for my life and have this great lifestyle. Then they focus on wealth building. I'm going to take part of that cash flow, I'm going to put it into long term investments so that I can retire one day. And then one day when I've done those two things, then I will think about building a company that has enterprise value and maybe I'll have a business that I can sell. Almost every influencer in the entrepreneurial world will talk about money in that order. I can also tell you, because I have been in this industry for two decades and know every entrepreneurial influencer that talks about this stuff, that most of them are broke. Most of them have no wealth, they have tons of cash flow, but they have no wealth and they have absolutely zero enterprise value. They do not have businesses that they can sell. So my invitation to you as an entrepreneur who is in the dirt, in the grind, building a company that you want to be proud of, is to flip the order of these three types of money to think about enterprise value first. Because if you build a company that you can sell one day, then you can invest it into whatever you want and you will never have to worry about cash flow ever again. One of these two approaches, the cash flow to investor to enterprise value takes an entire career. But if we flip the model and we talk about enterprise value first and we build towards that, it loses in the short run. It does not make as much money in the short run. And I'm talking one to three years. It does not make as much money. But after about three to five years, you start passing pretty much everybody else in the world. And the people who follow that model, the enterprise value first are not usually the people who are flashing fancy lifestyles on the Internet. They are not the people talking about how much money they're making. They are in the dirt for three to five years and then they build a company that is worth something. So today, what I want to walk you through is how we're implementing this throughout our community and how we are changing the structure of some of the deals we do and the brands that we invest in to be enterprise value first. Over the recent years since my exit, I have been investing into other brands from our community. At capitalism.com we raised a Fund called the Capitalism fund. We raised $1.6 million in March of 2020, which is about the worst time in the world to raise capital. And it was, it's a small fund, but we've been investing into E commerce brands and pushing them in the direction of building enterprise value that grows their business so that they can have an exit that sells, sets them up for life. I love the concept of bringing resources to the table to help entrepreneurs make this shift that I had to figure out all on my own. Because if we can bring capital to the table, advice to the table, if we can bring relationships to the table that free up the entrepreneur to build enterprise value now we can build something that is really special. We can build brands that not only make a difference in the world, but make a difference in that entrepreneur's entire generational financial family tree. That's what we're here to do. In fact, coming up here on the channel, you're going to see a case study with one of the brands that we invested in. The brand is called Integral. The entrepreneur's name is Jake. And Jake built a brand all on his own to about $50,000 a month. We break down how he did that, but the real shift for him happened when we came on as partners, mentors, investors, advisors, and we brought these relationships and capital to the table that freed him up to be able to cast a much bigger vision for the company. And as a result, that company is now worth about $5 million instead of about half a million dollars. So it's 10x in terms of enterprise value over about three years. And now he's able to cast an even bigger vision that he could have never done if he was operating as just a solopreneur. And this is the shift that I want you to be able to see and that I want you to know is possible for you. Because when you're starting out and you're in the grind and you're in the grunt, all you want is to win by having a million dollar business so that it spits off enough cash so that you can live a different lifestyle and not have a full time job. I get it. I've been there. That was me too. But I had no idea the amount of growth that could happen once I shift the perspective to thinking about growing the value of the business rather than spinning off more cash flow. So how do you make the switch? How do you make the shift from having a mildly successful business that might pay for your lifestyle to pursuing a much bigger vision? First of all, that is a Strategic decision. It's totally okay and normal to just want to have a seven figure business that pays for your life, that you operate for a very long time. One of the, I think undervalued things in this crazy entrepreneurial world is the value of having a cash flow business that grows 10 to 20% per year for 10 years. Compounding returns on those are fantastic. But if you want to make a play, if you want to pursue something much bigger in a shorter timeframe, the playbook does change. And the thing that changes, first of all is realizing that once you're at seven figures, you need a different level of support. You need a different level of contribution from the people that you're working with. It's no longer a good idea to have all of your work done by outsourcers that you're working with on upwork. It's no longer sustainable for you to be managing a bunch of outsourcers who do every little thing. And it's probably unlikely that you are going to become an expert at any one thing in your business that will take you to eight figures. What this means is that you need the support from other people. The way we do that practically, we@capitalism.com took a stake in an