165: Gray Hair, Peacocks and Unicornomics
Buck: Welcome back to the show everyone. Today my guest on Wealth Formula Podcast is well-known to the Wealth Formula Nation. His name is Damion Lupo. He’s been on the show before talking about his EQRP model through Total Control Financial, but today we’re gonna talk about something a little bit different, something that he calls Unicornomics, which is the title of his new book coincidentally, right? Damion, welcome back to the show.
Damion: Hey Buck, thanks for having me man it’s good to be back. Good to be back with all your tribe and your listeners.
Buck: Yeah I think the last time we got to hear from you was that the Scottsdale meetup event was last how many was like three or four months? Oh I don’t even remember anymore but by the way Damion you’re gonna be joining us in the next event which I think we have penciled down for Dallas. It’s not penciled it’s real but I’m trying to think what was it September 27th and 28th and you’re gonna be speaking there to with a number of other interesting folks. Damion’s a good speaker and he tends to give away money so make sure to make that talk.
Damion: Yeah that’s I basically just show up for the freebies going away just with a firehose of new ideas and you’re probably gonna take it’s gonna take you a month to recover from it which is what happened last time.
Buck: Exactly so okay let’s get to the book though cuz I know you’ve written you know you’ve written this book I don’t know if it’s actually pretty yet but I have a final copy it’s called Unicornomics. So broadly speaking what is a unicorn and what was the inspiration behind writing this book?
Damion: So a unicorn is this idea this term that was that was given to these tech companies when they somebody come up with an idea and then two years later they’d go public and there’d be a billion dollar valuation. It was basically just identifying a company that had hit that billion dollar valuation whether it was public or private and it’s this dream that people have they go to Silicon Valley or silicon Prairie or wherever they’re going with the tech companies and they’re basically saying I want to be part of one of these unicorns in the making so that I can cash out and become filthy rich. And so unicorn it is because has become synonymous with the rocket type of companies the ones that are doing really well and sometimes they do well sometimes they don’t but it’s it’s about taking something from basically just Stardust into that billion dollar valuation and what it takes to get there and it’s a formula kind of like the wealth formula there’s a unicorn formula and it’s something that’s pretty predictable. Most people if either you’re thinking you want to have a billion dollar company or you’re investing in a company that’s gonna be worth a lot of money there’s still a formula it’s the same basic formula if you miss the formula it’s pretty unlikely the thing is gonna work so if we’re talking about our investor brain which is what most of us are thinking about right now probably listening to this there’s a formula on and how you want to approach the people you’re investing with and the projects you’re investing in and if you get that formula right you’ve got an 85 percent likelihood of that thing actually working assuming it’s a good market idea.
Buck: All right so tell me tell me what was the inspiration behind the book? Have you been have you been involved with unicorns in the past have you seen unicorns in the wild?
Damion: I have. All the unicorns I’ve ridden a unicorn maybe mystically but I’ve started 50-plus companies over the last 25 years and having been a part of different levels of companies from startups that flopped within a matter of months to ones that went on to be sold for many many millions there is a formula around this stuff and I mean in full disclosure I have never started a billion dollar company it’s a very similar formula whether it’s Facebook or Peter teal or whatever or something that’s a 10 or 20 or 50 million dollar company like an apartment complex that’s being purchased as a business if and people get to invest in it so the idea was I looked at all these things and I said okay there’s something that I’m doing wrong all the ones have failed and there are things that are done right and so this is my experience and it’s also a lot of studies so it’s not just an academic thing this is many many tens of millions of dollars of my own money that I’ve spent learning what this is instead of just saying oh yeah I read a good book let me just rehash that book.
Buck: So spent meaning lost is that right?
Damion: That’s the other standing is what it is right?
Buck: No and I totally get that as a fellow entrepreneur that’s basically what it is right and when you have failures and companies all the time you know it’s like a very very expensive education but for us entrepreneurs who you know kind of get into this space where we have to have it all the time you know we have to chalk it up to something and make us feel better it certainly is education so we just say okay I’ve spent this money on education and here you go right so let’s talk let’s talk a little bit about what you’ve found with your research here what are the in understanding that no this this is not a show necessarily where a bunch of entrepreneurs you and I are entrepreneurs but most people who listen well formula podcast are making you know high six figures even seven seven figures per year and they may be the people who are looking for the unicorns as investors so with that in mind let’s apply some of the concepts let’s talk about some of the concepts you have as an investor looking at potential unicorns to invest in.
