Problem: 6
Monday, 08 October 2018

Finding More Leverage

Francis Pedraza
Oct 9, 2018 · Unlisted

Economics is the science of scarcity, and entrepreneurship is the art of overcoming scarcity by finding more leverage. Finding more leverage usually involves solving chicken-and-egg problems with creative, out-of-the-box, non-linear thinking and genius lateral moves.

All of the problems we’ve discussed so far can be solved with more resources, mostly by hiring more great partners. But because partner pay is tied to gross profits, for every partner we hire, we dilute our salaries, which makes the partnership less sustainable and increases the risk of our best partners departing. That’s one of our chicken-and-egg problems. If we solved our problems, our gross profits would go up, and we’d be able to hire more great partners. But without more great partners, it is harder to solve our problems, so our gross profits aren’t going up as fast as we’d like.

Now, in theory, if every partner hire is truly great, then our best partners won’t leave, because as the number of competent problem-solvers in the company goes up, the number of problems in the company will go down, and it will only be a matter of time before gross profits, and thus partner pay, catch up. And to a remarkable degree, that has been the case. The Partner Model has given us 3X leverage already: that is, we’ve got roughly three times the number of partners that we’d be able to afford without it. But The Partner Model hasn’t given us unlimited leverage. We’ve hit a ceiling.

The Explore-Exploit Model For Finding Leverage

And that’s how leverage works. You explore, find more leverage, then exploit that leverage until there’s no more left, then you go back to exploring again, looking for more leverage. Every time you find leverage, it’s like an explosion: the pace jolts forward as things move noticeably faster than before.

In the explore-phase, you’re looking for a weakness in the enemy line. In the exploit-phase, you’re leading a cavalry charge as they break and route. The way-to-be in the exploit-phase is relentless, aggressive and fast. You want to PUSH, push as HARD as you can. The exploit-phase yields to warrior spirit: the reckless Viking berserker or the Samurai in a bushido death-frenzy carry the day. But in the explore-phase, pushing harder is counter-productive. The way-to-be in the explore-phase is quiet, aware and probing. You hold your energy in reserve because there’s nowhere for it to productively go. You’re a seeker, not a warrior. Once you find, then you strike, and pour all your energy in the opening, until it’s fully tapped. Then you go back to scouting.

Seekers & Warriors

This isn’t just an elaborate metaphor, it is an all-too-frustrating reality. It’s frustrating because the higher-up you are in the organizational hierarchy, the more of your time you spend as a seeker, and the less of your time you spend as a warrior. At the bottom of the hierarchy, you’re experiencing minimum-ambiguity and operating within maximum-structure, doing a job. If you want to achieve better outcomes, you can work harder, or make incremental smart improvements. Being a warrior may be hard in the sense that it is athletic, but it’s simple: “yours is not to question why, yours is but to do or die.” The seeker is drowning in ambiguity. The discoveries are oases of clarity in deserts of ambiguity. Every time a seeker discovers a source of leverage, they give it to a warrior to exploit, and then they move on. Seekers create jobs for warriors.

Running Out Of Delegation Power: Hobbling Your Army

If you’ve run out of time, you’ve run out of a form of leverage. If you’ve run out of money, you’ve run out of a form of leverage. If you’ve run out of any resource, you’ve run out of that form of leverage.

But if you’ve got funding and runway, the best indicator that you’ve run out of leverage is that you’ve run out of delegation power. Your people are already so busy that you can’t give them more projects, without cancelling existing projects.

The Art of War contains this passage:

There are three ways in which a ruler can bring misfortune upon his army:
— By commanding the army to advance or to retreat, being ignorant of the fact that it cannot obey. This is called hobbling the army.
— By attempting to govern an army in the same way as he administers a kingdom, being ignorant of the conditions which obtain in an army. This causes restlessness in the soldier’s minds.
— By employing the officers of his army without discrimination, through ignorance of the military principle of adaptation to circumstances. This shakes the confidence of the soldiers.

