This post is an expansion on a framework conceptualized by Naval Ravikant. Naval is a serial entrepreneur and philosopher king. He co-founded Angelist and has become an extremely successful venture capitalist, with investments including smash hits like Twitter and Uber. In May of 2018, he released tweet storm titled “How to Get Rich (Without Getting Lucky)” that stamped into my mind an unforgettable framework on wealth creation. Naval has plenty to say on the topic, and you can read the full thing here, but the part I have yet to stop thinking about is the concept of leverage.
“Give me a lever long enough, and I can move the world”-Archimedes
What is Leverage in Business?
I’m not referring to what most call financial leverage (debt). I am talking about a more general kind of leverage that Naval references here:
I would describe it as the ability to take your value proposition and expand its reach to more people, thus creating more customers, profit, and wealth in the process. Naval explains that there are 4 types of leverage: labor, capital, code, and media.
In the traditional business world, there have always been two ways to scale your operation: with more money via debt/investment, or with more labor in the form of employees. Most of the time, one comes with the other. Even today, when a flashy startup raises money, it’s usually so that they can hire more people. Employees are expensive.
John D Rockefeller needed capital so that he could purchase more oil refineries and add to his army of laborers. Andrew Carnegie, Henry Ford, and the rest of the industrial giants needed the same. Long before them, empires needed massive amounts of labor to build out their infrastructure. The Colosseum and the Pyramids were built by slaves and skilled laborers.
In today’s society, labor is treated much, much better than in the old world. However, much of society resents the power of capital. There’s a harsh, but somewhat true quote that goes like this:
“Workers work hard enough to not be fired, and owners pay just enough so that workers won’t quit.”Robert T. Kiyosaki
The 20th century was filled with some of the greatest advancements in human history, but gatekeepers still guarded every industry. In order to break down the door, you had to know somebody or put in a superhuman level of effort and wait your turn. Capital has that effect.
Labor and capital require permission. To get people to work for you or give you money, you need to sell them on your ideas and capabilities. This is why persuasion is such a powerful skill. But even with world class persuasion abilities, you still need an impressive body of work. You need to show society that you’re capable. This is how the world works. It’s possible, but it can take a long time to access these forms of leverage.
The Internet Changes Everything
The internet has flipped this on its head. Don’t get me wrong, it’s still powerful to have people and money behind your efforts. But there are now other paths to attaining leverage. Consider what these examples of new world wealth creation have in common:
Post Malone was an up and coming artist from Texas when he made “White Iverson.” He recorded and released the song online 2 days later and was catapulted into overnight stardom.
Netflix and Blockbuster were competing in the mid 2000s for the movie rental market. Netflix went to Blockbuster looking to sell the company for $50 million. Blockbuster scoffed at them. 15 years later, Blockbuster is bankrupt and Netflix is valued at over $100 billion.
A kid at Harvard built a website that allowed students to connect in a new way. The app quickly became a hit at every college campus in the United States. Mark Zuckerberg moved to Silicon Valley for the summer, where seasoned VC’s got wind of his idea and infused capital behind it. Facebook now has billions of users and Zuckerberg is billionaire.
A 13 year old Canadian boy started posting singing videos on Youtube. He quickly built a following and was discovered by Usher, who would later sign him to a record deal. Justin Bieber is now one of the biggest stars in the world.
In 1994, a hedge fund analyst named Jeff decided to quit his prestigious job to sell books on the internet. For some reason he named his company after a jungle…
I could go on forever….but I am illustrating a point made by Naval:
What Post Malone, Jeff Bezos, and Netflix did would not have been possible before the advent of the internet.
Media as Leverage
People like Justin Bieber got rich because of the way that media has changed in an internet driven society. He posted Youtube videos, which could be immediately consumed by listeners across the world for free and without friction.
To do what Bieber did through Youtube, you used to have to create a demo and burn it onto a CD. Then you’d need to move to LA where you’d have to grovel day and night to get a music industry gatekeeper to listen to it and decide that it was good enough to give you a record deal. That company would then exercise control over your creative process and have the means to exploit you if they so desired.
That CD would then need to be taken to a factory, where an army of factory workers and expensive machinery would need to crank out millions of copies. Next, the record label would have to figure out a way to coordinate the logistics of getting that piece of content into retail outlets across the world. Millions of dollars in marketing spend later, listeners would have had to get in their cars and use gas to drive to the record store, wait in line to buy it, then drive home, where they would need to get out their record player or CD player, insert the disk, and press play in order to finally have access to the content.