Damion: Well some of the concepts I mean really when we’re looking at the investments we’re gonna put money into. We want to focus first and foremost on the people that are running the deal and are these people that just have an idea and they’re they’re saying hey give me some money and I’m gonna see if this thing will work or do you actually have pros I call them send centaurs versus leeches because one of them a centaur is like the one in a hundred that is that key person who’s out there and dominates if you’ve ever seen the movie 300 those are all like those are centaurs those are people that knew how to dominate and win and so you’re looking for those type of people. The other ones are leeches and they’re just basically trying to suck your cash for themselves and maybe see if something works because they’re just playing a roulette. So it’s starting with the people and so the question is do they have the execution intelligence how they actually done this or is this something that they went to a seminar I wrote a book and decided to go hey I’m gonna go try this thing I’m gonna make an investment and see if anybody wants to give me their money so you want to see the track record and you want to filter these people this is the first 15%. So when you’re looking at a business that you’re gonna invest in you’re looking at that first 15% it’s the beginning stages of the business or the investment has it been mapped out is there a blueprint do they have the proper cap stack and that’s the capital stack the debt and equity mix like has this all been put together or is somebody just coming up with an idea and hoping you’ll give them enough money to keep their lights on while they’re figuring it out. You don’t want to invest in people that are figuring something out or you’re gonna have an experience called a an investment loss we just talked about. So it’s it’s having that first 15%. And here’s one of the ways to figure it out is that business or is that investment able to be put on a bumper sticker. I mean if you’ve got somebody that’s got 52 different things and channels and different avatars like or if you’re investing in an apartment and you know exactly who the avatar is and they this person they worked within three miles of this particular location they make this much money and there’s crystal clear you can put that on a bumper sticker if they can’t tell you that run from the investment I mean it’s got to be on a bumper sticker or you’re dead in the water because they have no idea what they’re doing.
Buck: It’s a long bumper sticker.
Damion: It’s like the whole bumper may be the whole car.
Buck: All right so what else okay people we’ve definitely we’ve talked about people we’ve talked about you know the concept of you know trying to find something that is clear in terms of its you know why it’s a good investment what other things make up that you know that the formula.
Damion: Well you got to be crystal clear on this exit and when we look at investments we often talk about things that are we’re gonna get into we’re gonna change them we’re gonna improve them and then there’s gonna be a five year exit. I always like to have multiple exits so like in in terms of apartments I like the idea of being able to look at it an exit where it’s sold and also does the thing work long term if we hold it that way you’re not stuck when markets change. So I like being crystal-clear about that if you’re not if you go this is a great deal I hear this a lot Buck people say I got a great deal and I go cool what is it like oh man it’s just like the most amazing apartment I go beyond that and they go well no it’s in you know it’s in Timbuktu that’s a good place to invest like yeah but you don’t you’re not clear on how you’re going through this process and so the exit even if you’re not gonna exit understanding how you would exit and knowing how to structure it and meaning does the person that brought you the deal do they have it crystal clear in their mind how this thing would exit and how you get your money back because returning return on your money is one thing returning of your money is more important and that’s our friend Robert Kiyosaki would say this he’s like great nice investment when am I getting my money back not just return on it but when do I get it back I want the infinite return as often as possible. And so that’s that’s what we’re looking for that exit that crystal clear exit not foggy but like note no smoke no screen it’s probably clear.
Buck: Yeah and you know for example when we do these things with Western wealth capital and investor clothing that’s the idea right is the focus entire focus is all right boom this is how we’re gonna do it we’re gonna get our money back in this amount of time because a certain amount of elements that we know we can plug in these variables and know we’re going to increase net operating income by a certain amount and we know this because all the evidence around us et cetera. So there’s a clear map of why something’s going to work and what the goal is or if there are multiple exits what are those what sort of a plan B etc right?
