Everyone is fighting over labor and capital
Our brains aren’t evolved to comprehend new forms of leverage
Nivi: Why don’t we talk a little bit about leverage?
The first tweet in the storm was a famous quote from Archimedes, which was, “Give me a lever long enough and a place to stand and I will move the Earth.”
The next tweet was, “Fortunes require leverage. Business leverage comes from capital, people and products with no marginal costs of replication.”
Naval: Leverage is critical. The reason I stuck in Archimedes quote in there is… normally I don’t like putting other people’s quotes in my Twitter. That doesn’t add any value. You can go look up those people’s quotes. But this quote I had to put in there because it’s just so fundamental. I read it when I was very, very young and it had a huge impression on me.
We all know what leverage is when we use a seesaw or a lever. We understand how that works physically, but I think what our brains aren’t really well-evolved to comprehend is how much leverage is possible in modern society and what the newest forms of leverage are.
Society overvalues labor leverage
The oldest form of leverage is labor, which is people working for you. Instead of me lifting rocks, I can have 10 people lift rocks. Then just by my guidance on where the rock should go, a lot more rocks get moved than I could do myself. Everybody understands this because we’re evolved to understand the labor form of leverage, so what happens is society overvalues labor as a form of leverage.
This is why your parents are impressed when you get a promotion and you have lots of people working underneath you. This is why when a lot of naive people, when you tell them about your company, they’ll say, “How many people work there?” They’ll use that as a way to establish credibility. They’re trying to measure how much leverage and impact you actually have.
Or when someone starts a movement, they’ll say how many people they have or how big the army is. We just automatically assume that more people is better.
You want the minimum amount of labor that allows you to use the other forms of leverage
I would argue that this is the worst form of leverage that you could possibly use. Managing other people is incredibly messy. It requires tremendous leadership skills. You’re one short hop from a mutiny or getting eaten or torn apart by the mob.
It’s incredibly competed over. Entire civilizations have been destroyed over this fight. For example, communism, Marxism, is all about the battle between capital and labor, das kapital and das labor. It’s kind of a trap.
You really want to stay out of labor-based leverage. You want the minimum amount of people working with you that are going to allow you to use the other forms of leverage, which I would argue are much more interesting.
Capital has been the dominant form of leverage in the last century
The second type of leverage is capital. This one’s a little less hardwired into us because large amounts of money moving around and being saved and being invested in money markets, these are inventions of human beings the in last few hundred to few thousand years. They’re not evolved with us from hundreds of thousands of years.
We understand them a little bit less well. They probably require more intelligence to use correctly, and the ways in which we use them keep changing. Management skills from a hundred years ago might still apply today, but investing in the stock market skills from a hundred years ago probably don’t apply to the same level today.
Capital is a trickier form of leverage to use. It’s more modern. It’s the one that people have used to get fabulously wealthy in the last century. It’s probably been the dominant form of leverage in the last century.
You can see this by who are the richest people. It’s bankers, politicians in corrupt countries who print money, essentially people who move large amounts of money around.
If you look at the top of very large companies, outside of technology companies, in many, many large old companies, the CEO job is really a financial job. They’re really financial asset managers. Sometimes, an asset manager can put a pleasant face on it, so you get a Warren Buffet type.
But deep down, I think we all dislike capital as a form of leverage because it feels unfair. It’s this invisible thing that can be accumulated and passed across generations and suddenly seems to result in people having gargantuan amounts of money with nobody else around them or necessarily sharing in it.
That said, capital is a powerful form of leverage. It can be converted to labor. It can be converted to other things. It’s very surgical, very analytical.
If you are a brilliant investor and give $1 billion and you can make a 30% return with it, whereas anybody else can only make a 20% return, you’re going to get all the money and you’re going to get paid very handsomely for it.
It scales very, very well. If you get good at managing capital, you can manage more and more capital much more easily than you can manage more and more people.
You need specific knowledge and accountability to obtain capital
It is a good form of leverage, but the hard part with capital is how do you obtain it? That’s why I talked about specific knowledge and accountability first.
If you have specific knowledge in a domain and if you’re accountable and you have a good name in that domain, then people are going to give you capital as a form of leverage that you can use to then go get more capital.
Capital also is fairly well understood. I think a lot of the knocks against capitalism come because of the accumulation of capital.
Create software and media that work for you while you sleep
Product and media are the new leverage
Naval: The most interesting and the most important form of leverage is this idea of products that have no marginal cost of replication. This is the new form of leverage.
This was only invented in the last few hundred years. It got started with the printing press. It accelerated with broadcast media, and now it’s really blown up with the Internet and with coding.
Now, you can multiply your efforts without having to involve other humans and without needing money from other humans.
