What if I told you that a single F1 car costs more than this entire house to build? And yet, every race weekend, drivers slam these multi-million dollar machines into walls at 200 plus miles an hour. And some teams will spend up to $400 million a year, knowing they're probably never even going to win. Is this some sick twisted game that billionaires like to play by burning their cash to just feel alive again? Or is there an actual economic incentive to owning, sponsoring, and running an F1 team? I wanted to find out. So today we're digging into one of the most expensive, exclusive, and fascinating business operations in all of sports, Formula 1. Let me take you back to May 19th, 1996 in Monte Carlo. A heavy rain has just let up as Michael Schumacher takes his place at pole position. When the green lights go out, chaos erupts. Within the first lap, three cars had crashed. Five laps later, eight cars were now out of the race, and they continued to drop like flies throughout the 75 laps. both into the walls and into each other. By the end, there were only three cars left to cross the finish line. And this was happening all while the team owners and sponsors watched their multi-million dollar investments get smashed to bits all day while sitting on their yachts in the marina. But that's the risk these teams take every race weekend. So, the question is, why would anyone think that this 200 mph financial roller coaster would be a smart business decision? The 1996 Monaco Grand Prix shows just how high stakes the world of Formula 1 is. But behind the crashes in Champagne is one of the most complex businesses in the world. And to understand if a guy like me could actually start a team of my own, we need to follow the money. So, first, let's take a look at the Formula 1 Group, the commercial business behind the entire sport. In 2024, the F1 Group generated $3.65 billion in revenue. And keep in mind that this doesn't have anything to do with money coming from the teams. This is purely revenue driven through the F1 brand. So, where does this $3.65 $65 billion even come from? Well, like the perfect pit stop, F1's revenue has four key components. First off, we have broadcasting, which makes up the largest chunk and sits at about 33% of the total revenue, which is roughly 1.2 billion. This includes TV networks and streaming platforms around the world paying huge fees for the rights to show the races on their channels. The next chunk of revenue is driven by race hosting fees, which makes up about 29% of the overall pie. race circuit owners or local governments will pay anywhere from $15 to $60 million per year for the privilege of hosting a Grand Prix. And lately, with the newer venues that are backed by government money, like the races that we've seen in the Middle East, are often paying the highest fees. Next, we have global sponsorships, which make up for another 15 to 20% of the overall revenue. These are the brands we see plastered all over the racetracks like Pirelli, Hinekin, and Aramco, who all pay big money to be associated with the F1 brand. The remainder of the revenue comes from hospitality packages, merchandise licensing, and F1's digital platforms like F1 TV. But here's the interesting part of all this. Formula 1 doesn't actually keep all of the money that they generate. In fact, about 38% of the total revenue, which is around $1.2 billion in 2023, gets distributed across the 10 teams. This distribution is governed by the conquered agreement, which is a hush hush contract between F1, the teams, and the sports governing body, the FIA. But that distribution isn't exactly an everyone gets 10% of the pie type situation. No, because that would be way too easy. Instead, the money is distributed by how well each team does at the end of the season and also how long your team has been in Formula 1. So, a team like Ferrari, who has been in the sport the longest, gets to add additional historical bonuses to their distribution. Which means that if you're Ferrari or Mercedes, you might get over $150 million in prize money, while a team at the back of the pack might only get 60 to 70 million. And that sounds like a lot until you realize how much it actually costs to run one of these teams. You see, prior to 2021, there were actually no rules on how much an F1 team could spend. So, the bigger teams could just dump as much money as possible into their team, hoping that they would win. And that number often got up to as high as $400 to $500 million with the budget being split across a few key things in each team. The first and obviously most expensive was the car itself. Hundreds of engineers work on the cars and they spend millions on research and development to gain even a tiny performance advantage. Every piece of the car is purpose-built and every car that comes off the line is a prototype, often with oneofone components. Included in the car are the actual power units, more specifically the highly complex, technically superior F1 hybrid engines. If you're a team like HOS, who buys the engine from a manufacturer like Mercedes or Ferrari, you