Damion: Yeah and and one of the things that differentiator for their business your starting or your investment that you’re looking at is the assurance of reality and the assurance of the data. So when somebody says this is what’s gonna happen the question is is it is it like your mom assuring you that everything’s gonna be okay or is it the actual market that’s giving you that and is the person that’s saying here’s a good deal can they show you how it’s a good deal and prove it based on something that’s that you meet your arms around. It’s like your mom is always gonna tell you hey this is a great idea but that doesn’t mean the markets gonna like it and so you need to have something that something that’s concrete that’s not just somebody’s opinion but reality. I know your deals you’ve got reality backing those deals every single time and so when people look at them you can say look here’s all the stuff in the market that’s happening that has happened here’s the team that’s executed. That’s so much more important and so much more valuable than just somebody that you happen to like telling you this is a great deal and you go great I’m gonna do it well what how do you know and so you’ve got to prove it you got to make sure the deal can be proved.
Buck: It has to be especially important in the type of businesses you’re talking about because when you’re really talking about unicorns for the most part you’re talking about startup businesses right and so this is you know generally going to be limited presumably to the part of your portfolio that you are looking for asymmetric risk is that fair? I mean because listen real estate deal a real estate opportunity if you’re cash flowing or you know you’ve got equity day one and you’re doing it well you know what you’re doing there’s a little bit more fudge factor I hate to use that technical term but when you’re talking about you know when you’re talking about something creating Enterprise out of nothing it’s a completely different level of risk.
Damion: It’s totally different. And early that’s why investing it’s very a lot of times people make money as an entrepreneur or in their job and then they go to invest and they absolutely lose it because there’s a different way of looking at things. It should be fairly boring when you invest. You’re doing entrepreneurial stuff there’s a lot of juice and people you know make money lose money that’s very exciting but investing in an apartment should be one of the most boring things that you ever do very predictable. And so if you’re getting excitement about your thing because it’s you’re investing in some foreign location or you’re doing like give me a break. Go to the most boring place ever with numbers like just work every time.
Buck: Yeah honestly I think that’s you know that is a lesson that I’ve learned over the years to that and we’ve talked about that in the show is boring is good right? But now let’s focus though because from the from what we’re talking about with the unicorns. I’ve used this idea of you know part of your portfolio being involved with something that could explode you know giving yourself a chance maybe a 5% or 10% allocation. For me it happens to be you know some various digital currency cryptocurrency type stuff that you know if it goes to you know if it goes to zero which it’s not going to in my opinion you know it’s not going to kill me but if it explodes it’s gonna be a very very good year right and so when you talk about unicorns I presume you’re talking about you know those types of asymmetric risk plays that you’re taking you know taking a shot down the field you know and trying to win the game with one bet sort of speak right?
Damion: It is. These are the things where you’re investing especially with businesses versus something like real estate. If you’re investing in these things this is not something you’re putting 50 or 80 percent of your money in because that five or ten percent you put in you it’s not gonna change your world if it goes away and a lot of these go away. I mean when I talked about the 50 companies that I’ve invested in built it started their you know 80 plus percent of those things didn’t do anything I mean they’ve taught me a lot but they didn’t they didn’t go to the moon they went off a cliff and so that’s that’s part of this process and if I had gone all in on every one of those things I did in the beginning that’s you don’t do that you don’t invest in something. There a lot of times though businesses don’t necessarily have to be the crazy earth-shattering idea to for you to invest and it to turn into something that’s worth many tens or hundreds or you know hundreds of millions of dollars. It can be something where somebody just goes I have a better idea to make something just better you know and we’re going to change things and it’s it’s a sandwich it’s a popsicle I mean it doesn’t have to be crazy technology I think that’s what people miss they go well I can’t make a ton I can’t make more than 5% unless it’s super risky. I fundamentally disagree I think you just have to look at the first 15% and then whether it’s crypto or something else I see I like with unicorns you have a lot of control. With something like crypto you can learn by being in it but you and I have no control. So there is a different element of control.
Buck: But you’re talking about starting. You have your own business.
Damion: Right. Here’s the other thing too I learned this I think I learned this from Tim Ferriss. When you’re investing in startups part of the reason you’re investing in those is insider information it’s you being connected to people where you have access and so if you’re investing fifty or a hundred thousand dollars into somebody’s thing it’s being close in on the inside of this stuff whereas you’re gonna totally be an outsider if you don’t put money in. So you put the money in for different reasons not just the thing going vertical but because you’re gonna be you’re gonna access info you’d never see elsewhere.
Buck: What’s the, so I’m just looking over some of the notes on this what is, what is the China 1% idiot statement?
