A lever is a tool used to increase power with low effort. When using a physical lever, you can easily lift things that weigh much more than you —like a car— with minimal effort.
Leverage is the use of tools for your maximum advantage. It can multiply the outcomes from your effort, skill, and judgment. Leverage can help you achieve your life goals like financial independence, creating a movement, or a massive business with fewer competitors.
Archimedes, the most famous mathematician and inventor in ancient Greece, once said:
“Give me a place to stand and a lever long enough, and I will move the world.”
A bicycle is a form of leverage for movement; you can move much farther and faster with it. In this video of Steve Jobs, he explains a study of the world’s species and their ability to move from one place to another. In the study, humans ended up in the bottom half, but if you gave them a bicycle, they ended up #1 in the world. He uses this example to explain: “For me, computers have always been a bicycle for the mind. Something that takes us far beyond our inherent abilities.” Computers are a form of leverage for the mind.
Now let’s go into detail on the types of business leverages from the oldest to the newest.
Labor: It means other people working for you. Labor is the predominant form of leverage since the dawn of man.
Arguably labor leverage is the worst form of leverage. Managing other people is incredibly messy because it requires tremendous leadership skills, and it is hugely competed over.
You want the minimum number of people with the highest output, working with you to use the following forms of leverage that are more powerful and interesting.
Money: It means using money to work for you. It has been around for only thousands of years, so society understands them less well than labor.
This leverage converts to other types of leverage. It scales very well; if you can manage money well, you can handle more money better than manage more labor. It is an excellent form of leverage, but it is hard to obtain because you need to build up a reputation first.
Money has been the predominant leverage for wealth creation in the last century. Those who control the infrastructure of money have benefitted the most.
Products with no marginal costs of replication —media and code— are the newest forms of leverage. They got started with the printing press, and then it grew stronger with broadcast media. Now the internet and code had made this leverage explode.
Media: It means using the internet to spread content through social media, books, blogs, podcasts, or videos to gain influence and power.
A couple of hundreds ago, to spread a message by voice, you had to give a lecture at a University, now you can buy a cheap microphone, a computer and reach millions of people through the internet.
Code: It means programming and using computers to create products and services.
We have an army of robots at our disposal on the internet; we need to learn how to use them. Hence the importance of learning to code to speak their language.
Media and code help create the new fortunes of the world. They are permissionless; you can do it by yourself without the approval of anyone. They even enable labor and money to be more permissionless with the rise of communities and crowdfunding.
The older the leverage, the more time society has had to learn it, thus higher the competition —which you want to avoid. This is why it is essential to invest in the newer ones —digital leverage.
Pick Business Models with Network Effects
When choosing a business model, you should be aware of leverage that arises from network effects.
A network effect is when each additional user adds value to the existing user base. Network effects come from computer networking. Bob Metcalfe, who created the ethernet, famously coined Metcalfe’s Law: the value of a network is proportional to the square of the system’s number of connected users. If a network of size 10 has a value of 1,000, then a network of 100 would have a value of 10,000.
The classic example of network effects is language. Let’s say that there are 100 people in a community. There are 10 languages and 10 speakers per language. Now the community has to incur the cost of translation. If all 100 spoke the same language, it would reduce friction and eliminate the translation cost, thus facilitating value creation.
Let’s say one of those languages is English, and 1 additional person learns English. Now 11 people know English. The next person who wants to learn a new language will probably choose English —the most used language. Then this reason becomes stronger, and eventually, the majority end up speaking English, and the rest of the language will vanish slowly. The network effect is why the whole world will probably speak English or Chinese in the long term —at least as a second language.
The internet is a significant lever, and people who want to communicate on the internet are forced to learn English because it is the most used language. If you don’t know English, you will have a severe disadvantage in your education because there are so many internet resources that have not been translated. On top of that, translations are usually worse than in the original language. If you want to be technically competent in computers, you need to know English because it is the language of the best sources.
In business, network effects often have scale economies: the more you produce something, the cheaper it gets to make it, thus increasing margins, creating barriers to entry and monopolies. An example of scale economics can be Google, which has the biggest market for search and a monopoly.
Technology and media products have zero marginal cost of reproduction: additional consumers add no additional costs. For example, a famous podcaster can have 100 million more listeners without any additional costs.
When thinking about businesses, think about how each additional customer could add value to each other. Pick a business model where you benefit from network effects, scale economies, and low marginal costs.
From Laborer to Real Estate Tech Startup
Now let’s go concrete. The following are examples of how leverage increases in the real estate industry:
- Laborer: Someone orders them around in a construction site to carry things around. A laborer with more leverage uses tools like a bulldozer to gain more power and get paid more.
- General Contractor: They hire and coordinate a team of laborers. They are accountable to the results, thus having more risk if things go wrong but a higher reward than laborers if things go right.
- Property Developer: This might be a general contractor who did a bunch of remodeling, and now they search for run-down places to fix and sell them. They might even raise money from investors. To do this, they need more skills like understanding markets, neighborhoods, government approvals, and more.
- Famous Developer or Architect: They gain a reputation for doing great projects, and that by itself increases the value of a project without much additional effort.
- Urban Real Estate Developer: They build entire master-planned communities like Porta Norte. They need to understand, construction, infrastructure, greenfield development, earth movement, urbanism, market dynamics, marketing, politics, financing, management, architecture, and a bunch of other skills.
- Real Estate Fund: They invest in property developers, real estate developers, hotels, malls, etc. They understand the financial markets, raising money, corporate governance, and real estate. They may not want to manage workers or operate a project.
- Real Estate Technology Startup (aka proptech): They understand real estate, the industry’s inefficiencies, technology, how to recruit developers, write code, build the right product, and raise money from Venture Capitalists. A proptech would combine all types of leverages:
- Labor of the highest output: computer engineers, product managers, and designers.
- Money from venture capitalists and their own.
- Media using the internet for distribution.
- Code to create software.
This venture is a very high risk, high reward that could end up with hundreds of millions or billions of dollars and an IPO.
If you want to be more effective, then you must arm yourself with leverage. Your impact becomes bigger by combining all types of leverages aligned towards a vision.
Ask yourself: Am I skilled in the newer types of leverages? What are my strengths in every kind of leverage? What is my rate in each leverage? Rate them from 1 to 10. Ask the people who know you best how they would rate you in each type of leverage. What came out of my exercise is the following:
It is much easier for me to improve 2 points in code or media rather than 2 points in labor, and it will help me improve my abilities to use newer and less competed types of leverage. I invite you to do this simple exercise.
Reflect on what type of leverage you need in your life. Right now, it is more important for me to learn about media leverage; that is why I have invested in my communication skills by creating my podcast, YouTube channel, and blog. I lead a project that benefits the most from this type of leverage. If I wanted to start a proptech startup or invest in them, I would invest in code leverage.
Make sure you pay attention to the most useful leverage for you right now and create a roadmap.
Learn about leverage to allocate time, money and effort well. It will help you be more effective, recognize trends and how things grow big. As Charlie Munger once said:
“What helps everyone is to get in something that’s going up, and it just carries you along without much talent or work.“
- Some concepts in this blog post came from the extended tweetstorm of Naval Ravikant:
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