This podcast is a form of leverage. Long ago, I would have had to sit in a lecture hall and lecture each of you personally. I would have maybe reached a few hundred people and that would have been that.
Then 40 years ago, 30 years ago, I would have to be lucky to get on TV, which is somebody else’s leverage. They would have distorted the message. They would taken the economics out of it or charged me for it. They would have muddled the message, and I would have been lucky to get that form of leverage.
Today, thanks to the Internet, I can buy a cheap microphone, hook it up to a laptop or an iPad, and there you are all listening.
Product leverage is where the new fortunes are made
This newest form of leverage is where all the new fortunes are made, all the new billionaires. The last generation, fortunes were made by capital. That was the Warren Buffets of the world.
But the new generation’s fortunes are all made through code or media. Joe Rogan making 50 to a 100 million bucks a year from his podcast. You’re going to have a PewDiePie. I don’t know how much money he’s rolling in, but he’s bigger than the news. The Fortnite players. Of course Jeff Bezos and Mark Zuckerberg and Larry Page and Sergey Brin and Bill Gates and Steve Jobs. That is all code-based leverage.
Combining all three forms of leverage is a magic combination
Now, the beauty is when you combine all of these three. That’s where tech startups really excel, where you take just the minimum, but highest output labor that you can get, which are engineers, and designers, product developers. Then you add in capital. You use that for marketing, advertising, scaling. You add in lots of code and media and podcasts and content to get it all out there.
That is a magic combination, and that’s why you see technology startups explode out of nowhere, use massive leverage and just make huge outsize returns.
Product and media leverage are permissionless
Nivi: Do you want to talk a little bit about permissioned versus permissionless?
Naval: Probably the most interesting thing to keep in mind about the new forms of leverage is they are permissionless. They don’t require somebody else’s permission for you to use them or succeed.
For labor leverage, somebody has to decide to follow you. For capital leverage, somebody has to give you money to invest or to turn into a product.
Coding, writing books, recording podcasts, tweeting, YouTubing, these kinds of things, these are permissionless. You don’t need anyone’s permission to do them, and that’s why they are very egalitarian. They’re great equalizers of leverage.
As much as people may rail on Facebook and YouTube, they’re not going to stop using it because this permissionless leverage, where everyone can be a broadcaster, is just too good.
The same way you can rail upon Apple for having a slightly closed ecosystem in the iPhone, but everyone’s writing apps for it. As long as you can write apps for it, you can get rich or reach users doing that, why not?
The robot army is already here—code lets you tell them what to do
I think of all the forms of leverage, the best one in modern society … This is glib. This is a little overused. This is why I tell people learn to code. It’s that we have this idea that in the future there’s going to be these robots and they’re going to be doing everything.
That may be true, but I would say that the majority of the robot revolution has already happened. The robots are already here and there are way more robots than there are humans, it’s just that we pack them in data centers for heat and efficiency reasons. We put them in servers. They’re inside the computers. All the circuits, it’s robot minds inside that’s doing all the work.
Every great software developer, for example, now has an army of robots working for him at nighttime, while he or she sleeps, after they’ve written the code and it’s just cranking away.
The robot army is already here. The robot revolution has already happened. We’re about halfway through it. We’re just adding in much more of the hardware component these days as we get more comfortable with the idea of autonomous vehicles and autonomous airplanes and autonomous ships and maybe autonomous trucks. There’re delivery bots and Boston Dynamics robots and all that.
But robots who are doing web searching for you, for example, are already here. The ones who are cleaning up your video and audio and transmitting it around the world are already here. The ones who are answering many customer service queries, things that you would have had to call a human for are already here.
An army of robots is already here. It’s very cheaply available. The bottleneck is just figuring out intelligent and interesting things to do to them.
Essentially you can order this army of robots around. The commands have to be issued in a computer language, in a language that they understand.
These robots aren’t very smart. They have to be told very precisely what to do and how to do it. Coding is such a great superpower because now you can speak the language of the robot armies and you can tell them what to do.
Nivi: I think at this point, people are not only commanding the army of robots within servers through code, they’re actually manipulating the movement of trucks, of other people. Just ordering a package on Amazon, you’re manipulating the movement of many people and many robots to get a package delivered to you.
People are doing the same things to build businesses now. There’s the army of robots within servers and then there’s also an army of actual robots and people that are being manipulated through software.
From low to high specific knowledge, accountability and leverage
Naval: The tweetstorm is very abstract. It’s deliberately meant to be broadly applicable to all kinds of different domains and disciplines and time periods and places. But sometimes it’s hard to work without a concrete example. So let’s go concrete for a minute.
Look at the real estate business. You could start at the bottom, let’s say you’re a day laborer. You come in, you fix people’s houses. Someone orders you around, tells you, “Break that piece of rock. Sand that piece of wood. Put that thing over there.”