Damion: So there’s a lot of times we hear in the unicorn world our people that are doing startups they talk about how if they can just get 1% of the Chinese population to do this certain thing to buy this app to do whatever they go 1% is X number of people they say okay if it’s 1% of a billion then we’ve got what 10 million and and so you take that and you say well that average person is going to spend $10 a year and if we take that then we’ve got a hundred million and if the company’s worth ten times revenue we’ve got a billion dollar valuation. So they use these ridiculous stats and multipliers to value a company based on smoke and the stupid statement and a lot of times I mean I actually hear this from people that are fairly smart and it’s that one of the dumbest things that can come out of somebody’s mouth.
Damion: When you talk your book you say basically that if you follow these steps you can identify 85% of those companies that would be successful and become unicorns is that accurate?
Buck: Yeah here’s what the numbers mean. That if you get the first fifteen percent right which is basically this the pieces and the puzzle pieces inside this book that’s the beginning that’s the framework and that’s the entire game plan. If that’s in place then this then the idea the company has an 85 percent likelihood of success assuming the market actually wants this thing. So it doesn’t mean there’s a hundred percent guarantee what it means is that if you don’t get that first fifteen percent for example if you have the wrong legal documents then it doesn’t matter how good the market is you ask Bob Parsons the guy that founded GoDaddy. It the rumor in the tech community was that he spent five extra years before he sold the company because his the origination his documents for filing were wrong and he had to redo things. So that’s I mean it’s a perfect example of not getting the framework right because you’re being cheap you’re not getting the right team members around and so that’s that’s what this is it’s a high likelihood of success assuming that you have this stuff in place in the beginning.
Buck: Yeah so that’s basically you know that’s almost like saying it you know if you have you have you know approximately well where do you get the numbers okay so let me ask you that because we’re talking about eighty five we’re talking about fifteen percent where are you getting all these numbers for this stuff?
Damion: A lot of this was based on the work that Buckminster Fuller did. So you know the studying things that in his work which is really hard to actually understand. It’s understanding that that first fifteen percent there’s there’s a lot of work that like Robert Kiyosaki and some of these other folks that you and I know have done over the years and it was based on Bucky’s thoughts and ideas so that was the original premise those numbers and then in practical application. That’s what I’ve seen personally with all the companies I’ve done it’s just those numbers make sense to me and certainly there’s there’s going to be different people’s opinions of those that that’s my reality of seeing enough it’s not one or two it’s actually dozens of companies I’ve been in and I can tell you if you look at companies that have fallen apart there’s usually pieces of this of Unicornomics that are not in there that they missed.
Buck: Have you invested in a unicorn yet?
Damion: I’ve invested in things I thought were gonna be unicorn where it would pretend unicorns it was like something with a unicorn outfit on kind of wants those. But there’s no guarantee with a unicorn their truth is though you always want to have something that has that potential if you’re investing in it or if it was enough of those things even an apartment. If you do the right thing your wealth is going to systematically grow because you’re investing in things that have the framework correct and that’s what you’re really getting at is the framework in place and you know do you have do you have the right people in the right framework and if you can get those two things right we’re really high likelihood of overall winning even when some of your stuff is a learning versus a winning opportunity.
Buck: So you know might you people might be wondering people make you curious about investing in these potential unicorns I mean where do you even go to find you know unicorns to potentially invest in like how do you you know presumably you know you have done this you’ve invested in some things. Are these by invitation only you know pre IPO type things or what are you kind of how do you find them?
Damion: This is most of these most of these spaces are family and friends that you’re never gonna hear about which is why you want to ultimately be an insider to something to somebody somewhere if somebody’s doing something. A lot a lot of times there’s no type of organizations where there’s a lot of people with smaller businesses sometimes they end up on Shark Tank if you’re a part of any of these things you start hearing about stuff and it’s a matter of just getting access to something somewhere. There’s got to be a gateway it’s something where you’re not gonna just stumble into it but really it’s going there it’s going to you. That’s where I found a lot of the places where I looked at investing and invested some money was through EO which is Entrepreneurs Organization. There people that are constantly doing things they’re the doers and it’s people that have at least a million dollars in revenue in their businesses and they go up to a hundred plus million. So these are the type of people that are on their way to becoming a unicorn and it’s a vetted filtered group and environment once you’re inside that you become an insider and so if otherwise you’re going to be an outsider buying retail if you’re gonna go and buy some shares of uber or lyft your way late. I mean you need to be part of Sequoia or one of these other groups that got in way way way earlier before they were worth thirty billion dollars and the only way you do that is by insider information at a very localized level and that’s I’m adding EO is one of the greatest places whether you’re in EO or you know people that are part of yo it’s starting to connect and this is probably not something you do behind a computer screen this is all about face to face.