All three of these points relate to the principle of leverage in some way. If you can’t command your units to move, they’re bogged down. If you try to make your units move in ways that they can’t, you’re blocked. If you aren’t situationally aware, and don’t adapt to circumstances, you’ll lose leverage. If you don’t put the right people in the right roles, you’ll lose leverage.

In the last two weeks, I’ve basically run out of delegation power. This isn’t a result of bad management on my part. It’s actually a result of good management, I think. I’ve fully deployed my units. They’re all engaged in important projects. Over the preceding two and a half months I resolved a number of crises, and made structural, systemic and cultural improvements. Now we’ve got the right people in the right roles with the right strategy, and the main thing is just execution. If I was a full-time COO, I could plunge in to the execution level and try to pull out project management risk by being aware of all the cross-team dependencies and pointing out blind-spots and interstitial problems. But I know that in Q4 and Q1, I won’t have time for that, because I’ll have to do heads-up work. So instead, I’m focusing on hiring a COO. Again, my analysis is that I’ve reached Pareto on my management contribution. I’ve created 80% of the value I can create in 20% of the time, and now it’s time for me to move on and create leverage elsewhere.

So, what are my options? I can either wait for them to finish, and hope that these projects create the new leverage that they’re supposed to create, and then fully deploy that leverage again… Or, I can find new leverage somehow.

I’ve also run out of time. I see the projects I can take on. There are more projects for me to take on than I have time to take them on. So I’ve ignored most of them, and instead I’m focusing on hiring a COO and an assistant, so I can take on the projects that I think are the highest leverage.

Again, this is a good example of when not to be a warrior. If you’re out of leverage, pushing harder doesn’t work. It just burns you out and drains your resources further.

Ambiguity, Problem-Landscapes And Leverage

If there was a way to graph the journey of building leverage over time, it would be a punctuated up-and-to-the-right staircase. Leverage may result in exponential progress, but the leverage-journey is not linear or exponential, it is stepped. You have a breakthrough and ascend to another plane, then you are in a plateau for an extended period of time. In that plateau, it isn’t obvious which problems are the most important problems, or what the solutions to these problems are. You’re in a problem-landscape, looking for unlocking-mechanisms.

Crises And Leverage

Crises and leverage have a fascinating relationship I don’t fully understand. It’s a race-against-time relationship. If you find more leverage fast enough, the crisis doesn’t come. You can sense that a crisis is building, you can maybe guess what it will be about, but you don’t know how to prevent it or pre-empt it. Eventually a crisis comes and hopefully you find the leverage to resolve it. But it is also a the-problem-contains-the-solution relationship, like a riddle contains its answer. The crises that are building contain clues. If you pay close attention, those clues will tell you how to find the leverage to meet them.

Inflection Points

The history of the company can be told in our moments of leverage-discovery:

  1. Discovering the bot interface.
  2. Discovering market demand.
  3. Discovering process architecture.
  4. Discovering cheap labor supply.
  5. Discovering digital assembly lines.
  6. Discovering unitized pricing.
  7. Discovering the Partner and Agent models.
  8. Discovering the Squad model for the tech team.

These are some of the big milestones, but there are many smaller ones: discovering OKRs, discovering the advantages of transparently posting on Medium, discovering various sales channels, discovering The Watch for Operations, discovering how to project manage more reliably, discovering how to improve our tests for agents, improving our reward/penalty system for successful client work, etc. Every month there are one or two moments of discovery.

The reason I’m writing this blog at all is that I hope it will be a discovery. A new source of leverage.

Examples from Numerai

Richard is great at finding more leverage. Numerai’s initial leverage bet was that using homomorphic encryption they could host a data science tournament that would instantly give them access to better and cheaper predictions than every other hedge fund combined. That bet worked, spectacularly well. But then they made another leverage bet: that they could reduce the USD cost and increase the quality of the tournament results by paying 50% of payouts in their own cryptocurrency, Numeraire, and giving more weight to staked predictions. That bet worked too, even more spectacularly. Then they made another leverage bet: Erasure allows anyone, anywhere to make predictions about anything, and using the blockchain, provides an immutable record to validate the accuracy of those predictions, and, using Numeraire, provides a currency for staking and purchasing the next prediction in a series — giving Numerai another revenue stream, and making Numeraire the cryptocurrency for the entire hedge fund prediction industry.

