A Billionaire's Startup Capital Secrets

How Billionaires Become Billionaires

Back one day around 1985, or so, I was walking past the office of one of the profs in the business faculty at the university I was attending. As I walked by the open door, he popped his head out and asked "Peter, are you interested in some free books?" Turns out that he was retiring and in the process of cleaning out his office had concluded that he didn't want to move a ton of books.

Having been an avid reader since age 4, I couldn't resist the offer and stepped inside to see what treasures awaited. It turned out to be a fateful day due to one particular book on the super-rich that I took home with me. The book contained a memorable chapter on low-profile billionaire Daniel Ludwig who made most of his money in shipping. He was a master of creative financing and the use of OPM (i.e., Other People's Money).  What I liked about Ludwig was that he was a true rag-to-riches story who led a very simple life. For much of his work life, even after striking it filthy-stinking-rich, he used an officer's cabin aboard an old rusting oil tanker as his office. He was a man who enjoyed his work and had no neurotic need to show off to anyone. In him, I instantly recognized a fellow INTP.

Since I've been doing this series on creative financing for business startups (not real estate ventures), I have been thinking a lot of Ludwig and wanted to write about him--but that book was lost long ago and I couldn't even recall the title or author. Then a Net search a few nights ago struck gold. A home business website, of all things, had an excellent article on Daniel Ludwig and his financing methods. Whether you're looking for venture capital or angel capital to finance your startup, the following excerpt from it on Ludwig's creative financing is worth reading:

It was in the mid-1930s, when the late-blooming Ludwig was nearing the age of forty, that he finally began building the foundation of his present monumental fortune. That was when he discovered OPM.

He had borrowed money often before, of course, starting with his first ship-salvage venture at age nine. "But," says a Chase Manhattan Bank officer, "it hadn't been what you could call creative borrowing. He hadn't learned how to use other people's money as a lever to increase his own economic horsepower."

Ludwig arrived at his success formula in two main steps. The first step came when he wanted to borrow some money to buy an old general-cargo ship and convert it into an oil tanker. (Oil transport paid more than dry cargo.) He went to various banks in New York.

They looked at his frayed shirt collar and asked what he proposed to put up as collateral. He had to admit he owned but little in the way of worldly goods. He did have one elderly tanker afloat, however--the one in which his back had been hurt--and it occurred to him that he might be able to make a deal involving this ship.

"He came to this bank," says the Chase man, "and told us he had his tanker chartered out to some oil company. The monthly charter fees he received were just about equal to the monthly payments he'd have to make on the loan he wanted. So, he proposed to assign the charter to the bank. The bank would then collect the charter fees directly from the oil company, and that money would go toward paying off Ludwig's loan."

To many bankers it seemed like a crazy setup. Yet, it was in reality as safe for the bank as almost any small-business loan. Ludwig alone might not have been a four-A credit risk, but the oil company's credit was good. The bank could assume that, barring unforeseen economic catastrophes, the oil company would faithfully keep up its charter payments on the tanker. Even if Ludwig's new ship-converting ven­ture sank as had some of his others, the bank would still keep getting its money as long as the old tanker and the oil company stayed afloat. In effect, Ludwig was boosting his own feeble credit rating by using the oil company's.

The bank made the loan on that basis. Ludwig bought the old general-cargo ship he wanted, converted her to an oil tanker, chart­ered her out, used her to get another loan on the same basis, and converted still another dry-cargo ship to oil. 

This went on for a few years. As each loan was paid off, Ludwig came out with free-and-clear title to a ship. The charter fees for that ship stopped flowing to a bank and began flowing into his pocket. His cash position, his credit rating, and his shirt collars improved rapidly. 

And now, he was struck by a still more intriguing idea. If he could borrow money on an existing ship, why couldn't he also borrow on a ship not yet built?

