A survey conducted CB Insights, a data analytics company, found out that Capital or the lack of it is the second most important factor attributed as a reason why companies fail.
Many people believe that access to capital is the most important factor in business success. However, the report shows that having a market for your product is the single most important factor.
So what does this tell you about Capital? To start with, If you haven’t already, read up my previous articles in this series about the Factors of Wealth. See links below to get up to speed. I’ll wait for you 🙂
Done? Let’s go on…
Capital is a lever for the creation of wealth and the objective is always to increase its value. According to quotes attributed to Albert Einstein, ‘Compound interest is man’s greatest invention’.
Today I will share stories of how capital has been leveraged to create wealth and I hope you will learn a few things about creating wealth through financial leverage.
HOW WARREN BUFFET LEVERAGED HIMSELF TO WEALTH
Warren Edward Buffett was born on August 30, 1930. He is an American investor, business magnate, and philanthropist. He is considered by some to be one of the most successful investors in the world and is the second wealthiest person in the world with a total net worth of $73.9 billion.
In 1957, at the age of 27, Buffett operated three partnerships (firms) and by 1959, the company grew to six partnerships.
In 1960, Buffet asked one of his partners, a doctor, to find ten other doctors willing to invest $10,000 each in his partnership. Eventually, eleven agreed, and Buffett pooled their money with a mere $100 original investment of his own.
He invested this pool of funds in the shares of a company called Sanborn Map Company and by January of 1962 had an excess of $7,178,500, of which over $1,025,000 belonged to him.
He took $110,000 and made it $1m and over 50 years later has turned it to $73.9 billion. Can you do this?
CAPITAL FOLLOWS IDEAS
If you want to be wealthy, you need ideas. Money follows ideas. Think about this for a second. If you have money and you want to grow it, you will look for people who are doing things that make money. You are essentially looking for ideas.
In the same vein, investors are looking for opportunities to leverage their capital and are looking for companies with great ideas on how to make more money.
Ideas are two a dime but until you put it in action, no one knows if it will work or not.
Ideas are supposed to solve a problem. Money is the reward for solving the problem. Many start-ups fail to remember this part. You can have the best product in the world but unless is solves the problem of the relevant group of people, your idea is dead in the water.
I have said the statement above and I will keep repeating it. Banks make money by taking a commission for storing your money. Banks came about because people had a problem of where to store their money. Someone decided to take the risk of holding on to other people’s money for them.
Later, the money-holder started issuing out papers representing the value of money held with him. This is how banks evolved.
Stockbrokers buy and sell shares based on the perceived value of a company. They created a market out of this and purely based on the ideas and operation of another company, they make a gain or loss.
These are examples of how people leverage the pooling of money. In the current age, the buzzword is ‘crowdfunding’. From my example above of how doctors funded Buffet’s partnership, crowdfunding has been in place for a very long time.
Now that it is being measured, crowdfunding has overtaken venture capital as a source of capital for new ventures.
How are you leveraging capital?
Here’s what I want from you today:
Tell me your opinion: If you had $1m, what would you do to grow it?
You can post a comment here or shoot me an email firstname.lastname@example.org. I read every single response (yes, really).