Leverage: Doing More With Less

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“Give me a lever long enough, and a place to stand, and I will move the earth.”
– Archimedes

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“Leverage” is one of those concepts that tends to be interpreted as being more complex than it actually is. The simplest way to define leverage might be “the ability to do more with less”. Or, re-worded to include the requisite dose of corporate jargon, “the ability to generate more output without increasing the number of inputs”.

Though the concept of leverage is most commonly associated with the use of debt to finance the acquisition or operations of a company, there are countless other forms of leverage that we ought to be aware of, given that all of us have to contend with the reality of finite time and resources.

Instead of asking what else they should be doing to achieve their goals, entrepreneurs and investors might instead consider asking: “How can I magnify the impact of what I’m doing, without doing more of it?”

We begin our exploration of leverage by presenting a non-exhaustive list of 10 different forms of it, and conclude with a few ideas around practical application.

10 Different Forms of Leverage

(1) Debt as a Form of Leverage: Commonly referred to as financial leverage, this describes one’s ability to generate better returns without the requirement for additional equity.

(2) Cost Structure as a Form of Leverage:  Commonly referred to as operating leverage, this describes a cost structure that is largely fixed in nature, and as a result doesn’t need to scale 1:1 with each new dollar of sales. For example, when Intuit sells you its newest version of QuickBooks or TurboTax, it doesn’t need to hire an additional employee to service your needs as a newly acquired customer.

(3) Delegation as a Form of Leverage: When you hire people to do tasks that in turn free you up to work on the truly important things. For example, you might delegate the processing of payroll or the approval of every expense request to your Controller, to provide yourself with enough time to focus on strategy, culture, or capital allocation.

(4) Capital as a Form of Leverage: Investor Jeremy Giffon once told a story of an investor who rather flippantly invested $25,000 into his start-up, only to spend almost no time thinking about the company in the years that followed. Upon the sale of that company four years later, this passive investor earned more in exit proceeds than Jeremy did, despite him toiling away for four years to build the company to a point where it became an attractive acquisition candidate. As Jeremy so succinctly stated “I guess it is capitalism, not laborism”. Investor and entrepreneur Naval Ravikant echoed a similar sentiment when he said “You’re not going to get rich renting out your time. You must own equity – a piece of a business – to gain your financial freedom.” Of the two primary factors of production (capital and labor), capital tends to demonstrate much higher levels of leverage.

(5) Medium as a Form of Leverage: This refers to the ability to reach more people than you otherwise would with the same amount of time and effort. Contrast spending one hour recording a podcast that will be downloaded by 10,000 people, versus trying to reach those same 10,000 people through a series of in-person seminars.

(6) Zero Marginal Cost as a Form of Leverage: One of the reasons why enterprise software is considered to be among the world’s best business models is because you can sell a new “unit” of software at a marginal cost that is close to zero. This provides software companies with the ability to scale exponentially, at least in theory. Contrast this to a legal or accounting firm, whose growth is destined to forever remain linear: For each new customer that they charge $500/hour, they have to pay an accountant or a lawyer $250/hour to actually perform the work.

(7) Technology as a Form of Leverage: This can and does take countless forms, but part of the fundamental promise of technology is the ability to do more with less: Contrast sending 1,000 emails with mailing 1,000 physical letters. Or, to use a more recent example, utilizing an AI tool to build an app in minutes that otherwise would have taken a team of engineers days or weeks to build.

(8) Networks or Channels as a Form of Leverage: The company that I purchased in 2014 had an internal sales team of only three people, and naturally those three people could cover only a finite number of customers and prospects at any given time. However, our company also had a partnership with the industry’s largest ERP provider, who boasted a sales team of 100+ people. By integrating our two products together, and by offering something of value to their customers, their sales team sold our product on our behalf, and as a result we were effectively able to reap the benefits of a 100+ person sales team without assuming any of the traditionally associated costs.

Another example closer to home for many start-ups might be to partner with an established e-commerce brand (Amazon & Shopify are two that come to mind) to provide them with access to millions of potential customers without the need to build their own internal distribution network.

(9) “Productivity” Leverage: Type-A overachievers the world over have forever sought out ways to accomplish more within any given 24-hour period. Though there are some “brute force” ways to accomplish this (things like sleeping less, eating meals at your desk, or eliminating all unscheduled whitespace in one’s calendar), such tactics don’t provide leverage, nor do they prove to be particularly sustainable over the long run. Instead, high-leverage activities like adequate sleep, exercise, journalling, or meditation typically allow their practitioners to squeeze more productivity out of a given workday than would otherwise be possible in their absence.

(10) Knowledge, Expertise, or Experience as a Form of Leverage: An experienced CEO might be able to make a strategic decision in one day that might necessitate weeks of analysis by her less experienced peer. An investor who is deeply experienced in a given industry might be able to make an investment decision on the basis of 3 deeply insightful questions, whereas her less experienced peer might require 100 or more questions to arrive at the same conclusion (if she’s able to arrive at that conclusion at all). Knowledge and experience compound over time, especially when that knowledge and experience is accumulated within a tightly defined context (within a particular industry or geography, for example).