This was his second giant step in learning the uses of OPM. Ludwig's new proposition went something like this. He would design a tanker or some other ship for a specialized purpose. Before the keel was even laid, he would find a customer to charter her when she was completed. Waving the charter contract, he would walk into a bank and ask for a loan with which to build the ship. The loan was to be of the deferred payment variety, under which the bank expected little or none of its money back until the ship was actually afloat. Once she was afloat, the charter fees would be assigned to the bank and the loan would be paid off as before. Eventually, when the entire years-long transaction was completed, Ludwig would sail away as owner of a ship in which he had invested barely a dime of his own money.  (Source)

Okay, so what's the take-way lesson here some of you are already asking. The lesson is that the lowest form of entrepreneurship consists of sitting on one's behind waiting for some kind venture capitalist or angel investor to dump $500K or $5 million into your lap.  The really good entrepreneurs  always have a few methods for financing any aspect of a startup. While most people are absorbed with re-editing their business plan for the 30th time, the savvy entrepreneurs are cobbling together their startup financing from a variety of sources. Money doesn't just come from VCs and angels. Become acquainted with all the other sources.

By the way, the book I picked up for free back in 1985 was The Very Very Rich and How They Got That Way by Max Gunther. (Be forewarned, this is not a book on financing techniques. Rather it's a collection of short biographies.)

If you are interested in creative financing for your startup, be sure to check out the other posts on this blog. Better yet, bookmark this blog as I'm currently on a roll with this subject.  And don't forget to read about  how billionaires become billionaires.

Comments

[Wall Street Billionaire]

Wall Street billionaires!

[John]

Very interesting article. I added Max Gunther's book to my amazon wish list and will be bookmarking this blog. Thanks!

[Caprinardo Delirio]

Damn, this is a good post, Peter. Ludwig used the oil company to boost his own credit rating. Genius! The Billionaire Boys Club series sounds good too.

[Sunny]

Hi. Just found this site through news.ycombinator.com . Really found your Ludwig story reference and your blog post educational. Thanks for sharing and I'll subscribe your feed . looking forward to your new posts. Cheers.

[Ryan]

Very nice post. I love the concept of creative financing, leverage and OPM.
I just checked my library and will pick up the Gunther book asap.

Thanks for the recommendation!

[Vincent Liu]

Great read. The idea of using OPM seems to be a common theme for a few wealthy people I know, so I'm sure that pattern isn't just purely sheer coincidence. Keep up with the good posts, will be looking forward to them!

[Scott]

Sure would like to raise some capital for my business, but I am too nervous of developers who may snatch my idea for easily making a billion or so dollars.

Five years in research and development, the business is now ready to go live.

I am hoping the advertising revenue is enough to sustain the growth, so long as no serious problems come along during.

Here is a hint of the business model...it is not what you make, it is what you spend.

Sorry, I just cannot release details...too much invested already(5 years, and countless thousands in research and development).

The business plan from a realisitic perspective is a solid winner, that will not fail. The only question is how big will it get. So far it looks like it will easily run into the billions of dollars within 2-5 years.

Need some legal advice before venturing into the venture capital world.

Any suggestions? The problem is anyone can easily copy the business plan.

Oh look, the sharks are coming in for a closer look!!!

Who can you trust these days, besides no one?

[patricklee]

Good article. I hear a lot of rags to riches stories. Hope mine is next.. Thanks. Will definetly take a look at The very very rich and how they got that way. Thanks

[Shirley]

Great post on how to become a billionaire. Great insight and very motivating. After all, these guys put their pants on the same way we all do right? I think there is plenty of opportunity in up & coming economies and cultures. Imagine introducing something simple, which we take for granted, to an up & coming country. The possibilities are endless.

[Shirley]

Enjoy this slide show on how billionaires become billionaires.

http://www.forbes.com/lists/2007/10/07billionaires_all_slide.html?partner=msnedit

[Shirley]

Here's another slide show on how billionaires become billionaires.

http://www.forbes.com/2007/03/06/bachelors-billionaires-rich_07billionaires_cz_lk_0308bachelors_slide_9.html?thisSpeed=15000

[DM]

Your how to be a billionaire series is great.
In the U.S.A the ones who take the risks are the ones who are seeing the rewards. I also agree that it’s very interesting to think about all the possibilities to build wealth. So many people seem to think that you need to be an internet genius or a real estate mogul to grow your wealth but there are so many, less than glamorous, jobs out there that are making people filthy, stinking rich.

