The Theoretical Wealth of Tech Billionaires

One of the fastest ways for people these days to become billionaires is by starting something in technology.

Research from PWC shows that 27% percent of billionaires in the US all made their wealth in technology second to only the billionaires in the financial services but the tech billionaires also have an average net worth twice as much as those of financial billionaires.

Many people nowadays are so concentrated on building the next Facebook or Google and it may be because they really like the idea of making great tech products or some think that they should make something cool while others who happen to be the majority are in tech because of the money that comes with it.

So many people are now learning how to code or work with AI technology which is more about the potential that technology has rather than actually caring about the products.

Can you believe that 40% of AI startups in Europe did not have that much AI technology back of them?

Many people are in love with the idea of owning a tech company but they don’t know how hard one has to work to make it happen or they just do not want to put in the work. I’m guilty too.

That would be fine since hard work can be developed over time but the other really scary part most especially for the majority of the billionaires that are in technology for the money is the idea of theoretical dollars or in paper assets.

Let’s take the richest man in the world for example. The genius himself Jeff Bezos. If you do not know him, then you know the company he founded. (Amazon).

Jeff Bezos is someone whose work has routes in long-term thinking. This has made him make decisions that have seen amazon grow from an online bookshop to the leading retailer in the world over the last 20+ years.

Imagine that much of Jeff Bezos’ net worth comes from the percentage he holds in the company. Let’s say 70% of his wealth is in Amazon.

On the surface, this is all good but then there is something else that this figure reveals.

If this were true, it would mean that if Jeff Bezos needed to come up with a certain amount of money in the billions for something like $10B to save another project he was working on or to invest in something else, there would be a 70% chance that money would come from his Amazon holdings.

The problem with this is liquidity.

Liquidity in this case would mean how fast Jeff Bezos’ amazon stock would be sold or bought without impacting the stock price of Amazon.

Here lies the problem. If Jeff Bezos can only liquidate about $3B of his stock every year without negatively impacting the company’s stock price, it would take him more than 4 years to come up with $10B if it was to come from his amazon stock.

But he is worth $189B, why can't he just sell off the $10B of that $189B in one go.

This is very risky since the amazon stock cannot take on that much liquidity without having a heavy impact on its stock price.

In simple terms, other investors would see him selling that much of his own company stock and they would think that something wrong is going on within the company. They would then naturally run for their money as well causing the stock to fall in a dive that may be devastating for the company.

Some people have up to 100% of their wealth in their company holdings and live a really comfortable life so what’s the big deal here?

Well let us apply the same principle to someone who has 100% of their holdings in his or her $10M company.

In our example above, Jeff Bezos liquidates about 1.6% per year of his amazon stock so that his company does not fall into chaos.

So if we take 1.6% for another $10M business owner as well, we would have $160,000. This would mean that an owner of that business can liquidate about $160,000 every year for his business without putting his company at too much risk.

You can see how hard it would be for such a person to come up with a million dollars in a few hours if they really needed to.

This is the biggest problem many tech entrepreneurs have. They have most if not all their wealth in one single company and would struggle to come up with a fraction of that wealth if they needed it to work on something else.

Am not saying that having such paper money should never happen. I am saying that there is a way to make sure you minimize that risk.

When you have most, if not all of your wealth identity tied to a specific venture whether you own it or not, it can be really hard for you to focus on making things that matter. All the work you do will be to help you preserve that wealth at all costs.

This will lead to bad decision-making and having a mediocre impact in the market-place.

Most startups fail within the first 5 years of them being in business and if your startup is in that category, and you have all your wealth tied up in there, we can see how that would end up.

If Elizabeth Holmes (founder of Theranos) had 100% of her wealth in Theranos. What do you think that did to her when her company failed?

Imagine having dropped out of an Ivy League school to pursue her passion sinking in 100% of her wealth and identity only to have her reputation, and finances and life ruined by the failure of her company.

One of the reasons people are able to fail and get back up so fast if ever at all has to do with having resources to do that.

If you have only one skateboard and it gets lost while you are in the middle of nowhere, your ability to get back to your skating practice will depend on how fast you can get another skateboard as a temporary solution for the time being. Contrast that with someone who loses their skateboard in a city full of skaters.

The same goes for finance and wealth we hold in companies. Having all your wealth in one company moreover wealth that you cannot have access to any time you want is dangerous for not only your life but also your productivity.

If you lose the company tomorrow, you would have to start from zero again. This is what happened to Ray Dalio when he bet against the United States in 1982. Thank God he is perfectly fine now but this is the same mistake many business owners do most especially in tech.

Why Bill Gates is still the richest man in the world

The reason why Bill Gates to me is still the richest man in the world offers the solution to this problem.

When Bill Gates stepped down as chairman of Microsoft, he also started downsizing his holdings in the company to where he now holds about 1.36% of it. This makes him have about $22B in Microsoft and he has other investments in real estate, waste management, transport, and many other sectors.

If he decided to come up with say $115B in a few months, he could do that very easily because he does not have significant wealth in any one sector.

The same goes for his best friend and fellow billionaire Warren Buffet. He too could come up with $70B in the same time frame if the need arose.

Contrast that to Jeff’s $3B in a year and you realize that diversification is very important.

Diversification

When you have diversification, we all know that it’s a responsible way of managing our finances but it also makes liquidation very easy.

If Bill gates had the same 70% of his wealth in Microsoft, he would have a net worth of not less than $500B today.

But this would put him in exactly the same position as most billionaires and even business owners especially those in tech.

He would have liquidation problems and he would also be very exposed and would be wiped out if Microsoft was to go out of business.

Diversification also helped Microsoft to remain relevant in the market place since he was able to step down and allow other people to carry the vision forward without trying to cling to the decision-making of the company.

His 1.36% gives him peace of mind knowing that his identity is not tied to Microsoft alone and this makes him able to let go and let them do things better than he did.

If you do not diversify, there is no way you can be able to let go of your company because that would be like giving someone your money to use it to run your business.

They will surely run your business down with it. And if you stay as well and decide to run it yourself, your judgments will be crowded with thoughts of making decisions that only benefit your company.

If you have a company or any investments for that matter, diversify. Please.

You can get Tony Robin’s Book called “Money Master the Game”. It will teach you all you need to know about this and practical steps on how to get it done.