infrastructure company that we partnered with and we now plug into the brands in our portfolio. So some of the first things that we free up are inventory management, some marketing, influencer relationships, TikTok shop management. All of the things that the entrepreneur wants to pursue but doesn't have the ability to do because they have no time. When we free up that time, all of a sudden the entrepreneur can think about what he wants the company to be. A good example of this is one of our clients. Her name is Vanessa. Hi Vanessa. We're so proud of the transformation that she is making inside of the capitalism incubator because she came in with a business doing $1.7 million but very little profit. And she was spending a lot of her time managing inventory orders and keeping SKUs in business and answering a lot of emails and just the operational things that happen when you run a low seven figure business. We brought in our infrastructure to free up about 60 hours a month of her time. Those relationships actually drove down her costs, so she had more margin, she had more profit in the business. And now she has the space to launch products that match her vision, not just the products that are going to win on Amazon or that the data says would be good. She can now launch products that match her vision and as a result, the enterprise value of her company will go up at least $1 million as a result of her going through this process. This is how we start to shift the entrepreneur out of this operator's mindset into an owner's mindset. We free up the things that are taking up a lot of their time that they're not actually that good at, and then we place them back into a visionary seat, which requires that you give up a little bit of control so that you can have the space to think clearly about what you want to build next. The transition to acquiring help in the forms of employees or outsourcers is bumpy. It can be hard and it's a different level of risk that a lot of entrepreneurs are not willing to make, which is why they don't go in this direction. But I'm thinking about a conversation I had with Gary Vaynerchuk back in 2019. I think it was. I was sitting at dinner with him. Lewis Howes was there, Jay Shetty was there. There were, there were like six of us around the table. And he had just acquired a company called 1:37pm it was a meet, I think it still exists. It's a media company that he had in the Vayner X portfolio. And he told me that he acquired this business and that they were making all of these investments to grow this media channel. And I asked him, I said, gary, how are you after acquiring this business? How are you funding the investments to make this business grow even bigger? And he said the most interesting thing he said, by driving down profit margin. And I was stunned because what he was saying was, I'm reinvesting all the profits into people, growth and opportunities to grow this business. And I was like, wow, he really doesn't care if he loses. He is not thinking about protecting the profit margin. He is thinking about reinvesting as aggressively as possible to make that business grow. That takes a different level of confidence. That takes a bit of comfort in losing. And I don't know that most entrepreneurs have that type of attitude that Gary Vaynerchuk does. But if you look at what he does, he puts money into a business like Empathy Wines and in a couple years it's a nine figure exit. He grows a company off of his audience and he sells it like he did with Resi, he did with Empathy. He's done with several other brands as well. So that takes a different level of commitment and sometimes capital to be able to make that transition. And sometimes that means that the most appropriate thing to do is not to reinvest all of your Capital, not to reinvest all of the profits into the business so that it is tied up. It's to go out and partner with investors who fund the next chapter of growth. And that is something that we actively do inside of the fund and something that we're doing with the next chapter of our company, which is the capitalism marketplace. When Alex Hormozi was preparing to sell Gym Launch and Prestige Labs, a story that he tells publicly in his content, he lived here in Austin and we spent some time together. And I listened to Alex weigh whether or not to sell the business. And when he decided to go in the direction of having an exit, he had to make some changes to the business that compromised the short term cash flow of the business. For example, I remember Alex sharing with me that the ads that they were running that didn't feature his face didn't convert as well as the ones that did feature his face. And there was a transition there in which they had to find new messaging, they had to find new faces, they had to find a new way of saying things in order to replace the productivity of Alex being in the ad. Why does that matter? Well, if Alex can't step away from the business, the business isn't worth as much. This is part of the transition of making investments into equity value, into the enterprise value of the business versus the cash flow. If Alex was only focused on squeezing out as much cash flow as possible, then he would have just kept running more ads with his face on it, but he would have never been able to step away from the company. And that would have compromised the value that they would have gotten when they exited the company. So that was one of the big transitions they needed to make, which hurt the short term cash flow of the business. And sometimes when you are making the pivot into I'm going to build something that I can sell, you will have to make decisions that don't look good in the short term, but they build that long term enterprise value that way make up for any lost cash flow that you miss out on in the short term. It is really hard to build a business with enterprise value