The Universal Law of Leverage

Saturday, October 10, 2008

Statistics suggest that most successful startup founders have three failures under their belt before they make it big. It doesn't have to be that way. While nothing can replace hard-earned experience, people can and do learn from other people's mistakes. I'm a firm believer that a couple of simple (in hindsight) lessons can significantly increase the overall success rate. In this article I want to talk about leverage. I think that in at least half the failures I've seen (my own as well as others), misunderstanding the mechanics of leverage played a key part. First, let's take the cat out of the bag:

The probability of you getting leverage in a given situation is
inversely proportional to how much you need it.

This isn't a philosophical statement at all. It is a universal law of nature (probably from the sociology realm), and is as real as gravity, conservation of energy, or, to give a slightly more relevant example, supply and demand in economics. It applies to countries, businesses, and people. If you absolutely need a defense ally to keep your enemies at bay, you're probably not going to get one. If you need a partner to successfully distribute your software to customers, none will be in sight. And, to use the infamous dating analogy, if you're really desperate to find love, you'll have to keep waiting.

The inverse of this also tends to be true. If you're perfectly capable of defending your borders on your own, you'll have dozens of countries pledging support. If your software sells just fine on it own, potential distributors will barge down your door. And if you already have a partner or are perfectly happy staying single, you'll have plenty of opportunity to get dates. (This last part hasn't been true for me. There are exceptions to every rule.)

This is a fairly simple concept, and yet, every day people start companies with business plans that depend on cooperation of key suppliers, or outside funding, or a chain of other highly unlikely events. The reason, I think, is psychological. People don't want to believe this simple truth, because it makes things hard. So they go on living the way they lived, waiting for their big break.

Big Breaks

"But wait a minute!", I hear you say. "People do get big breaks!" Yes, they do. People win lotteries left and right too. It's just extremely unlikely that it's going to be you. But even the big breaks that we see happen around us probably aren't big breaks at all.

The first problem, is that most people that appear to have gotten a big break, actually didn't. They went through months, or years, of grinding away, until they started seeing signs of success. Then they had their break - at precisely the time when they didn't really need it anymore.

The second problem, is that most breaks aren't actually big. They're little, welcome pieces of luck that occasionally come your way. They help, but they don't propel you into the sky, they just temporarily help you get a little higher. The trouble is that once you get one or two of these, you'll keep designing your business to depend on more. And while you can (and probably will) get a few pieces of luck, the probability that you'll get twenty breaks in a row until you finally hit it big is infinitesimally small.

Learning To Fly

The good news, is that leverage is like gravity. When you first understand gravity, you'll probably get discouraged from ever attempting to fly. But with a lot of careful thinking and hard work, you can use gravity to your advantage to propel you into the stratosphere.

There is a lot of careful balancing involved. It's ok to depend on getting leverage, but you have to make sure you don't depend on it before the time is right. You'll have to get the first little taste of success without any leverage whatsoever. Set up the proverbial lemonade stand, so to speak. Once you sell some lemonade, you'll get a tiny bit of leverage - you'll be able to open a pretty good bank account, or even may be get a small loan. You'll buy more lemons. Make more sales. You'll then be able to get some key ingredients at wholesale prices, so you can scale a little better. More profits. You'll open another stand. And just when you're about to figure out how to scale out the whole thing, you'll get a call from Safeway. "Could you be our lemonade supplier?"

But think of what would happen if you depended on the call from Safeway on day one.

Comments?

If you have any questions, comments, or suggestions, please drop a note at coffeemug@gmail.com. I'll be glad to hear your feedback.