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Example From Laborer to Entrepreneur.html
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<p>![[Naval-Ep25.mp3]]</p>
<p>From low to high specific knowledge, accountability and leverage</p>
<p>Laborers get paid hourly and have low accountability</p>
<p>
<strong>Naval:</strong> The tweetstorm is very abstract. It’s deliberately
meant to be broadly applicable to all kinds of different domains and
disciplines and time periods and places. But sometimes it’s hard to work
without a concrete example. So let’s go concrete for a minute.
</p>
<p>
Look at the real estate business. You could start at the bottom, let’s say
you’re a day laborer. You come in, you fix people’s houses. Someone orders
you around, tells you, “Break that piece of rock. Sand that piece of wood.
Put that thing over there.”
</p>
<p>
There’s just all these menial jobs that go on, on a construction site. If
you’re working one of those jobs, unless you’re a skilled trade, say, a
carpenter or electrician, you don’t really have specific knowledge.
</p>
<p>
Even a carpenter or an electrician is not that specific because other
people can be trained how to do it. You can be replaced. You get paid your
$15, $20, $25, $50, if you’re really lucky, $75 an hour, but that’s about
it.
</p>
<p>
You don’t have any leverage other than from the tools that you’re using.
If you’re driving a bulldozer that’s better than doing it with your hands.
A day laborer in India makes a lot less because they have no tool
leverage.
</p>
<p>
You don’t have much accountability. You’re a faceless cog in a
construction crew and the owner of the house or the buyer of the house
doesn’t know or care that you worked on it.
</p>
<p>
<strong
>General contractors get equity, but they’re also taking risk</strong
>
</p>
<p>
One step up from that, you might have a contractor, like a general
contractor who someone hires to come and fix and repair and build up their
house. That general contractor is taking accountability; they’re taking
responsibility.
</p>
<p>
Now let’s say they got paid $250,000 for the job. Sorry, I’m using Bay
Area prices, so maybe I’ll go rest of the world prices, $100,000 for the
job to fix up a house, and it actually costs the general contractor, all
said and done, $70,000. That contractor’s going to pocket that remaining
$30,000.
</p>
<p>
They got the upside. They got the equity but they’re also taking
accountability and risk. If the project runs over and there’s losses, then
they eat the losses. But you see, just the accountability gives them some
form of additional potential income.
</p>
<p>
Then, they also have labor leverage because they have a bunch of people
working for them. But it probably tops out right there.
</p>
<p>
<strong
>Property developers pocket the profit by applying capital
leverage</strong
>
</p>
<p>
You can go one level above that and you can look at a property developer.
This might be someone who is a contractor who did a bunch of houses, did a
really good job, then decided to go into business for themselves and they
go around looking for beaten down properties that have potential.
</p>
<p>
They buy them, they either raise money from investors or front it
themselves, they fix the place up, and then they sell it for twice what
they bought it for. Maybe they only put in 20% more, so it’s a healthy
profit.
</p>
<p>
So now a developer like that takes on more accountability, has more risk.
They have more specific knowledge because now you have to know: which
neighborhoods are worth buying in. Which lots are actually good or which
lots are bad. What makes or breaks a specific property. You have to
imagine the finished house that’s going to be there, even when the
property itself might look really bad right now.
</p>
<p>
There’s more specific knowledge, there’s more accountability and risk, and
now you also have capital leverage because you’re also putting in money
into the project. But conceivably, you could buy a piece of land or a
broken-down house for $200,000 and turn it into a million dollar mansion
and pocket all the difference.
</p>
<p>
<strong
>Architects, large developers and REITs are even higher in the
stack</strong
>
</p>
<p>
One level beyond that might be a famous architect or a developer, where
just having your name on a property, because you’ve done so many great
properties, increases its value.
</p>
<p>
One level up from that, you might be a person who decides, well, I
understand real estate, and I now know enough of the dynamics of real
estate that rather than just build and flip my own properties or improve
my own properties, I’m gonna be a massive developer. I’m going to build
entire communities.
</p>
<p>
Now another person might say, “I like that leverage, but I don’t want to
manage all these people. I want to do it more through capital. So I’m
gonna start a real estate investment trust.” That requires specific
knowledge not just about investing in real estate and building real
estate, but it also requires specific knowledge about the financial
markets, and the capital markets, and how real estate trusts operate.
</p>
<p>
<strong>Real estate tech companies apply the maximum leverage</strong>
</p>
<p>
One level beyond that might be somebody who says, “Actually, I want to
bring the maximum leverage to bear in this market, and the maximum
specific knowledge.” That person would say, “Well, I understand real
estate, and I understand everything from basic housing construction, to
building properties and selling them, to how real estate markets move and
thrive, and I also understand the technology business. I understand how to
recruit developers, how to write code and how to build good product, and I
understand how to raise money from venture capitalists and how to return
it and how all of that works.”
</p>
<p>
Obviously not a single person may know this. You may pull a team together
to do it where each have different skill sets, but that combined entity
would have specific knowledge in technology and in real estate.
</p>
<p>
It would have massive accountability because that company’s name would be
a very high risk, high reward effort attached to the whole thing, and
people would devote their lives to it and take on significant risk.
</p>
<p>
It would have leverage in code with lots of developers. It would have
capital with investors putting money in and the founder’s own capital. It
would have labor of some of the highest quality labor that you can find,
which is high quality engineers and designers and marketers who are
working on the company.
</p>
<p>
Then you may end up with a Trulia or a RedFin or a Zillow kind of company,
and then the upside could potentially be in the billions of dollars, or
the hundreds of millions of dollars.
</p>
<p>
As you layer in more and more kinds of knowledge that can only be gained
on the job and aren’t common knowledge, and you layer in more and more
accountability and risk-taking, and you layer in more and more great
people working on it and more and more capital on it, and more and more
code and media on it, you keep expanding the scope of the opportunity all
the way from the day-laborer, who might just literally be scrappling on
the ground with their hands, all the way up to somebody who started a real
estate tech company and then took it public.
</p>
</body>
</html>