Hacking your way to startup 10x growth. The power of leverage

Using debt to increase growth is part of every successful business. The smartest entrepreneurs use debt not because they want to, but because they have no choice. Adapting your business and your thinking to the debt cycle is the key to growth.

What is the debt cycle? You borrow < million at 10% interest. You use it to build a product. Then, after a year, you can borrow another < million at 10% interest. You use that money to buy more inventory. Then, after a year, you can borrow another < million at 10% interest. You use that money to build a better product. Repeat indefinitely.

The debt cycle is like the photosynthesis cycle. What starts with debt eventually turns into a profit. But it starts with debt.

The debt cycle also allows entrepreneurs to avoid being trapped by their own cash flow. In the old days, entrepreneurs would build and sell a product, then wait for it to sell and to collect the money. They ended up waiting two years or more before they could borrow more. The debt cycle eliminates this problem: you can borrow money as soon as you need.

The debt cycle also frees entrepreneurs from thinking about money. They focus on building the thing customers want to buy.

Financing a startup with leverage

The key to financing a startup is what I call "leverage." Leverage is borrowing money, but spending it in such a way that you are only paying interest on money that was already borrowed.

It's easy to think of leverage as something that applies only to large companies: they can borrow a lot of money and, if it works out, pay back the loan and go on to make more. But leverage in small companies is even more important. For small startups, every dollar you borrow has a big impact on how much you spend.

For example, imagine that you're a two-person company. You sell <0,000 of widgets. And there is no sign that your business is going to grow. But you find a partner who will buy $30,000 of your widgets. Do you let the partnership go? Or do you take the partner's money and spend it on marketing?

You could spend $30,000 on marketing, but that would mean giving up 50% of your revenue. Or you could spend $30,000 on hiring. Hiring is risky, but it's safer. It's more likely that hiring will pay off. But you still need to borrow money. So, in this case, you have to borrow money and spend it on hiring.

In either case, you're borrowing $30,000, but spending only <0,000. The smaller the startup, the more important leverage is.

Some companies use leverage effectively. But most companies do not. Most people think that borrowing money automatically implies debt, and they avoid debt like the plague. But borrowing money is very different from debt.

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