Looking for Leverage

All Things Venture #086

I was on a call with a founder earlier this week, and he said something simple but profound. He was describing the architecture of his product, and explaining how he’s been able to ship so much code with so few engineers. He said, “we leverage protocol to drive efficiency in our system. Once we’ve integrated to the protocol layer, we can easily replicate integrations that mirror the protocol.” It was an extremely brief part of our hour long conversation, but it stuck with me because the reality is that in venture, and in business, broadly we’re all looking for different forms of leverage. Take for instance this very newsletter. I started it nearly three years ago during the pandemic as a way to connect with founders and the broader tech/VC industry after the world shut down. Today it’s a form of one to many communication where I can share my thoughts broadly with a wide range of people whose opinion I respect and value. I learn a lot from this newsletter. I get feedback from people smarter than me. I reconnect with old friends and colleagues, and rather than having to meet with every single person individually, over coffee, over dinner, or at a happy hour - I get to spend a few minutes (okay, let’s be real sometimes it can be a few hours) writing, reflecting, and sharing all of the things I’ve recently learned at once. Instead of thirty, thirty minute one on ones, I spend thirty minutes having 300 one on ones. That’s leverage.

Here’s another example from a fantastic book I’m reading called “Merchants of Debt” by George Anders. It’s about the rise of private equity firm, and LBO pioneer KKR. This specific quote isn’t about a KKR deal in particular but it does illustrate the power of leverage of a different form:

“In 1981, Simon’s group brought a greeting card company, Gibson Greetings, from RCA Corporation for $80 million, putting up just $1 million in equity capital and borrowing the rest of the purchase price. Within three years, Wesray sold stock in Gibson to the public at $290 times the price it had paid, producing a $290 million windfall for Simon and his fellow investors. That headline making gain, coupled with KKR’s relentless rise, turned heads on Wall Street.’’

290x. A 561.91% return in 3 years. Those are video game numbers. Those are “I win capitalism numbers.” Those are my kids' kids’ kids’ will have their college tuitions paid for numbers, all because of leverage. All because, at least at the time, you could lever up your dollar 79 times, to the point where $1 million dollars worth of equity, could effectively become $80 million.

I think leverage is important to understand because they are the tipping points in business (and competition generally) that can allow you to win. I also think that there are business models, and businesses that naturally have leverage baked in. Three categories that come to mind are businesses that deal with media, money, or technology. It’s not by accident that the 5 largest US companies’ (i.e Apple, Microsoft, Google, Amazon, and Berkshire Hathaway) all directly in this manner. These are some of the largest, most profitable companies in the world and they make money off of money, money off of media, and money of tech. Said another way - they make money off of things they create once, and re-distribute ad nauseum.

I wanted to write this quick post because A) I haven’t written in a few weeks and B) because it was one of the moments at work where you feel like you get smacked in the face a little bit, and see the world a tiny bit clearer. It was one of those moments where you have a marginally greater understanding on how business works, and how to think strategically about the game at hand. So in any event, if you’re thinking about starting a business, or a side-hustle, or even trying to pick a career - think about where there’s leverage that already exists, and where there’s leverage that you can create yourself. Think about how you can do something once and it’s used 1,000 or 10,000 or 100,000 times. Think about skills that will enable leverage. Think about how something can become repeatable, scalable infrastructure that works whether you are directing the process from your WFH setup, or on a yacht in the Aegean (Am I manifesting my summer vacation ?? lol idk, you tell me).

In any event leverage is critical in VC backed startups, and traditional businesses alike. Correct use and understanding can mean the difference between catastrophic failure or inimitable opportunity. Leverage is a tool to understand, to deploy, and to corral to your advantage. If you don’t, who knows? Maybe you miss out on your own $290 million dollar opportunity.