My previous understanding of leverage was shallow and superficial. I didn’t comprehend the different forms of leverage, nor their respective characteristics. I didn’t understand how to access leverage, and which forms of leverage were available to me. Most importantly, I didn’t realize how I could use leverage to increase the impact of my decisions and achieve my ambitions with less time, less effort, and fewer resources.
This essay will explore the concept of leverage and will discuss how you can implement leverage in its various forms to achieve your desired outcomes.
Understanding Leverage
What Is Leverage?
“Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.” – Archimedes
The idea of leverage comes from physics and has three parts: input, lever, output. Using a lever, you can amplify your input force to produce an output that is disproportionately greater.
Remember playing on a see-saw as a child? Placing your weight on one side caused the other side to go up. This is leverage in its most basic form.
Leverage in the physical sense has been used by humans for centuries. The first recorded use of a lever dates back to 5,000 BC in the ancient Middle East. Levers were prominently used by the Egyptians in constructing the Great Pyramids. The first documented explanation of the concept is attributed to Archimedes, who designed the pulley system, allowing sailors to use leverage to lift heavy objects onto ships. Given our longstanding history of using physical leverage, leverage in this sense is intuitive to us.
Why Is Leverage Useful?
At its core, leverage creates a disconnect between input and output.
The idea of leverage can be applied to domains beyond physics – like on the impact of our work, creations and decisions. By applying leverage, we can generate more value out of the same amount of time, energy, and resources. To use an aphorism, leverage creates “more bang for your buck”.
What can we conclude from this?
That as individual contributors, we want all of our work, creations and decisions to be as levered as possible.
That raises two questions: What types of leverage are there? How do we utilize them?
Types Of Leverage
I will examine four major types of leverage. They are categorized based on whether they are permissioned or permissionless.
Permissioned Leverage: A form of leverage that requires a third-party’s permission to access.
1) Labor
2) Capital
Permissionless Leverage: A form of leverage that is freely accessible to anyone.
3) Software
4) Media / Content
Labor
The oldest form of leverage is labor. Labor leverage is achieved when people are working for you. If you have people working for you, they can execute on your ideas, creations and decisions. As a result, your output is greater as compared to working by yourself.
Labor leverage is paradoxical – it is the most over-valued form of leverage, but the least efficient. Humans have evolved to understand labor leverage well. A heuristic we often use to judge success is the amount of people who work for someone. That is why people are impressed when you “lead a team”. We intuitively understand that the more labor leverage a person has, the more power, wealth and influence they have. This results in people competing for labor leverage.
But labor leverage has its drawbacks.
Recruiting great talent is expensive, time-intensive, and energy draining. Managing people requires leadership skills, is emotional and messy, and is hard to scale. Most importantly, labor leverage requires permission. You need to convince people to come work for you – which can be done through numerous means such as a salary, equity, an opportunity to learn, etc. Regardless, you need their permission. So, you want the minimum amount of labor that allows you to pursue your desired outcome.
Capital
Capital is the second type of leverage. It has been the dominant form of leverage used to become wealthy over the past 100 years. Think of Wall Street, bankers, private equity firms, and hedge funds – essentially people who deploy and move large amounts of money.
The reason capital is so powerful as a form of leverage is that it scales.
Let’s assume you spend a month creating and diligencing an investment idea. You invest $1,000 of your own money, and the investment returns 10x. Your total return is $10,000.
Now let’s assume you launch a fund, raise $100,000 of other people’s money and realize that same 10x investment return. Assuming you collect a percentage of the fund’s upside – 20% is common – your total gain is $200,000. The time, energy and judgement you used to arrive at the investment decision remains constant, but the payout is 20x greater.
If you are good at managing capital, you can manage a lot of it. It is much easier to manage more capital than it is to manage more people.
But, like labor, capital requires permission. Unless you are already wealthy, you need to convince other people to trust you with their capital.
Seeking Permission
Permissioned leverage (labor and capital) will be provided to people who display perceived judgement.
Leverage magnifies the impact of our decisions. With leverage a good decision becomes great, a poor decision, becomes terrible. Leverage, then, should flow to people who have the best judgement and decision-making process.
But perception matters.
Society needs to perceive that if it provides you with permissioned leverage that your judgement will produce positive outcomes. Building this brand requires taking risks in public and being accountable for the outcome. This is a double-edged sword: it allows you to take credit when things go right but deal with the pain publicly when you are wrong. Over time if you display good judgement publicly, permissioned leverage will flow to you.
Software
Software is the newest form of leverage, and potentially the most powerful. This is where all the new billionaires, like Jeff Bezos, Larry Page, and Jack Dorsey are made.
Coding is an incredibly powerful form of leverage. It can be deployed and distributed at scale with almost no additional marginal cost. People can interact and use this technology even when you are on vacation or sleeping. If you are exceptional at creating software, your leverage is high and your output is infinite. One engineer at Google created Gmail. One engineer wrote the code for what became Instagram.
Part of what makes software leverage powerful is that it is permissionless. With labor, someone needs to follow you. With capital, someone needs to give it to you. But learning to write software is available to anyone.
Media / Content
Media (or content) is the last of the four major types of leverage. It has evolved and been disrupted the most.
Media leverage started with the printing press hundreds of years ago. You could produce one book and scale up production via the printing press. To spread your ideas, you no longer needed to be at lecture halls, universities or in the public square. However, scaling up was slow, capital intensive, and required permission from owners of printing infrastructure, publishers and other gate keepers.
Over the last century, media leverage has accelerated dramatically with the advent of broadcast technology. You could send your message to millions of homes through TV and radio. But it was still not egalitarian. The owner of the broadcasting infrastructure needed to give you permission to use it. As a result, they often controlled the narrative and the economics.
The internet has changed that.
Podcasts, social media, online writing, YouTube videos, etc. have transformed media into a form of permissionless leverage. You can create a podcast with a cheap microphone and distribute it to millions of people. Joe Rogan’s podcast is bigger than traditional news and he is a multi-millionaire because of it. The “Call Her Daddy” podcast blew up in less than a year. Seth Godin has become a prolific author, advisor and entrepreneur through leveraging writing online. Even your local influencers are leveraging media to grow their wealth and build their brand.
Becoming Levered
One type of leverage is typically not enough to achieve outsized results. The most powerful results occur when you combine different types of leverage. That is when massive impact is seen. The best examples of this are the tech giants. When you combine labor leverage (product designers, engineers, sales team, etc.) with capital leverage (public markets, venture capital), software (the algorithms working 24/7) and media (TV shows, ads, branding, etc.) you end up with trillion-dollar companies.
As individual contributors, we need to seek as many types of leverage as possible. When we become leveraged workers, we can out-produce non-levered workers exponentially.
Work In Progress
It is no secret that I am trying to become as levered as I possibly can be. Writing online is one avenue I am using to achieve this end.
In the knowledge-economy, we create impact with our minds. Our ideas and decision-making processes are the most valuable form of currency we have. When I write online, people can access my knowledge, ideas and how I think at scale. The content I create can be accessed by anyone, anywhere, at anytime. It allows me to control my brand. It is my attempt to build permissionless leverage while I continue to publicly hone my judgement in order to gain access to permissioned leverage.
Building and combining different types of leverage isn’t easy or quick. But the power of becoming levered is worth the cost.
Notes, Inspirations & Additional Readings:
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Thanks to Charlotte, Josh and Eric for their review and feedback.