as a solopreneur. It's possible. And there will undoubtedly be case studies of people who build AI companies that sell for hundreds of millions of dollars. And they were the only founder that is 100% coming. But as of right now, the idea of being a solopreneur caps out at a few million dollars. It's really hard, and I'm sure there are exceptions, but it is very hard to go beyond Seven figures. When you are doing everything yourself, this is why people who have partnerships statistically win more often than people who are solopreneurs. This is also why at a certain point you have to make the decision of do I want to have a little lifestyle business or do I want to learn to deal with people? Do I want to learn to lead? Do I want to learn to accept support from other people? And that is its own transition. Because if you raise capital from somebody else, there is a part of you that that feels a little bit indebted to the people who backed you. That's healthy, that's normal. You want to do other people well. One of the traps that we fall into as entrepreneurs is we're thinking about what we can extract from the marketplace and we're the only one that is affected by that. But when you have a partner, when you have employees, when you have shareholders or investors, you have to make a switch into thinking about creating value for all stakeholders. That means customers, that means investors, that means employees, and it means you. When it's only you, you can fall into the trap of just pulling as much cash flow as possible. When it's not you, then you can actually create things that have ripple effects, sometimes for decades or generations. And that's when you can create generational wealth. I think the clincher there is not necessarily that bringing on a partnership makes you more valuable, but when you can flip your energy into being about other people, that's when you do things that actually matter. That's when you build something that might be attractive for somebody else to buy. Because you can't do that when you're only thinking about how much short term cash flow you can pull off the table and put in your pocket. That's only you thinking about you. And therefore, how are you going to build something that is valuable enough for somebody else to buy? They don't, because they don't want to buy your job. They don't want to buy the thing that pays for your lifestyle. They want to buy an asset that is creating value for other people. And therefore, one of the steps that might be necessary in the transition is for you to learn how to have other people who benefit from your success in the form of investors, partners, employees and other stakeholders. That's a hard transition and it's a strategic decision that you have to make for yourself. But if you want to make that transition, that is something that we have resources to be able to help you do. Over the coming weeks, I'm going to be sharing some new things with You. I'm going to be sharing with you some case studies of brands that we've invested in so that you can see what the advice looks like and what the transition looks like to go from a seven figure company to casting a vision that is much bigger than that. You're also going to see a preview of some of the resources that we're building@capitalism.com including the capitalism Marketplace. This is something we've been building for the last year. It creates the opportunity for investors and brands to come together and I'm really excited about this for our community because this is the opportunity both for people who are investors to get involved in brands that are excited about, but it's also the opportunity for the brands that we've mentored and nurtured to now have this support in form of capital and relationships so they can start to make this transition. We're doing some tests on this right now and if they go well, it will be a tool that will serve our community for years to come. If you want to be on the investor list, by the way, to see what deals we're nurturing, you can go to capitalism.com marketplace. You'll see the deals that we have active right now and you can get on the list for the deals that are coming down the pipeline. You need to be an accredited investor in order to participate, but you can go see the deals that we're working on no matter where you are in your journey. Another thing I'm going to be sharing with you is a model that is beyond anything that I have done myself. But I have met some individuals who are pursuing a bigger way of playing the game that I find really interesting. And it is 100% focused on enterprise value and how you drive that up as much as possible and as quickly as possible. It's beyond my skillset and my knowledge base, but it's inspired me to think differently about how I advise the entrepreneurs in our community and and I want you to see some of the takeaways that have come from learning their model. So stay tuned for what we have coming on the channel. I hope it inspires you to think bigger. If you made it this far in this video and you're still at the beginning of your journey, the best place for you to get plugged in is to download our free resources over@capitalism.com playbook and if you're already at seven figures and you're looking to make this transition, you should at least check out some of the things that we have available to help you stay in the owner's seat because the resources that we bring to the table make it possible for you to actually build a business that matches your vision, not just something that pays for your lifestyle. And you'll feel a lot less alone in the journey as well. These are the things that I wish existed when I was building my brands. Thank you for watching. We're really excited about some of the things that we have ready for you@capitalism.com so I appreciate you being part of this journey. Thanks for watching and I'll see you next time.