Wealth Building Step 2: The Step Few Entrepreneurs Take

This is part of an ongoing series about how to build wealth. To receive the rest of the posts in this series, go to paparelli.com and subscribe.

If there is a recipe for wealth building that I’ve observed to be most successful over the years, it can be best summarized with these five steps.

Five Steps to Wealth Building

Step 1: Build a long-term business which provides cash-flow and increases in value each year.

Step 2: With the excess cash, invest in or start other businesses which produce cash and grow in value.

Step 3: Sell these businesses to other investors or companies who approach you and who want to buy them.

Step 4: Build your credibility with increased market exposure and public relations. People must conclude you are successful.

Step 5: Raise money from wealthy people who want to invest in you and your investment thesis. This will allow you to increase your personal cash-flow, take ownership of bigger deals, and realize higher dollar returns with far less personal risk.

Earlier I wrote about David Cummings and how he built his initial wealth. Now let’s talk more about Step 2.

David Cummings (Atlanta Tech Village) is an engineer. He saw a big problem which needed to be solved. He clearly defined the problem and then used all his programming talent and financial resources to solve it.

As a great entrepreneur and leader who just stepped into a red-hot market, David built a fast-growth, profitable company.

Step 2: With the excess cash, invest in or start other businesses which produce cash and grow in value and may later be sold.

David Cummings accomplished this. There are only a select few business people who get to Step 2. There are even fewer who succeed to the level David succeeded. David’s second business was an incredible success story.

This is an important next step in the wealth-building process. In most cases, the first business you invest in (and you must have majority ownership) will not grow to the moon. There will be some limitation.

There are, of course, exceptions.

Companies like Home Depot, Amazon, Google, Microsoft, Apple, and Facebook are all unicorns. The business people who started these businesses will likely spend most of their professional lifetimes in these businesses. But even with these unicorns, we find examples of these business people investing in or starting new businesses.

Steve Job, after being fired from Apple Computer, started a company called NeXT. The mission was to build a supercomputer for education. He raised over $400mm and sold the company twelve years later to Apple for $489mm. He received $1.5mm in Apple stock as his part of the sale. But this led him to eventually becoming the CEO of Apple.

In 1986, Steve also invested $10mm of his own money in Pixar and became chairman of the board. Pixar was in need of Steve’s software expertise as it was struggling to survive. It had the vision but couldn’t execute. He continued to invest and eventually, after investing $50mm, took control of the company. In 1986 Pixar released Toy Story in partnership with Disney. Shortly after the success of Toy Story, Pixar went public with a value in excess of $1b.

And the rest is history.

I use Steve Jobs as an example of Step 2 in wealth-building. Had he stayed at Apple, he might not have ever invested in NeXT and Pixar. But forced to leave Apple, he continued to invest in and build other companies. One, NeXT, provided personal cash flow while building some amazing software, which only added to Steve’s credibility. The other, Pixar, used his money, leadership, and software expertise to transform the movie business.

But Steve went back to Apple, his original company. It needed his help again. The stock was down to $6/share, and they had no vision or products. Boy, did all that change under his visionary leadership!

David’s “next” company was Pardot. He built it from scratch. Navigated it through the pivots. Found a fast-growth market with a big problem. Grew the company. Sold it for north of $90mm. And guess what? He still has Hannon Hill, his Step 1 company. And it is still producing cash-flow. How about that?!