The secret to scale a startup by leverage factors

According to Naval Ravikant who I greatly admire, there are 3 forms of leverage you can apply to your own skills, which are:

1. Labor - this form of leverage is easy to understand. Have people working for you will increase your output
2. Money - again an easy one to understand. Use capital to do more.
3. Products with no marginal cost of replication - yeah, I know, this one is a mouthful. The idea of no marginal cost of replication is how you make a significant impact by having the ability to replicate your work output at no significant cost. Think of books, movies or even pieces of code. These were written/filmed/coded once but can be applied a multitude of times without the initial cost of creating them initially.

Having taken some time to think about this incredible piece of insight, I tried to apply this model to the founder perspective. Think about the 3 forms of leverage as power multipliers that can impact the success/failure of a startup.

Let's start with labor. All investors know that a startup is as strong as it's team. While initially this is the founders team, that is definitely not the long terms plan. In this case, the ability of a founder to attract and recruit smart and talented people to their company can easily help the company scale. Here is one such example: While one of the founders is a very good sales person, she can't sell to more than 20 clients a month. To scale this up, she would need to hire additional sales people so they in turn can get help get new clients signed up. The challenge here is you need to convince people to tie their time with your vision.

Money is a very easy but dangerous form of leverage. Having money for marketing events, advertising, paying head hunters to get top talent or outright buying smaller startups makes running a company much easier. However, that is a short term solution that needs to translate into better revenues and profits down the road since no company should keep losing forever. The challenge here of course is that you need people to give you that money in order to spend it.

Last and my personal favorite is the 0 cost replication leverage. I like to think of this as a disconnect between the amount of input and output of the effort. To achieve this, the founders need to figure out how the cost of each additional clients is reduced over time, getting to the point where onboarding new clients is almost a zero cost with almost all the revenue transferring directly to the net profits. A good example of this are SaaS companies that build a server based product that can serve many clients using the same resources. Defining the challenge here is a bit hard but it would be in finding such a product that can scale in revenue without linear scaling of the associated costs.

As you can see, these forms of leverage apply to the startup ecosystem and experienced investors can usually estimate a startup success potential by checking the boxes on these leverage factors.