The Link Between Risk and Return

With many forms of leverage, the promise of higher returns or more output usually comes with the requirement to assume additional risk. For example, a lot of debt in a capital structure can amplify returns to shareholders during good times, but could put the company’s survival at risk during bad times. The same is true for operating leverage: When the company is growing, we are blessed with a cost structure that is largely fixed in nature, but when the company is shrinking (especially if it’s shrinking quickly), we are cursed by that very same thing.

The forms of leverage that I find most interesting are those where there isn’t an obvious positive correlation between risk and return (or, if there is one, there is an asymmetric relationship between the upside and the risk required to achieve it): Though they’re not without their costs, several of the examples above seem to present a relationship between risk and return that is less linear. These include delegation, mediums, networks, and expertise, among others.

Examples of Practical Applications

To prevent this blog post from being an entirely academic and intellectual exercise, below are a few practical examples of how leverage can be used as a decision-making framework, of sorts. In each example I lean on my own experience as a Software CEO, though these applications certainly aren’t limited to any single industry:

• Prioritizing Feature Requests: Every software company that I’ve ever worked with is consistently bombarded with a never-ending list of new features and functions requested by customers and prospects. While a “brute force” solution may be to hire more developers to build all of these features (a conclusion fraught with peril, as I explain in another post, The Biggest Temptation of a Software CEO), the higher leverage solution is to “ruthlessly prioritize”, and focus only on those features that you can “build once, sell many times”: That is, features and functions that tend to be widely requested, come with an inherent willingness-to-pay, and are reasonably uniform in their scope and implementation. (Form of Leverage: Zero Marginal Cost).
  
  
• Focus or Diversify?: Though of course there are going to be exceptions to this, in small and perpetually resource-constrained companies, more often than not I’ve observed that the benefits of focus tend to outweigh the benefits of diversification. In their pursuit of growth, small businesses may attempt to implement a “brute force” strategy of trying to sell as many products to as many markets as possible. However, often a company’s propensity to say “yes” to everything inadvertently serves as the primary impediment to achieving the growth that they seek. A higher leverage alternative might instead be to focus on becoming the most formidable competitor within a smaller and more well define niche. As Jim Collins wrote in Beyond Entrepreneurship 2.0: “One of the most effective strategies for a small to mid-sized company is to focus on one particular market or product line and, within that area of focus, be significantly better than the competition. We have seldom seen companies suffer because they were too focused, whereas we have seen quite a few companies flounder because they were not focused enough.” (Form of Leverage: Knowledge, Expertise, or Experience).  

• Buy vs. Build vs. Partner: Whenever a company wants to release a new product, enter a new geography, or sell into a new vertical market, consciously or otherwise they have to answer the question of whether to a) Do it themselves; b) Partner with another company already doing the thing of interest; or c) Acquire another company already doing the thing of interest. Though of course no single option is superior to the others across all circumstances, it’s easy to default to the idea that everything needs to be done in-house, an idea that can sometimes be of the “brute force” variety. In some cases, however, higher leverage options are available and should be considered: These can take the forms of channel partnerships, white-labelling an existing product (developed by another company) within your own, or benefitting from the services and reach of a systems integrator or value-added reseller (Form of Leverage: Networks and Channels).

• Augmenting Your Customer Support Team: The average customer support team is drowning in customer problems and inquiries, and in my experience, ~80% of such inquiries are of the routine and repetitive variety. As your customer base grows and the incoming ticket count increases, a “brute force” solution might be to hire a new customer support rep for every 20 new customers acquired. A higher leverage option, however, might be to train any number of widely-used AI tools on your internal product & knowledge database, and have a chatbot respond to the more routine requests, allowing your existing team of reps to focus on the ~20% of customer issues that are truly complicated or important (Form of Leverage: Technology).

• Hiring: Within the world of software development, there exists the concept of the “10x engineer”: That is, a single person who is so skilled at their craft that they are at least 10x more productive than the majority of their peers. I’m not suggesting that you turn every hiring process into a unicorn hunt targeting the 10x employee, but I am suggesting that certain hires are higher leverage than others (as an aside, my favorite example of a 10x engineer is Chris Sawyer, who single-handedly designed, programmed, and created the popular 1999 video game, Roller Coaster Tycoon. Just imagine asking your engineering team today how many people would be required to build that same game from scratch!). (Form of Leverage: Knowledge, Expertise, or Experience).  

Conclusion

Hopefully by now you appreciate that the idea of leverage goes far beyond the money that you owe to the bank. By understanding and applying different forms of leverage—whether through technology, networks, expertise, or other means—we can come closer to achieving the exponential results that we seek without proportional increases in effort or risk.

I’ll conclude with a final quote from Naval Ravikant: “It doesn’t take money to make money, it takes leverage to make money”.

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