“Give me a lever long enough and I’ll move the earth.”
As Archimedes realized and clearly explained about 300 BC, leverage allows you to greatly expand the power you are applying. In other words, for the lever and its fulcrum you can convert a small amount of input force into a large amount of output power.
This is one of the paradigms for the business world (one of the many useful metaphors of physics and chemistry), especially in the 21st century technology industry, where indexal growth is an ideal rather than an exception.
In traditional business and financing, the term leverage is used to refer to the use of debt financing to extend the influence of most shareholders’ own capital. However, this is just one of the many examples of ball amplification in a business context.
Naval Ravikant, one of the leading startup entrepreneurs, investors and thinkers in the world, talks about the three main sources of leverage that can help you to broaden the impact of your actions and decisions – people, capital and technology.
1. Labor as leverage
The first type of leverage is one of the oldest in the world – labor. Of course, you can achieve a lot more if you work together as a team to realize your ideas than if you were working on your own.
Important to realize and not so intuitive part that the sum of the whole is more than its parts. If you have experienced experts in your team with the necessary domain knowledge, they will be able to quickly develop and expand your ideas and actions without linearity. This is especially true for complex, innovative projects that require creativity rather than simple, manual work, where the effect is more linear.
The downside of labor as leverage is that it is very difficult to manage people effectively and human time and effort, in general, is quite expensive. This is why the biggest challenges that startup founders face revolve around the initial startup team.
2. Capital as leverage
Money and physical resources are the second type of leverage that you can use to make your activities more effective.
We mentioned that labor is expensive – having access to capital can solve this problem. In fact, this is exactly what startups do when it comes to raising funds. They are trying to gain access to capital that will allow them to buy time and effort.
With money, however, you can gain access not only to labor, but also to other productive resources – land, factories, computers, etc.
This kind of leverage was the center of the industrial revolution – if your team has access to production facilities and access to capital, you can achieve much more.
The problem with capital is that you have to persuade people to give it to you, so very few young entrepreneurs have access to it.
3. Digital technology as leverage
Code and media do not have the same problem, and this is why Naval calls it unauthorized leverage.
The extremely low marginal cost in the digital world means that anything digital you create can reach billions of people cheaply. As a result, digital technology is the main source of wealth for the creators of the new rich-information age.
4. An audience as a social connection and leverage
We can add another source of leverage to the list – social leverage. Being well connected to your industry can give you much easier access to labor or capital and even initial access to technology (meaning you can engage in technological trends like blockchain in front of the general public).
Moreover, if you have a social status and a sufficient audience, you can greatly influence people’s economic behavior.
Such leverage companies try to buy when investing in influential marketing.
Of course, this list is not exhaustive, but it does explain well how the main way to make a big impact in the world is to use different sources of leverage to expand the impact of your actions.
“Leverage is a power factor for your judgment.” – Nava Rabikanta