# Building Generational Wealth By [Brandom Musings](https://paragraph.com/@zoomervc) · 2023-03-01 --- There’s an infinite number of ways to define ‘making it’. Some people chase generational wealth, influence, and a lasting legacy while others are perfectly happy with enough wealth to cover their everyday expenses, a solid work-life balance, and a healthy family. ![Are we all really GMI?](https://storage.googleapis.com/papyrus_images/7cf0511c3ccd12ffb9ecd21735aed7631af5e7216e333abb32948bec03046bed.png) Are we all really GMI? Ballin? ------- Being pretty young and highly ambitious, I want to have it all. Working in VC and crypto, you’re constantly surrounded by news of [acquisitions](https://techcrunch.com/2022/09/15/adobe-is-buying-figma-for-20b-taking-out-one-of-its-biggest-rivals-in-digital-design/?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAFD-A0pK1zgYQLGhQkacklywGwqUfm4AKNoholxMTboH1y45NMt0Uc1WqVErjlQ7M40x-sRasNdUqeJGsuO-xHKI0_LHNWXlodbN486GWjzmbhzKMlrp2zUVUF6MVPPF9T-cjFJef-iUeauVcDA4E1AMuaUHZHm8GkiiPsneVb7u), IPOs, NFT pumps, and other wealth transfer events that seem to scream that you’re falling behind. [The rise and proliferation of social media](https://morningconsult.com/wp-content/uploads/2019/11/The-Influencer-Report-Engaging-Gen-Z-and-Millennials.pdf) in our culture has led an increased feeling of inadequacy in the modern youth. All influencer personas are curated snippets meant to boast life’s accomplishments while largely ignoring the tumultuous journey necessary for success. It’s all very inherently ingenuine, but that’s a topic for another day. [https://twitter.com/Makerealcents/status/1630920835409010689?s=20](https://twitter.com/Makerealcents/status/1630920835409010689?s=20) Ballin. ------- Since the majority of my circles are chasing generational wealth or financial freedom, I’ll about this definition and how I’ve seen it achieved. In my experience there’s two high-level ways people achieve [UHNWI](https://www.investopedia.com/terms/u/ultra-high-net-worth-individuals-uhnwi.asp) levels of wealth: 1. Luck: Buying and holding some asset (equity, token, property) before it pumps, winning the lottery, etc. I’d lump being born rich into this category as well. 2. Leverage: Making use of **_other people’s capital_** to build your own wealth. Leverage -------- It takes money to make money, right? Successful people in the world realize that active income is worth jack, but even passive income won’t create generational wealth without leverage. Making 20% on your $10K meme stock portfolio buys you groceries for 1-2 months. Congrats! Making 20% [carry](https://carta.com/blog/what-is-carry/) doubling a $10M AUM Fund I gets you $2M. VC funds leverage institutional capital (endowments, pensions, foundations) and human capital (bright founders’ time and energy) to return bank. VC-backed startups are a prime example of using leverage to create life-changing wealth. You start a company investing financial, labor, and time capital to get your idea off the ground. Over the course of the company’s life, you give allocation to Venture Capital firms in exchange for the necessary funds to build a fleshed out product and find your market fit. After capturing a sizeable share of the market, your company can be acquired or even IPO unlocking generational wealth that you can continue to compound by starting other companies, [angel investing](https://www.investopedia.com/terms/a/angelinvestor.asp), etc. ![Not financial advice.](https://storage.googleapis.com/papyrus_images/de8aa32bf7e09faa3e997830dd4e9bb306b5eff4caf9865ded22839c13a11da7.png) Not financial advice. Risky Business -------------- Creating venture backed companies and other leveraged career paths are high risk. A [small number of firms](https://www.linkedin.com/posts/jerrcfa_powerlaw-earlystageventure-pareto-activity-6985610025058590720-d_DL?utm_source=share&utm_medium=member_desktop) generate the majority of returns in the VC industry. Similarly, the vast majority of startups fail with only a few standouts responsible for most venture capital returns: > “the **_biggest secret_** in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined.” > \- Peter Thiel This is known as the [Power Law](https://altos.vc/blog/paradox-of-the-power-law-in-venture-capital), a theory most VC firms portfolio construction is based on. Only a few portfolio companies are responsible for the vast majority of returns for Venture Capitalists. This concept is similar to the [Pareto Principle](https://www.investopedia.com/terms/p/paretoprinciple.asp) (20% of effort is responsible for roughly 80% of outcomes). I write this to highlight the reality that **most startups fail**, regardless of how much work you put in. Many don’t find a true product market fit or show the necessary traction to get interest in later stage funding rounds. If you’re not comfortable living with constant uncertainty, entrepreneurship is likely not the path for you. There is no free lunch: the lucrative returns of exiting a startup have huge risks. Not every company is venture-backable or scalable, but that does not mean they’re any less necessary in our society. ### Addendum This post mostly looks at startups and wealth creation from an analytical perspective. I mention startups as a tool for building personal wealth rather than creating value for others or changing the world. Creating companies, venture/angel investing, and other high-leverage paths are filled with ambiguity day-to-day. If you’re not passionate about the path you take, it’s very difficult to gather the support in your vision necessary to succeed. In simpler terms, if you’re only in it for the money, people will easily smell through your bs. --- *Originally published on [Brandom Musings](https://paragraph.com/@zoomervc/building-generational-wealth)*