There’s just all these menial jobs that go on, on a construction site. If you’re working one of those jobs, unless you’re a skilled trade, say, a carpenter or electrician, you don’t really have specific knowledge.
Even a carpenter or an electrician is not that specific because other people can be trained how to do it. You can be replaced. You get paid your $15, $20, $25, $50, if you’re really lucky, $75 an hour, but that’s about it.
You don’t have any leverage other than from the tools that you’re using. If you’re driving a bulldozer that’s better than doing it with your hands. A day laborer in India makes a lot less because they have no tool leverage.
You don’t have much accountability. You’re a faceless cog in a construction crew and the owner of the house or the buyer of the house doesn’t know or care that you worked on it.
General contractors get equity, but they’re also taking risk
One step up from that, you might have a contractor, like a general contractor who someone hires to come and fix and repair and build up their house. That general contractor is taking accountability; they’re taking responsibility.
Now let’s say they got paid $250,000 for the job. Sorry, I’m using Bay Area prices, so maybe I’ll go rest of the world prices, $100,000 for the job to fix up a house, and it actually costs the general contractor, all said and done, $70,000. That contractor’s going to pocket that remaining $30,000.
They got the upside. They got the equity but they’re also taking accountability and risk. If the project runs over and there’s losses, then they eat the losses. But you see, just the accountability gives them some form of additional potential income.
Then, they also have labor leverage because they have a bunch of people working for them. But it probably tops out right there.
Property developers pocket the profit by applying capital leverage
You can go one level above that and you can look at a property developer. This might be someone who is a contractor who did a bunch of houses, did a really good job, then decided to go into business for themselves and they go around looking for beaten down properties that have potential.
They buy them, they either raise money from investors or front it themselves, they fix the place up, and then they sell it for twice what they bought it for. Maybe they only put in 20% more, so it’s a healthy profit.
So now a developer like that takes on more accountability, has more risk. They have more specific knowledge because now you have to know: which neighborhoods are worth buying in. Which lots are actually good or which lots are bad. What makes or breaks a specific property. You have to imagine the finished house that’s going to be there, even when the property itself might look really bad right now.
There’s more specific knowledge, there’s more accountability and risk, and now you also have capital leverage because you’re also putting in money into the project. But conceivably, you could buy a piece of land or a broken-down house for $200,000 and turn it into a million dollar mansion and pocket all the difference.
Architects, large developers and REITs are even higher in the stack
One level beyond that might be a famous architect or a developer, where just having your name on a property, because you’ve done so many great properties, increases its value.
One level up from that, you might be a person who decides, well, I understand real estate, and I now know enough of the dynamics of real estate that rather than just build and flip my own properties or improve my own properties, I’m gonna be a massive developer. I’m going to build entire communities.
Now another person might say, “I like that leverage, but I don’t want to manage all these people. I want to do it more through capital. So I’m gonna start a real estate investment trust.” That requires specific knowledge not just about investing in real estate and building real estate, but it also requires specific knowledge about the financial markets, and the capital markets, and how real estate trusts operate.
Real estate tech companies apply the maximum leverage
One level beyond that might be somebody who says, “Actually, I want to bring the maximum leverage to bear in this market, and the maximum specific knowledge.” That person would say, “Well, I understand real estate, and I understand everything from basic housing construction, to building properties and selling them, to how real estate markets move and thrive, and I also understand the technology business. I understand how to recruit developers, how to write code and how to build good product, and I understand how to raise money from venture capitalists and how to return it and how all of that works.”
Obviously not a single person may know this. You may pull a team together to do it where each have different skill sets, but that combined entity would have specific knowledge in technology and in real estate.
It would have massive accountability because that company’s name would be a very high risk, high reward effort attached to the whole thing, and people would devote their lives to it and take on significant risk.
It would have leverage in code with lots of developers. It would have capital with investors putting money in and the founder’s own capital. It would have labor of some of the highest quality labor that you can find, which is high quality engineers and designers and marketers who are working on the company.
Then you may end up with a Trulia or a RedFin or a Zillow kind of company, and then the upside could potentially be in the billions of dollars, or the hundreds of millions of dollars.
As you layer in more and more kinds of knowledge that can only be gained on the job and aren’t common knowledge, and you layer in more and more accountability and risk-taking, and you layer in more and more great people working on it and more and more capital on it, and more and more code and media on it, you keep expanding the scope of the opportunity all the way from the day-laborer, who might just literally be scrappling on the ground with their hands, all the way up to somebody who started a real estate tech company and then took it public.
Naval Ravikant: “Forget rich vs poor, white-collar versus blue-collar. it’s now leveraged vs un-leveraged”,