How First Principles Thinking Took Naval Ravikant From Zero To Millionaire Silicon Valley Icon

The entrepreneur behind AngelList who also funded Twitter started with nothing.

Naval Ravikant is an impressive human being, often touted by Tim Ferriss and other Silicon Valley giants as one of the few people who are not only ultra-successful but also genuinely happy.

Apart from being the founder of Epinions, AngelList, and Venture Hacks, and an early investor in Twitter, Uber, and Stack Overflow — he also spends a lot of time with his loving family. Not bad for someone who started his life in a poor family in New Delhi, India.

Naval’s success in Silicon Valley, both as an entrepreneur and an investor, is largely due to his hardcore first-principles approach to everything he does. In his book, he states that he would rather read a basic microeconomics book multiple times than try to learn a bunch of complicated economical theories.

He is not alone in this. Elon Musk is famous for taking this approach as well. In fact, it was instrumental in the creation of Tesla, Inc.

First-principles thinking is so powerful because the world is too complex for any of us to grasp what’s really going on. What we can do instead is understand the simplest, most true concepts well, which can then serve as a proxy for the complexity, and vastly increase our chances of navigating the world successfully.

You and I can also learn to take this approach to entrepreneurship — to better understand the fundamental forces at play and increase our chances of building the things we want to build.

Here are the biggest lessons I’ve learned about first principles in entrepreneurship, highly influenced by Naval’s thinking.

What is entrepreneurship?

Entrepreneurship in its simplest form is the act of using your specific knowledge to create value in someone else's life.

The specific knowledge is a concept invented by Naval.

“The specific knowledge is this weird combination of unique traits from your DNA, your unique upbringing, and your response to it. It’s almost baked into your personality and your identity. Specific knowledge is found by pursuing your genuine curiosity and passion rather than whatever is hot right now. It cannot be taught, but it can be learned.”

- Naval Ravikant

As an example, let’s say you were born with good genes for physical fitness and a genuine curiosity about the human body. Throughout your life, you train and compete at an elite level in several sports. By doing this you collect a wealth of exclusive information such as various exercises, knowledge of common training mistakes, and nutritional strategies. This learning comes easy to you because of your natural curiosity.

Compare this to someone who never competed in any sport, and never really trained a day in their life. Now, this person wants to take charge of their physique and become more fit.

It would be easy for you to apply your specific knowledge to train this person, thereby creating value by helping them become fit and healthy.

Entrepreneurs get paid for their perspective

When you factor in competition (there are many other people who also know how to train this person), you can see that the specifics of how you think this person should be trained (your solution) and the associated costs and benefits, will determine how successful you are compared to the other people.

This means that as an entrepreneur, you get paid for your perspective.

Step one: freelancing

The most straightforward way to apply your specific knowledge is through freelancing. Freelancing means selling your limited time of applied specific knowledge to create value for a limited number of clients.

The upside to freelancing is that it’s easy to start. As long as you have specific knowledge and a client, you can start making money right away.

The downside is you only have twenty-four hours in a day, and you don’t earn any money unless you spend your time working.

It simply does not scale.

Note: there are some ways to bridge the gap between freelancing and more scaleable entrepreneurship, such as productizing your services — and I’ve written extensively about them here.

How to scale

“You will get rich by giving society what it wants but does not yet know how to get. At scale.”

- Naval Ravikant

How do you create value at scale? You apply your specific knowledge with leverage.

According to Naval, there are three main types of leverage (and I added a bonus one); labor, capital, technology, and social capital.

Let’s go through them one by one.

1. Labor

The first type of leverage is labor.

Labour is when other people sell their time to you, so you can take advantage of their specific knowledge to scale the value you create and capture. In return, they get money and security (what we call a “job”).

Together, you form a company. As the entrepreneur, you own most of that company. This is why labor can be viewed as your leverage.

Labor is the least scalable type of leverage and comes with lots of headaches:

• Every new person costs the company money (salaries)
• Every new person needs different circumstances to stay motivated
• Every new person needs to be right for the job so you can take full advantage of their specific knowledge (this is called specialization and division of labor)
• Every new person must fit in the company culture
• …etc.

With that said, labor is often required to create something of value — no single person has all the skills needed to build Google or Facebook. But you want to rely minimally on this, and maximally on the other types of leverage.

2. Capital

The second type of leverage is capital.

Capital is basically money, but in a more true sense, it’s all resources of value.

In a functioning business, you have valuable resources in the form of financial assets, skilled employees, intellectual property, etc. These resources are put to work to leverage the company’s value creations so it can grow and earn more resources — to a large extent, the company funds itself.

However, in the early days of a business, you have very few resources. You mostly have a vision for the business you want to build. So when we talk about using capital as leverage in the startup/entrepreneurship world, we are essentially talking about selling a piece of that future vision to get the resources to build it now.

One way to look at it is that you acquire the resources, a.k.a. the “muscle” of a much bigger, already functioning business.

I actually have intimate experience with this, as I am closing my first-ever funding round next month. I am selling 8.75% of my company which will allow us to “pose” as a company of five full-time employees for at least ten months.

The upside to using capital to leverage your specific knowledge is that it’s highly scalable. There is a LOT of capital in the world, and money works for you while you sleep.

The downside is that capital is hard to get access to for most people.

3. Technology

The third type of leverage is technology.

It’s kind of the “holy grail” of leverage and is what allowed the top companies of the last two decades two become larger and more powerful than many nations.

It’s almost infinitely scalable; it never gets tired, and once you figure out how to solve a problem via technology, you can run that solution with minimal mistakes or problems, ad infinitum.

For example, at my company, we are working on a product that, in time, will essentially replace a doctor’s visit plus the work of a personal 24/7 world-class health coach — for an infinite number of patients!

Technology is also much easier to gain access to than capital. In most parts of the world, anyone can access a computer and the internet. They can learn to code for free, or easily find someone who knows how to code.

It’s important to note that we are mainly talking about digital technology here since analog technology usually requires capital.

The only downside I can think of is that technology tends to devalue the softer, more human qualities that are essential for our experience of the world.

4. Social capital

The fourth type of leverage is social capital.

It’s when the social nature of humans is harnessed to amplify the value you create. To my knowledge, Naval has never specifically mentioned this type. But I think he would agree with me on it.

As an example, imagine a solo YouTuber who uploads a video to her fans. What leverage is used? Obviously, tech was used to make the video. And the video is uploaded to this hugely complex tech platform. But what makes her followers want to share the video with their friends? What makes them want to go and follow her on other social media platforms after watching?

That’s social capital.

In the same way, when Facebook started it wasn’t a tech-driven platform. It was simple tech, driven by social capital and status; this fancy school had it, so now this next fancy school wanted it — then all fancy schools had it, so everyone else wanted it! That has very little to do with the tech.

The upside of leveraging social capital is that other people essentially work for you for free, and the effect is often exponential (viral).

The downside is that only certain types of businesses (like social networks) naturally lend themselves to this type of leverage.

Final thoughts

No matter what level you are at in your entrepreneurship journey, it’s useful to go back and study Naval’s first principles of entrepreneurship. It will help you see more clearly what exactly it is you are doing in your business, and maximally leverage the value you create.

The most successful businesses today take advantage of ALL of the different types of leverage but rely most on capital and technology (tech startups). This is because labor comes with many headaches and social capital lends itself only to certain types of businesses.