Wealth Secret Of The Day – Use The Power Of OPM (Other People’s Money)

Wealth Secret Of The Day - Use The Power Of OPM (Other People's Money)
Image – Pixabay (PD)

“When you get a couple million dollars from a VC firm, you tend to feel rich. It’s important to realize you’re not. A rich company is one with large revenues. This [VC] money isn’t revenue. It’s money investors have given you in the hope you’ll be able to generate revenues. So despite those millions in the bank, you’re still poor.” — Paul Graham, “How to Start a Startup”.

Many successful entrepreneurs will agree that using Other People’s Money is one of the great keys to wealth.

Bankers have of course known about this for centuries; it is practically the cornerstone of their business model. They are highly experienced at making money using other people’s money.

Everybody does it. The most common use of OPM in most people’s lives is that of obtaining a mortgage. This generates great leverage and enables the original investment to be multiplied by a large factor. For example, let’s say you put down $20,000 and the bank lends you $80,000 to buy a $100,000 home. After 3 years, let’s say you are able to sell the home for $120,000. You get your $20,000 back, plus another $20,000 profit: You doubled your money, minus a little interest.

Obtaining and using OPM for an enterprise can rightfully be called an art. The underlying formula for obtaining OPM in business is simple: People everywhere are looking for ways to increase their wealth. If you can provide a sure-fire way for people to increase their money, they will hand you money. There are a huge number of investors, with money, who are looking for the best way to make a return on their money. Although it is often believed (by those seeking investment) that there is not enough investment capital to go round, the opposite opinion is often held – that there is more investment capital than there are opportunities. This is because really good investment opportunities are hard to find.

There are also other ways to obtain OPM – such as grants or donations – which may not necessarily require repayment.

Obtaining OPM requires care: The fact that the person or organization actually has the money is not the only factor involved in whether you should work with them.

One of the classic mistakes of OPM is that the person attempting to obtain it may have dollars in their eyes and be too attached to getting the money to think clearly about whether the deal is actually a good one. Some are simply so attached to getting the money that they allow the investor to negotiate absurdly high returns or other unfavorable conditions. An investor, whether an Angel Investor or Venture Capitalist, may well want to oversee how their money is used and attempt to control operations. This may be highly beneficial – as very often, those who are experienced and already successful in business may make excellent advisors – but many are those who have lost control of their businesses to their VC investors.

It’s always a good idea to do due diligence – find out what you can about whether the other person or organization has a good track record in this area. Have they maintained a good relationship with others they have done business with? Do they come recommended? Do they understand anything of the field that the money is required for? Do they have a tendency to interfere or act in a controlling, aggressive or domineering manner? How long have you known them? Have they even done this before? Are they a potential loose cannon? Some investors can go through what seems like complete personality change when their money is at stake and they feel shadows of sudden doubt. OPM can seem like a dream come true – but I have also observed situations in which it turned into a nightmare with terrible consequences.

As an antidote to attachment to any potential investor, bear in mind that there are always more possible investors. If your idea or model is good and sound, there is no reason why others would not want to invest in it! So if one potential investor doesn’t seem right, seek others. And if you cannot seem to find any others, if you are not getting the interest you require; ask yourself if perhaps your business plan/ model is not as good as you think it is.

Bear in mind also that if a project has outside funding, it will need to provide sufficient profit not only to have made the enterprise worthwhile for you, but also enough to give the investor their return. A project with outside funding needs to generate even greater profit than a self-funded project.

Another entire aspect of OPM is the concept of consolidation – that the combined assets of more than one individual or organization have greater power and can enable great expansion. This ties in with an idea previously discussed – that being the biggest can create a huge competitive advantage. VC funds may have a large pool of resources and be actively seeking the best ideas to get behind.

Multimillionaire entrepreneur Felix Dennis (Amazon affiliate link) was a true expert in OPM and – like most other major business players – used it throughout his career. He divides the providers of OPM into a few different categories:

“The Sharks” – Major financial institutions, who will be delighted to loan large sums of capital in return for a “piece of the action”. Felix tried to borrow $20 million and was told no, but they could lend him $100 million no problem (so long as they could be an “end-game partner”). Sharks have big money but also have big fees and big interest rates.

“The Dolphins” – Venture Capitalists who are so nicknamed because like flipper the dolphin, they want to “flip” everything (i.e. sell your business) as quickly as possible. They tend also to want as much control as possible, demanding a high return but insisting on a short time-frame. VC is fashionable but Felix warns against it, stating that time and again he has witnessed original owners / founders “squeezed out” by the demanding dolphins who only care about growth and want it all now.

“The Fishes” – essentially these are “Angel Investors”: Friends, acquaintances, relatives, business colleagues and associates, small investors and “friendly bank managers of the old school”.

In his brilliant book How To Get Rich (Amazon affiliate link), Felix Dennis goes on to explain how the fishes helped him build his first business, which (importantly) he continued to own 100% of. The “pie” was all his, and while everyone got paid, he did not end up owing his soul to the sharks or the dolphins….

OPM is a complete subject unto itself, with many technicalities such as contract law. Here are a few links for further exploration.

Michael A. Lechter and Robert Kiyosaki “OPM – How To Attract Other People’s Money For You Investments – The Ultimate Leverage”

Other People’s Money (NuWire Investor) (great article)

The Credit Process: A Guide For Small Business Owners (Federal Bank Of New York)