Buck: Right and also obviously there’s you know we’ve had we’ve had we had a guest to boats for like over a year ago who’s wrote a book about I can’t remember his name but he wrote a book about angel investing and he’s well-known in that space and you know if you look if you go to like meetups or whatever you Google your area you know Los Angeles or you know Dallas or wherever you are and you put angel investor group a lot of times you’ll find some large investor angel investor groups which is basically doing the same thing right I mean it’s you know I think you’re probably talking about identifying things even before they get to that funding level.
Damion: It’s way earlier it’s and it’s part of that stuff and one of the things too is being conscious to what you’re investing in and making I suggest people invest in things that they have some semblance of understanding around like probably look at things in the medical arena and have a way better idea than me or other people that don’t have the medical background because I mean it may be I’m assuming I don’t know I mean you have this background that most of us don’t a lot of times I see medical professionals doctors and they go out and they invest in hi-tech stuff and they have no clue what they’re looking at what they’re doing is they’re buying a magic story and that’s you’re doing something that you don’t really understand because you want the juice and so that’s one of the questions is this the juice or do you actually get what you’re investing?
Buck: Well you know actually I will tell you I’ll take it a different step with doctors but I’ve seen notoriously amongst doctors and you know healthcare professionals in general is that they’ll think that they have an edge and then they’ll put a bunch of money and some new you know some sort of a device company or something like that which is incredibly stupid because most of these things don’t work but because in this sort of niche world they understand that this might have some value and they say I kind of like that whatever they end up dumping a bunch of money in and then and then they get burned too. So it cuts both sometimes there’s this all saying you know a little bit of knowledge as dangerous as well so if you’re not looking at things from all of these business fundamentals it’s not ideal either.
Damion: To that point one of the most important things you alluded to this in the beginning when you’re talking about throwing money into something investing in something that has potential to be a rocket but you’re not gonna die if you get crushed. In terms of I’ve seen the same thing with a lot of doctors they invest in devices and things that seem like they’re world shattering or earth-shattering. The problem is they don’t understand position sizing and they don’t understand that you don’t ever put more than certain amount maybe it’s five or ten percent of your money into something they go way too all-in on something so they think oh this is for sure. Nothing’s for sure and the position sizing is more important than the thing. Van Tharp who is an excellent guy to study in terms of trading and investing psychology talks about position sizing and your risk and how much of your whatever your nest egg you’re going to put into any one thing and your risk tolerance is around how much you can lose and what that impact is going to be to your portfolio. That’s 80 plus percent of your strategy and whether you’re going to win. The actual thing you invest in is like five to fifteen percent it’s such a small number but most people look at the system or the device or the thing and they think that’s what it is it’s not it’s the actual position sizing that’s more important.
Buck: Before we get going I want to talk about something that you do that you’re known for that is incredibly boring but stable and in smart it’s the eQRP. Obviously I you know I talked about this you know and I promote you and your product because I think it’s a wonderful idea for real estate investors. Can we just hear it from you sort of a summary again of what an eQRP is why it’s different and why particularly people who are investing in things such as real estate where there is leverage involved may want to consider?
Damion: Yeah definitely. I mean this is a huge thing couple of things with the eQRP. This basically allows that 25 trillion dollars of retirement money that’s floating around out there. It’s the biggest pool of cash. It allows people to use their retirement money for things like real estate or startups or almost anything you can imagine and it you can use them you can invest in these things and use leverage. So in these real estate deals that we do there’s a lot of leverage involved and the problem people have is they’ve been investing a lot of IRA money self-directed IRA money in these type of deals with with debt and when they do that they get hit with you bit tax so that’s a big problem because it’s like thirty seven percent tax.
Buck: So explain what that is because that so just so people know what UBIT is and what UDFI and what these things are.