can expect to spend about $15 million per year for your engine. Then we have the people it takes to run the team. Most of the top teams will employ anywhere from 800 to 1,200 people. While that number sits a little closer to 3 to 400 at the smaller teams, you also have to factor in logistics to transport your traveling circus all over the world across 24 races and shipping replacement parts and upgrades from the factory to the team throughout the year. So, as you can imagine, those costs can easily spiral out of control. And we haven't even mentioned the guys that are willing to jump into these death traps and drive them at their maximum speed, the drivers. Rookie contracts are typically around $500,000 per year. And these salaries can run as high as $55 to $60 million per year for drivers like Lewis Hamilton and Max Vstappen. In fact, the spending war got so out of control that in 2021, Formula 1 had to hit the brakes by rolling out a budget cap. For the first time in the sports history, the teams were limited on how much they could spend. It started at $145 million in 2021 and has since then dropped to $135 million per year in spending. But now you might be thinking, how are teams like Red Bull supposed to even keep the lights on if nearly 40% of their budget cap is spent on their driver salary? And we haven't even mentioned the top executives like Christian Her and their pay. Well, that is where we need to read the fine print. Within the budget cap, there are some special callouts that provide some wiggle room for the big dogs to continue spending more than everybody else. Specifically, things not included in the cost cap are expenses involving the driver's salary, the three highest paid executives, the marketing costs, and a few other expenses. So, while the cost cap has helped level the playing field somewhat, the biggest teams still have significant advantages through their established infrastructure and the ability to spend unlimited amounts in the uncapped areas. Which brings us to a very interesting question. How do smaller teams even compete? Well, as with any business challenge, the smaller you are, the more creative you have to be. Let's look at the HOS F1 team as an example. When they entered F1 in 2016, they took a completely different approach. Instead of building everything themselves, they bought as many of the car components as the rules would allow from Ferrari. This model allowed them to operate with less than 250 employees when they started, which is a fraction of what the top teams have. Other teams like Williams have survived through technical partnerships, drivers bringing in sponsorship money, and becoming incredibly efficient at allocating cash across the business. So, what does that mean for a guy like me? If I were a billionaire with a lot of money just burning a hole in my pocket, could I just set up shop and start an F1 team? Not exactly. First, to even get a spot on Pit Row, you need to pay an anti-dilution fee of about $200 million. And this goes directly to the existing teams to compensate them for reducing their share of the prize money we talked about earlier. Then you'll need the facilities to actually run the team. This includes your factory, design offices, racing simulators, and possibly a wind tunnel if you've got the cash. That will run you another $100 to $200 million. To build your first car, you're looking at about $100 to $150 million. And definitely don't forget the staffing, equipment, and operating expenses you're going to need on hand for at least 2 years before you get any significant prize money. That all means that before you've even seen your car roll onto a racetrack, you've spent nearly half a billion dollar on this thing. This explains the drama surrounding the Andredy Cadillac bid to join F1. Even with American Racing royalty and General Motors backing them, the new team was forced to make multiple concessions throughout the negotiations, including removing Mario Andredy himself from the team. And it's even reported that they were forced to pay a $450 million anti-dilution fee to the other teams. It's like the world's most exclusive country club raising their membership fee as soon as a new member application is dropped at the door. But we have to remember that this isn't just purely about racing anymore. This is about protecting a multibillion dollar franchise. And now that we know how teams can spend the money, let's talk about how they actually make money because surely these people aren't just burning hundreds of millions of dollars a year just for the sake of racing or for fun. There has to be some business incentive. First off, the prize money that we talked about earlier. In case you haven't noticed, that doesn't cover much of anything in this sport. The real money comes through sponsorships. At the top, you have your title sponsorship packages that give the sponsoring company naming rights to the team. These contracts can reach as high as $50 to $100 million per year. For example, it's reported that Oracle pays Red Bull $100 million per year as their title