If you trade your time for money, you have a job. Even if you own the company, if your revenue stops when you stop working, you are just a high paid freelancer. To build a scalable business, you must detach your inputs from your outputs. The mechanism for this detachment is Leverage.
Leverage is the use of a small initial investment, credit, or borrowed funds to gain a very high return in relation to one’s investment. While the financial definition focuses on debt, in the modern startup world, leverage is much broader. It is any tool that amplifies your effort.
Archimedes said, “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.” For a founder, finding that lever is the primary strategic task.
The Four Forms of Leverage
#Naval Ravikant famously categorized leverage into four distinct buckets. Understanding which one you are using is critical.
1. Capital: This is the oldest form. You borrow money or raise equity to buy factories or run ads. It requires permission. You have to convince investors or banks to give it to you.
2. Labor: This is hiring people. It is the most common form of leverage for traditional businesses. You hire ten people to do ten times the work. However, managing people is messy and expensive. It also requires permission; people have to agree to work for you.
3. Code: This is the leverage of the software age. You write code once, and it can run for millions of users while you sleep. The marginal cost of replication is zero. It creates massive wealth because it scales without adding headcount. It is permissionless. No one can stop you from writing an app.
4. Media: This is the leverage of the internet age. A blog post, a podcast, or a video can reach millions of people instantly. Like code, it has zero marginal cost of replication. It allows you to scale your influence and sales without a sales team.
High Leverage Activities
#As a founder, you must constantly audit your calendar for leverage.
Sending a single email to a client is a low leverage activity. It has a 1:1 ratio of effort to impact.
Writing a playbook on “how to email clients” for your sales team is a high leverage activity. You do the work once, and it improves the performance of ten people forever.
Building a product feature that eliminates the need for the email entirely is the highest leverage activity. You have used code to solve a labor problem.
The Risk of Amplification
#Leverage is a force multiplier. This means it multiplies your judgment. If your judgment is good, leverage creates massive wealth. If your judgment is bad, leverage destroys you quickly.
If you borrow a million dollars (Capital Leverage) and invest it in a bad product, you go bankrupt faster than if you had just used your savings. If you hire fifty people (Labor Leverage) to execute a flawed strategy, you burn cash at an accelerated rate.
Therefore, as you add leverage to your business, you must increase the rigor of your decision making. You cannot afford to be wrong when you are moving the world.