There are only four ways to create acquire wealth (to become highly wealthy – HNW, or ultra wealthy – UHNW):
- Bet other people’s money on other people’s businesses (Fund Management).
- Example: Mutual Funds, Private Equity, Hedge Funds
- Risk/Return Profile: Relatively low personal financial risk (you’re primarily risking reputation, track record, career risk), but high potential returns via performance-based compensation.
- Leverage: High leverage, as wealth is created through management fees on substantial external capital, amplifying returns without investing significant personal capital.
- Bet your money on other people’s businesses (Investing).
- Example: Angel Investing, Venture Capital, Public Equities
- Risk/Return Profile: Direct personal risk proportional to investment size. Potential returns can vary widely, ranging from moderate (in diversified stocks or bonds) to exceptionally high (in early-stage angel investing).
- Leverage: Limited leverage, as returns directly correlate with your invested capital, unless supplemented by borrowed funds (margin loans), increasing risk exposure. Early-stage investors benefit from external capital infusion if the startup grows and reaches milestones.
- Bet other people’s money on your business (Fundraising).
- Example: Angel-Backed Startups, Venture-Backed Startups, Growth Companies
- Risk/Return Profile: Medium personal financial risk (mainly reputation and time invested rather than personal capital), but substantial upside from ownership stakes funded by external investors.
- Leverage: Very high leverage. Your equity ownership is significantly enhanced by external capital infusion, greatly magnifying potential returns if successful.
- Bet your money on your own business (Bootstrapping).
- Example: Private Businesses
- Risk/Return Profile: Highest personal financial risk due to full exposure of personal capital, but with maximum potential long-term personal rewards and total control.
- Leverage: Lowest leverage, as your business growth is constrained by your own capital; however, you retain complete autonomy, avoiding dilution or external control.