“All men can see these tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved.” To an outside observer, Richard’s performance is an orchestral masterpiece. But understood within this framework, it is a series of brilliantly conceived and executed leverage moves.This doesn’t make it any easier to copy, I hope I can do the same thing. But it does give us some insight and a place to start.

Finding More Leverage For Invisible

This is the set of ideas I’m working with right now to find more leverage for Invisible. I want everyone at Invisible to be working on their own set of ideas. Depending on where you’re at in the company, the ideas you should be working at should relate to your problem-landscape. Leverage often comes from very micro improvements. A hundred tiny improvements amount to one large improvement. And sometimes the tiny improvements lead to the large improvement. The point is: are you thinking this way? Think this way.

Leverage Idea 1: Make Key Hires
Erinn ran hiring in Q3, but she has other responsibilities that distract her. As she knows, the highest-leverage hire we can make is a hiring manager. Hire the person who will focus full-time on hiring more people. Then expect that person to deliver more and better candidates.

The second key hire is a COO. I’m hiring a COO to run the company, so I can focus on business development, sales and marketing.

The third key hire is an Executive Assistant for me. I need support on a bunch of things, but the main thing is that I need an SDR to line up tons of high-leverage meetings for me, so I can maximize the value of my time.

Leverage Idea 2: BDSM ;-)
Implied in the Executive Assistant hire is that I need to be spending more time doing BDSM: Business Development, Sales and Marketing (yes, it’s a joke).

For example, I can do a crazy enterprise deal that will give us $1M/yr in revenue, or do more press appearances, or headhunt for my COO hire, or go to prospect-rich networking events, etc. And soon, I’ll be fundraising again. I’m good at all these things, and our sales and marketing team is small enough that my involvement should actually help in percentage terms. Although our model cannot depend on me, I can provide some leverage over the next year to help us get to Series A.

Leverage Idea 3: Hire Strategists And Sales Agents
As discussed in the Product-Market Fit post, I think the key to scaling our growth is going to be hiring an army of Strategists and Sales Agents with the right training and incentives.

Leverage Idea 4: Hire Tier 5 Stem Cells
Erinn had a brilliant idea to solve the hiring chicken-and-egg problem. We need lots of young, hungry and talented Partners. But we only need one or two more senior Partners. Our most junior Partner tier right now is Tier 4. But why not introduce an even more junior Tier 5, and hire candidates mostly between the ages of 18–24: right out of college, ready to take a risk with upside, eager for a formative, intense, high-leverage learning experience. After a year with Invisible, they’ll have learned all the skills and merit points they need to stay on with the company in more autonomous roles. But for that first year, we can give “Padawan” apprentices to each of the team leaders and key managers to use as they see fit, increasing their project management bandwidth and span of control.

Leverage Idea 5: Hire Engineering Agents For Feature Development
Shane suggested that engineers begin to scope feature work so that cheaper engineering agents in third-world countries can write the code. That would free up our engineers to focus on architecture, integration and code-review, and give them more leverage.

Leverage Idea 6: Launch A Process Automation Tournament Via API
I’d like to build this in Q1 and launch it in Q2, but I think that our entire process library and training data from the Digital Assembly Line can be scoped for automation by external developers. If that is, indeed, possible, then we could pay, say, $1000 for every 1% of a process that an engineer automates. This would give investors a clear signal to invest more money: for every $100K they get a fully automated process, or the equivalent in outcome and margin gains across many partially automated processes. (Our automation model is that for every hour we automate, we give clients half an hour back as outcome gains, and keep half an hour for ourselves as margin gains.)

Every day I’m looking for more leverage. Help me!

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