Damion: UBIT is unrelated business income tax. It’s this tax that the IRS uses to level the playing field when you have tax shelters like trusts and retirement accounts and they say okay well if you’re going to do certain things we’re going to tax you. So if an IRA does certain things like buys real estate and there’s leverage in it, it says that’s not quite fair to somebody else that’s using a non retirement account so we’re going to trip this thing, The UDFI is what gets tripped it’s unrelated debt financed income. So basically your IRA is making income from debt and they say all right that’s gonna trigger this unrelated business income tax that’s the thirty seven percent. So that’s terrible especially when it’s surprise after your you have a syndication or you’ve invested and it cashes out and you get a $50,000 tax bill inside an IRA it’s a bad day. The eQRP is freaking amazing because once you convert an IRA over into an eQRP you’re exempt from that tax it’s gone and it’s a it’s a unicorn situation we don’t know why exactly but it’s it doesn’t it’s exempt from that tax I think its guess is because IRAs have two trillion dollars more in them than 401ks and so the IRS has just made this an exemption. So basically what that means is that you’ve got the ability to invest in all these really cool things that are non Wall Street and you’re not going to be hit with the tax when they’re leveraged and that’s the beautiful thing about real estate the leverage opportunities right it’s why all the juice is there.
Buck: So let me ask you this if you’re somebody who doesn’t have like a you know a retirement account now I’m one of those people right I use wealth formula banking for that kind of thing. But you know there’s a lot of people who do already have IRAs or 401 KS etc but say you wanted to you know one year you got a big you got a big bump right in would one option because you can the the maximum was what seventy five thousand dollars per person or something like that per year?
Damion: Individuals under age 50 is fifty six thousand a year.
Buck: Alright so you want to put a hundred or you know between you and your spouse maybe put a hundred and twelve thousand dollars away and you think well gosh maybe I’ll do that for a year but I want to keep doing this could you just do it one year?
Damion: You can do it just one year there’s there’s no requirement it’s very flexible and it’s one of the benefits that Tom wheelwright and I have talked about is there’s this new thing in the tax code after the tax reform act where you’re you get a 20% deduction or reduction in your taxable income if you have an LLC and you’re under a certain amount like 150,000. So here’s why the retirement account could be valuable. If you let’s say you made a hundred and ninety thousand dollars you go oh crap I’m over that I’m gonna lose that thing well I guess what if you if you contribute forty fifty thousand dollars into your eQRP you’re gonna be below that basis and now you’re gonna get the 20 percent reduction. And so that’s a huge value that reduces your tax bill not only from the contribution but from its bottom line and you’re gonna have a lower AGI have to adjust to gross income after you get that 20% deduction that you wouldn’t have qualified for if you didn’t use some type of vehicle to get your income down.
Buck: Right and so yeah I mean it’s it’s obviously I think a really interesting tool and you know I think it’s something that people should definitely look into if they’re in currently an IRA because the other thing that I think you mentioned before is some people say wow I’m already invested every bunch of stuff invested in an IRA through an IRA you can actually assign those to a QRP later right I mean you don’t have to just say well that’s that’s that I’m in an IRA already.
Damion: Yeah if you got if your IRA has invested in assets and you go I’m stuck you’re not stuck we could move we can move your assets from the IRA into a qualified plan into an eQRP and that’s that’s a huge thing because you don’t actually have to sell anything you can just move it’s called an in-kind rollover. And then the next question that comes up people say well I’m a w-2 or I’ve got this job or I’m not qualified the reality is just about anybody can become qualified it’s you have to have a business and a business being something you could have a lemonade stand you can be you could do consulting there’s a million things that could be done and the EQ RP works if people have employees that’s I mean it works for just about anybody so if you if this is something that’s interesting don’t think that you’re not qualified or that you’re stuck just because maybe you’ve googled it or somebody has said that this really can be something that anybody can tackle and use.
Buck: We always have a commercial anyway but tell us where we can learn more about that and get a hold of you.
Damion: Best place to get to find the information about the QRP is the QRPbook.com. And if you go there you’ll get a copy of the book and I’ll literally mail it out to you and you’ll have it and you can learn about it.
Buck: Fantastic man well it was good having you again as always and I’m sure I’ll talk to you before the Dallas event but if not we I’ll see you there in person.
Damion: Sounds a good, Buck. Thanks for having me man.
Buck: We’ll be right back.