Mental Models #6: The Power of Leverage

What's up, everyone. This is Alex Lieberman, co-founder, and Executive Chairman of Morning Brew. Welcome back to Founder’s Journal, my personal audio diary, where I give you, the business builder, the tools you need to think better in order to build better, whether that's building a business, a team, or a new product. We're doing things a little bit differently this week. We dropped our third-ever mini-series, which means you got two episodes on Monday, two episodes Wednesday, and two episodes today. You're listening to episode six in the series, the last of the mini-series, but also be sure to check out today's Classic episode as well. This week's theme is Mental Models. We're going to talk about some of the most powerful tools you can use to sharpen your thinking, prioritizing, and decision-making. Many of these tools have been made famous by leaders like Dwight Eisenhower and Elon Musk. And today I am talking about the power of leverage. Let's hop into it. 

Two types of leverage

Leverage is a multiplier. Here's how I define it: For one unit of input—that input could be time, connection or money—with leverage, you get way more than one unit of output. And leverage comes in all different forms. I think Naval Ravikant put it best. There are two major groups of leverage: permissioned, leverage and permissionless leverage. And I'm going to talk about both groups and the types of leverage that sit under them. 

Permissioned leverage

Let's start with permissioned leverage. Permissioned leverage is the oldest form of leverage. And if you know what leverage is, and you think of examples of leverage, odds are that you're thinking about some sort of permissioned leverage. As the name implies, this type of leverage requires someone else's permission. And within permissioned leverage, I think there are three types. There is capital leverage, there is operational leverage, and there is knowledge leverage. Capital leverage is what most people think of when they think of the word leverage. Something dealing with money or getting lent money. So for example, if I want to buy a house for a million dollars, I don't have to pay the full million dollars today if I don't want to. I just have to put down say a hundred thousand dollars and a bank will cover the rest of it in the form of a mortgage. That is capital leverage. A hundred thousand dollars of my own money with leverage gave me the ability to buy a house worth a million dollars. So bringing it back to permissioned leverage, this type of leverage required permission by the bank to give money in order for me to buy the house. Same thing goes for operational leverage. Operational leverage is simply labo. Hiring someone else or several others to do a job that you don't want to or need to do. So for example, by hiring an executive assistant, I don't personally have to spend say three hours a day on email and my calendar. That is operational leverage. By having a team of people, a founder or a CEO can accomplish a mission of a business, a mission that is far bigger than what they can accomplish on their own without doing most of the work, because they have operational leverage. Management is another way of saying operational leverage.

Operational leverage is one of the oldest forms of leverage. It is still highly effective, but it is not infinitely scalable. One of the reasons for that is, again, because it is permissioned like Naval said. To gain labor leverage or operational leverage, you need to convince someone to work for you. You need to convince them to stay working for you. And they only work for you some percentage of the time since by definition, a job isn't 24/7.

There's one last type of permissioned leverage that I think a lot of people overlook, but it's super powerful. And that is knowledge leverage. Knowledge leverage is leverage that is created by surrounding yourself with people who possess information that you don't. Another way of saying this is your network or your closest confidants. This is actually one of the most unfair advantages that I've had as a founder of a business. By having access to people that are experts in their domain and have become experts over decades of acquiring knowledge and experience, this type of leverage saves years of time. So I can become really smart about direct-to-consumer brands by talking to Nick Sharma about everything he's learned about the last decade. I can become really smart about real estate by talking to Chris Powers about everything that he's learned building up a nine-figure portfolio of real estate assets. I can become really smart about living a purposeful life by talking to Jay Shetty about his life's work and his time as a monk. Knowledge leverage is super underrated.

Permissionless leverage

Okay, so those are the three types of permissioned leverage, as Naval refers to it. Now, let me talk about permissionless leverage. Permissionless leverage is a newer phenomenon thanks to technology. This is leverage that doesn't require someone else's permission to gain that leverage. You need permission from a bank to give you a mortgage. You need permission from a person to work for you. You need permission from an expert to share their biggest career learnings. Permissionless leverage is the type of leverage that is infinitely scalable, and it works for you while you sleep. Permissionless leverage is the newest type of leverage, and it's only been made possible by the internet. And there are two types of permissionless leverage: software leverage and media leverage.

So let's go through software leverage, it's simple. Code is the language of computers, hardware, and robots. And now that we have the ability to speak that language to through coding and programming, we can have this army of computers work for us 24/7, 365 days a year. And the best part of it is not that it just creates incredible leverage, but it's also highly scalable. Once you teach a computer to do something, it becomes virtually free for that computer to do whatever that thing is for customer 10, customer 100, and customer 10,000. This is why Marc Andreessen famously wrote that software is eating the world. It's why nine of the 10 largest public companies in the world are tech companies. And it's why software businesses trade at higher multiples versus pretty much every other type of business. Software leverage is massive and it's wildly scalable. Then there's one other type of permissionless leverage. And this is the type that I am quite familiar with and spend a ton of time thinking about when building a media business. Because of the advent of social networks and social media, as well as low cost tools like Substack, MailChimp, Canva, etcetera. Every individual with a device and the internet has the ability to broadcast their message to the world as if they are a TV or media company that has thousands of employees.

Leverage in action: media

Here's a simple example. I spent 15 minutes recording this podcast in my office. That 15 minutes is now featured on a podcast feed that's broadcasted to tens of thousands of followers. That 15 minutes has also been edited and is now featured on YouTube for Morning Brew subscribers, or for people who search “leverage” to watch. That 15 minutes has been cut into 10 pieces of derivative content that I can share with my 157,000 followers on Twitter, my 98,000 followers on LinkedIn, or to my followers on Instagram and TikTok. Think about how powerful that is: the ability to get in front of hundreds of thousands of people, just with 15 minutes of my time, some scripting, and a camera. That is media leverage.

So to sum it up, leverage is the process by which one unit of input—time, money or knowledge—is turned into many units of output. So to sum it up, leverage is the process by which one unit of input—time, money or connections—is turned into many units of output. Leverage can be permissioned or permissionless. And your job is to understand these different types of leverage so that you can make use of them in your career and magnify all of the knowledge you accumulate and the smart choices you make as a professional. 

As always, thank you so much for listening to Founder’s Journal and specifically this episode on the power and types of leverage. If you enjoyed, make sure to tune in to all six episodes that this week are part of Founders’s Journal’s mini-series on Mental Models.

Also make sure to pound the subscribe button, whether it's on Apple, Spotify, or the podcast player of your choice. That is the number one way we grow the show. And finally, if you do subscribe, make sure to check out Founder’s Journal content on Morning Brew’s YouTube channel. Go to YouTube, search Morning Brew, and click on our channel. There, you'll see an entire playlist of Founder’s Journal videos, like why Ethereum matters, how to overcome imposter syndrome, and how we sold Morning Brew for eight figures. Our show is produced and engineered by Dan Bouza. Our associate producer is Bella Hutchins. Brian Henry is our executive producer. Alan Haburchak is Morning Brew’s director of audio. Holly Van Leuven is our fact checker. Noah Friedman is our video producer and editor. And I'm your host, Alex Lieberman. Thanks again for listening and I'll catch you next episode.