partner. Then major sponsorships in the best positions on the car can cost between 10 to 30 million per year with smaller logos ranging from 1 to5 million and the smallest of the stickers running around half a million dollars. But what most people don't realize is that the true value of sponsoring an F1 team doesn't actually come from seeing your logo zip around a track. Instead, it's all about what happens behind the pit. This is the Paddock Club, and it's F1's exclusive hospitality area where companies bring clients, make deals, and network with other major corporations. A single weekend pass will cost you thousands of dollars, and many business deals worth millions are made there over race weekends. This is especially valuable for these B2B companies like tech firms, consulting companies, and financial services who aren't marketing to everyday consumers like you and me, which just adds to the lore of the F1 weekend. By sponsoring a car and getting to close deals worth hundreds of millions of dollars, all while watching your investment zip around a track at 200 mph, that $50 million sticker doesn't look too bad anymore. But this still brings us back to our big question. Can an F1 team be profitable or are they just burning cash for fun? Well, historically, most teams operated at a loss, mainly supported by wealthy owners or automotive manufacturers who just viewed this whole thing as one big marketing expense. But with the new budget cap in place, the landscape has adapted and teams are now finding ways to turn their marketing side projects into profitable, somewhat sustainable businesses. In fact, in 2023, the Mercedes F1 team reported an 83.8 million pound profit. And it's reported that Ferrari's F1 operation is believed to be profitable, as well as McLaren Racing that went from a9 million pound loss in 2022 to a profit of over 12.9 million in 2023. Which means that between the budget cap, increased revenue from F1's audience growth, and better management, some teams have made profitability a possible outcome, but it's definitely not guaranteed. Besides profitability, the jump in F1 viewership has led to a lot of changes around the Paddic. Since Liberty Media bought F1 in 2017 and expanded their viewership through new races and most notably Netflix's docue series, Drive to Survive, every team in the Paddic has seen their valuation skyrocket. With the average value of an F1 team in 2024 sitting at nearly $2.31 billion and Ferrari and Mercedes at the top of the list worth 4.78 billion and 3.94 billion. Even Little Williams Racing, which was acquired by Dorton Capital in 2020 for about $180 million, is now valued at nearly $1.24 billion. That's an almost 600% return on an investment in just a few years. And what looked like a risky bet on a struggling backmarker team now seems like financial genius. This also explains why the teams are so against adding new teams in and upsetting the current status quo. They've worked hard to transform the massive expense that is motor racing into tangible, valuable franchise assets. Looking towards the future, F1 is pursuing multiple new factors of growth, specifically F1 TV, gaming, and social media collaborations, which are meant to bring in a younger audience all over the world. They're also experimenting with self-promotion of their own races like the Las Vegas Grand Prix, which would allow F1 to capture all the event related revenue rather than just the hosting fee. Yet the everpresent question of is Formula 1 actually a good business remains. And like many questions in business, the answer is it depends. For Liberty Media, this has been a phenomenal investment. After purchasing Formula 1 for $4.6 billion in 2017 at a valuation of $8 billion, they've almost quadrupled their investment with the most recent valuation of F1 coming in at $30 billion in value. For the individual teams themselves, it's a little more complicated. The biggest teams with manufacturer backing or wealthy owners can leverage F1 marketing, technology development, and brand building beyond just direct profitability of the team. Smaller independent teams face a tougher road. But with the budget cap and growing valuations, even they can potentially operate sustainably and build some equity value, even if annual profits remain slim. So, could I start an F1 team? Technically, yes. But not without close to a billion dollars in cash, years of building and development, and a brutal fight against a system that is almost built to keep newcomers out. Because Formula 1 isn't just for motorsport, it's becoming a masterclass in turning burning cash into building empires. These teams have transformed from passionate racing projects into global entertainment franchises worth billions of dollars. And while I might not be joining the grid anytime soon, understanding the business that makes those milliondoll crashes possible makes the races that much more enjoyable to watch. If you thought this was interesting, check out this video on venture capital. Another world where failing 80% of the time somehow makes billionaires. [Applause]