[Mathias]

It is not a rocket science starting companies. Have reserved bookings from customers, start your company, sell part of your business as expensively as you can and finance a project manager and the project. The money that isn't needed is yours to keep.

People make this "start-up" thingy so complex and I wonder why.

The key word to starting companies and becoming very rich from doing so is summed up in two simple words: "Proven demand".

No customers, no business. No customers, no value for investors. People try to raise investor money before they have someone willing to pay for the service they want to offer. That is a dumb way to approach things.

Meet demand and you will carve out gold no matter where you are in the world. Investors will love you. So will customers.

Second keyword: "Give value".

Give value and you will get the money.

[making money]

But why? Why spend all this money, make this heroic effort, just to make web surfing twice as fast? The first reason is because Google can do it. The company likes big stretches like this. The second reason is because everybody else CAN’ T do it. The technology required is so breathtaking and audacious that even a Microsoft or IBM wouldn’ t dare to try it and certainly Yahoo won’ t. The best Yahoo can hope for is that Google fails, which they probably won’ t. And the final reason for doing this is because it co- ...

[dax]

very good post! i've read stories similar to this one. and i was hoping to get a startup for myself and maybe i'll be the next one to post my story of success soon. ;)

[Mizan Lubd]

Excellent information and tips on how to become billionaires. Thanks

Regards,

Mizan Lubd

[Brian]

Great article. I've found very few that actually use creative financing for their businesses even though it' more logical and reasonable. I don't understand why so many seek out VC's and angels when financing can be arranged with private, wealthy investors.

For those in the comment fields that requested help, try going to www.gofundyourself.com and see if he's sharing any stratgies any time soon. I've been through the program and it teaches how to raise money from wealthy investors.

[Troy]

I don't understand why so many seek out VC's and angels when financing can be arranged with private, wealthy investors.

--

Private wealthy investors = angels

[brian]

Troy -

Yes, all angels are wealthy investors but
all wealthy investors are NOT angels. It's a big difference as well.

Matt shows you the difference between them. One wants to invest in companies and has the experience to complete the due diligence, server on the board, and even become involved. The other does not nor do they have the knowledge or experience to do so. Hence they are passive investors and the angels are not.

[hypotheek offerte]

I think it is actually a site with great report. Yes, you are doing absolutely fine job.

[Daniel Ludwig fan]

Daniel K. Ludwig was the man!You won't find a more interesting a billionaire than old Daniel Ludwig.

[Chad Clawson]

Scott,
There are a lot of people you can trust. Most professional investors are not at all interested in "stealing" your idea. They invest money in good ideas, not steal them. They would not long remain in business if they did so--no one would take any businesses to them.

All you need is a good NDA to protect you. Don't take the idea to a company or individual that might have an incentive to compete against you, take it to a professional investor with a solid reputation.

By the way, companies don't go to billions in 2-5 years. I believe it took more time than that for even companies like Microsoft and Amazon to reach the $50MM mark. Things never take off as fast as you think they will, no matter how good the idea.

[Impact Your Life]

We are a Faith-Based Non.Org. ( Impact Your Life ). We do Presentations on Drugs,Alcohol and Gang Prevention. We go local and abroad. We are in need of Finacal Assistance. thanks Gary Wagner/Founder

[DENNIS ALLSOP..]

I WAS EMPLOYED BY LUDWIG AS AN ENGINEER FOR THE BUILD UP OF HIS 20 YEAR LEASE OF JAPANS EX NAVAL SHIP YARD AT KURE WHERE THE WORLDS FIRST REAL SUPER TANKERS WERE BUILT WITH ALL USA MATERIALS 1954 ERA. LUDWIG WAS A MISER TO HIS EMPLOYEES. I SHOULD WRITE MY OWN EXPOSE OF HIS WASHINGTON PAY-OFF CONNECTIONS STARTING VIA HIS NORFOLK US MARITIME YARD AND T-2 TANKERS...A LONG STORY RENTAL OF KURE WAS 1$ PER YEAR.....1951 ERA.

[Lee Arnett]

Daniel Ludwig is one of the greats.