The most important business lesson I've ever learnt
Give me a lever long enough and a fulcrum on which to place it, and I shall move the world. - Archimedes
During my time in Vietnam I decided to read The Almanack of Naval Ravikant, a collection of lessons from Naval Ravikant, a modern-day philosopher who, like me, built a career in hi-tech as an entrepreneur and investor.
The most important lesson I took from Naval also happens to be the most important business lesson I’ve ever learnt, the importance of building leverage.
The easiest way to think of leverage is a means to increase output. Output can be measured in time, money, products, reach, etc.
At the end of the day we all have 24 hours in the day so the only way we can build wealth and have a bigger impact on the world is through leverage.
Leverage can be built using labor (the most common form of leverage), capital, software, media, or better business models and/or processes.
Labor is the easiest but worst form of leverage. If I run a coffee shop I can hire someone to work in the kitchen and the overall output of the coffee shop will increase.
The reason labor is the worst form of leverage is because finding, recruiting, managing, training and supporting staff comes with a wide range of challenges. On top of the proxy challenges of working with people is the fact that generally speaking individuals can only add so much leverage. A coffee shop employee can only provide so much productivity to the business. The law of diminishing returns is also a factor that will fight against you.
One of the reasons top software engineers get paid so much is because of the high leverage they can bring to the business. A superstar software engineer could write code which makes an enterprise like Google hundreds of millions of dollars over a decade.
We all take advantage of this form of leverage. A mother will hire a cleaner once a week to help keep the house clean while the mother works, or spends time with the kids. The overall “output” of man-hours dedicated to keeping the house organized and the kids happy goes up.
Capital is another common form of leverage. Taking a mortgage to buy a property is a form of leverage. You may put 20% down and the rest of the cash needed to purchase the property is provided by the bank. Someone with just a few tens of thousands of dollars can all of a sudden be in control of hundreds of thousands of dollars of wealth through the power of financial leverage. Of course this comes with risk and uncertainty.
The two most powerful forms of leverage are software and media. Let’s start with media since it’s the easiest to understand.
When I say media, I’m referring to online content. Online content can take the form of YouTube videos, eBooks, courses, etc. Even this newsletter is a form of online content.
The reason online content is such a great form of leverage is because once the piece of content has been created and published, it becomes an asset with unlimited potential to provide a return.
In the screenshot above you see the lifetime count of views for a YouTube video I published on the 27th April 20. Over 2 years later the video continues to provide value to viewers, and helping to expose my agency’s brand to more people.
My two Udemy online courses, which in total took about 4 days of my time to create, continue to generate revenue each month.
These digital assets provide value to the market even while I sleep, and at scale.
Established content creators are reaching millions of people each month through content they created years ago. This is leverage.
Software is the gold standard of leverage because, like media, software has the potential to create massive value at scale while not being a commodity.
Anyone with a few hundred bucks can create a YouTube channel, but building software which provides actual value to the market is a different story. The no-code movement is changing this and sooner or later code, for the most part, will be commoditized, but that’s a topic for another day.
Software is unique in that the cost to serve each additional user is insignificant. This allows software businesses to work at scales never seen before in history.
Even the world’s most popular consumer brands like Macdonald’s and Coca Cola will never have the reach of businesses like Google and Facebook.
So how am I building leverage?
Since this newsletter is already very long I’m just going to leave you with a bullet list of some of the ways I’ve been building leverage over the last few years. I will most likely expand on some of these items in future newsletters.
I shifted from being a freelancer to running an agency and hired a business analyst to help me serve the agency’s clients —> Labor-based leverage.
I’ve been automatically investing into the S&P 500 index since 2019 —> Capital-based leverage.
I’ve recently started firing legacy clients which don’t fit the vision of my agency, this will allow us to provide a better service to ideal customers and make the business more scalable —> better business model and processes.
I recently started the process of developing a SaaS product —> Software-based leverage.
I’m building a YouTube channel —> Media-based leverage.
So how are you building leverage? Hit reply and let me know.
Until next time.
- Justin