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.”

Archimedes using a lever to move the world
Archimedes lever, from Mechanics Magazine, published in London in 1824

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.

Jack Butcher Diagram on Digital Leverage
Jack Butcher’s Diagram of 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.

Metcalfe's Law
Diagram of Metcalfe’s Law

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.

Develop Leverage

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.

  1. Some concepts in this blog post came from the extended tweetstorm of Naval Ravikant:

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Book Review: Developing My Life

The book, Developing: My Life is about the life of real estate developer William “Bill” Zeckendorf Jr. He was a pioneer who helped revitalize neighborhoods in New York and Santa Fe, New Mexico.

He developed many New York projects until 1987, when the stock market crashed and left him in a terrible financial situation. After that, he moved to Santa Fe, New Mexico, where he continued real estate development. In Santa Fe, he was involved in community affairs with universities, hospitals, performing arts, and more.

Bill’s strength and focus was in structuring the project, which means envisioning a project, buying the land, choosing an architect, securing financing, hiring contractors, and placing a team that would follow through.

This book talks a lot about generations. His father, William Zeckendor Sr. was one of the biggest and most famous developers in the United States. His two sons have a billion-dollar real estate development business. His grandchildren are almost all involved in real estate.

Real estate development is a craft where the most common path to get in is by apprenticeships through family businesses. It is tough to get into the business because you need a lot of capital, expertise, and connections.

Development is slow, and having many projects under your belt might take decades. This book helps you identify some patterns and learn from someone who was once the most active developer in New York—one of the world’s most sophisticated markets. I recommend this book to people who want to improve their judgment on real estate development or better understand how cities get built.

Bill’s life story is full of warning tales. It demonstrates how someone so knowledgeable in real estate can make small fortunes in many projects but lose their shirt when a deal goes sour or when the market dries up. In the last chapter, “Summing Up,” Bill opened up on what happened to him and his father, explaining the concept of “developer’s disease.”

“After suffering with my father through the demise of his company and personal bankruptcy, I was determined never to let that happen to me. Still, many years later, I, too, succumbed to what ultimately took him down. I call it developer’s disease.

Developer’s disease is a rare but highly contagious condition that afflicts certain developers. They hire the best architects. Their projects are the most admired. They’re financially very successful. They start with one project at a time. Then one project grows into another and another until they have many projects—some would say too many—underway. They begin to take on the most difficult projects, not just to put up buildings but remaking whole neighborhoods. Their goal is no longer making money; it’s being a savior. And they are treated royally for their pains. Based on their sterling records, financial institutions rush to provide money, and investors clamor to partner on their projects. And then, just as these developers are riding high, invincible, a deal goes sour or the market turns, and their luck runs out. Developer’s disease mows them down.

That’s pretty much what happened to me. After a cautious start in the 1970s, by the middle of the 1980s, I was the busiest developer in New York City, with a full plate of deals in progress and a full-blown, if undiagnosed, case of developer’s disease…

…Were I to make my career over, I might undertake fewer projects, juggle fewer balls, and steer clear of personal guarantees. But I wouldn’t for a second choose another field. I can’t think of anything more challenging, more satisfying, more frustrating, and more fun than real estate development.”

Favorite quotes:

“Bill would chase a deal, secure financing, and then pore over the plans with the architect. But as soon as the first shovel hit the ground, he moved on to the next deal.”

“One of the challenges in a renovation is something most people don’t think about: you have little control over the construction workers. When a new building goes up, construction proceeds in an orderly fashion, floor by floor. The floors’ sides remain open, so you can readily see who’s doing what, and where and when. But in renovations, workers are hard to track; they are all over the building at any given time. We found that some of them were hiding in rooms, literally sleeping on the job.”

“These things happen: projects that look good on paper for one reason or another don’t pan out.”

“Big is key for turning around a decaying neighborhood. A small building won’t change anything; the infusion of high-quality new apartments must be sufficient to upgrade the available housing stock.”

“As a further amenity—one not offered before in a New York apartment building—the one and two-bedroom units were laid out so they could be combined easily into larger apartments. This provided to be an effective marketing tool, and designing interiors so the apartments could be readily joined became a Zeckendorf trademark.”

“For me, the thrill of developing was not in watching a building go up: I seldom spent any time on job sites, leaving construction supervision to my project managers. My passion was putting together the deal. I loved every aspect of it: finding a property, assembling a site, securing financing, hiring an architect, and working on the plans. Once we broke ground, I was happy to turn over day-to-day supervision, only stepping back in if a problem arose or we needed more financing.”

“Most developers like to hold on to commercial buildings, leasing out the office space as an ongoing source of income. However, I didn’t want to be a landlord any more than I wanted to be a hotelier and preferred the business model of our residential condos: sell off the individual units as quickly as possible and get out.”

“With apartment sizes ranging from studios to two bedrooms, the Vanderbilt was aimed at younger buyers. To attract this market, we put in a state-of-the-art health club with a swimming pool, sauna, and basketball and squash courts.”

“Building apartments near a hospital center is good for business: doctors welcome the convenience, and buyers find it reassuring to have a top-flight medical care close at hand.”

“Big projects take more time and money and involve more parties. All of that ups the ante. In executing the four biggest projects of my career, I discovered the many ways a project could go right—or horribly wrong.”

“The terms were stiff, however, and we had to make personal guarantees on the loan. I always tried to avoid personal guarantees: if you put up personal assets as collateral and the project runs into trouble, you risk losing your assets.”

“Negative opinions come with the territory: developers automatically get a bad rap because what we do inevitably means change.”

“A complicated project can easily take ten or more years to come to fruition, exposing the developer to uncontrollable changes in market conditions.”

“The key to a successful assemblage is to keep your intentions quiet. You don’t want to tip your hand and have other developers swoop in and tie up parcels you’re after. Nor do you want the owners of the lots to jack up the prices, or rent-controlled tenants to stick you up for exorbitant relocation fees.”

“And we were a full-service organization, not merely developing our own properties as a managing partner with equity but also offering our expertise as project managers.”

“Between New York and Santa Fe, I had more than a dozen projects in the works when the stock market crashed in 1987. I was leveraged to the hilt, and it was only a matter of time before I ran aground.”

“Unless a developer has very deep pockets or a large portfolio of properties, leverage is the only way to finance a deal. I seldom financed a project alone. Having multiple partners allowed me to share the risk, but also meant sharing the returns. And often, it meant taking my money out to invest it in my next venture before I could reap the profits.”

“Inevitably, if a project is going to make a big impact on a community, somebody is bound to oppose it.”

“I learned a long time ago not to assume that anything is impossible.”

“And while my father and I usually had half a dozen or more projects underway simultaneously, my sons concentrate on one or two buildings at a time.”

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