Today, artists don’t have to sell themselves to record labels and can take control over their ability to be “discovered.” They are one song away from blowing up, and they now have the ability to build their own communities in a way that would have required capital and permission from record labels to do so in the past.
Content works day and night for you on the internet. Search engines and social platforms are designed to work 24 hours a day to put your art into the hands of those who want it most. Sure, the market is saturated because there is no friction to posting a song on iTunes or Soundcloud. But it has never been more possible for independently produced music to be discovered by fans. This opportunity is also available to filmmakers, writers, and podcast hosts. It has created the rise of the Vlogger and Tik Tok star. Kids used to want to be astronauts when they grew up, now they want to be influencers.
Code as Leverage
Amazon has taken over the world because of code based leverage. The success of their online store has led to a runaway expansion into new business verticals. They so dominated the e-commerce world that they could suddenly command as much capital and labor as they wanted. With investors clamoring to pour money into the retail giant and hourly workers lining up at the doors of fulfillment centers, Amazon has become an example of a company that is utilizing all 4 of Naval’s types of leverage.
Don’t forget about other billionaires like Bill Gates (Microsoft), Larry Ellison (Oracle), or Jack Dorsey (Twitter & Square). All created companies with code based leverage.
Software is eating the world.-Marc Andreessen
Even Elon Musk, who is building businesses in the capital and labor intensive automotive and space exploration industries, earned his initial fortune from PayPal and Zip2. Both were software companies. Tesla’s gigafactories are filled with code powered robots. Some would even argue that the key advantage to Tesla is that their cars are a unique form of software.
Power Has Shifted to the Individual
Ok Sam, I get it-the internet is powerful. Thanks for telling me something I already knew. What does this have to do with me?
Those who can find ways to utilize these new forms of leverage will become exponentially powerful in the next 20 years. People who can create great content and build high leverage products (typically software) have the ability to earn wealth in a way that is unique to the 21st century.
Yes, raising money and hiring dozens of employees is flashy. But what about the person who figures out a way to help accounting firms save 30 hours a week with a piece of niche software? If he could get 10 companies to pay $1000/month for it, he could earn $120k/year in revenue by himself from that one product. It takes work to keep the product up to date and bug free. But once he builds the software, it can exist in countless places all at once. He doesn’t need to build a factory and hire workers to make another one.
The opportunity for individuals and small teams to generate vast amounts of wealth is unprecedented. I don’t think many people have opened their eyes to this yet. Neither does Naval:
Those Youtubers that parents make fun of hold more power in their hands than people realize. Many Youtube channels have over 1 million subscribers. Pewdiepie, a UK based Youtube star, has 105 million subscribers. If just 10% of his subscriber base watches one of his videos, he gets 5x the viewership that CNN (762k) and Fox News (1.4M) average in an entire day, combined. Pewdiepie is bigger than the news…by himself.
How to Take Advantage of This:
Here is my thesis: young people who develop the skills to seize the power of code and media will be the most likely to create wealth in their lifetime. The future of entrepreneurship will be driven by the internet.
11 Skills To Give You an Advantage in an Internet Driven World
-Computer science/software development
-Video, audio, and film production skills
-The ability to hold a long and interesting conversation
-A sense of humor
-Design: particularly digital product design and graphic design
-Mastering software tools like G Suite, the Adobe Suite, Quickbooks for small business, etc…
3 Softer Skills:
-Innovative thinking and idea generation
-The ability to overcome the fear of judgement
The Wild Card
This brings me to the missing link in our ability to take advantage of new forms of leverage. You may have the entire list of the skills above, and then some. But what will you use them to create?
You need to figure out how to build products/services/content around something specific to you. Naval calls this “specific knowledge.” It is “knowledge that you care about.” What keeps you up at night? What can you not get enough of? Is it sports? Helping people with their finances? Teaching math more effectively to people in inner cities? The Smurfs?
Naval explains in this video that specific knowledge cannot be accumulated too deliberately. It comes slowly, through following your own path and doing the things that seem fun to you but weird or boring to others. It is what makes you unique.
If you can combine who you are with skills centered around new forms of leverage, you will become a force to be reckoned with in 2040. There will still be companies that benefit from capital and labor. But, if you focus on developing the ability to use the newest forms of leverage to bend reality to your will, people will probably be lining up to work for you and you won’t have a difficult time getting your hands on capital.
I’ll be putting a lot of my eggs in the code and media basket over the next 20 years. I actually need to do way more than I am now to take advantage of both. The opportunity is everywhere. It will only become more obvious.
Let me know what you think of this expansion on Naval’s framework. Are there high leverage skills I am missing? I’d love to hear your thoughts. Email me at firstname.lastname@example.org