Selling pickaxes during a gold rush

There is a saying in the startup world that “you can mine for gold or you can sell pickaxes.” This is of course an allusion to the California Gold Rush where some of the most successful business people such as Levi Strauss and Samuel Brannan didn’t mine for gold themselves but instead sold supplies to miners – wheelbarrows, tents, jeans, pickaxes etc. Mining for gold was the more glamorous path but actually turned out, in aggregate, to be a worse return on capital and labor than selling supplies.

When a major new technology trend emerges – say, the rise of online video or social media – entrepreneurs can try to capitalize on the trend by creating a consumer product (mining for gold), or by creating tools to enable consumer products (selling pickaxes).  For most technology trends, the number of successful companies created in gold mining and pickaxes are comparable, yet the gold mining businesses tend to get much more attention. In online video, YouTube is often thought of as the big winner; however, to date, more money has been made by online video by infrastructure suppliers like Akamai. Y-combinator is known for their high-profile B2C startups but their biggest exits to date have been in infrastructure (most recently Heroku which rode the popularity of Ruby on Rails to a >$200M exit)*.

When you start a company, the most important consideration should be working on a product you love (a startup can be a 5+ year endeavor so if you don’t love it you probably won’t be able to endure the ups and downs).  A secondary consideration should be matching the skills of the founders to the market.  Tools companies tend to require stronger technical and sales skills, whereas B2C companies tend to be more about predicting consumer tastes and marketing skills. A final consideration should be the supply-and-demand of startups in the space.  Because B2C companies tend to be “sexier” and get more press coverage, many entrepreneurs are drawn to them. This tends to lead to greater competition even though the market opportunities might not justify it.

There are many exciting technology opportunities emerging today: some are horizontal like mobile, location, and local; others are vertical like fashion, art, real estate, education, finance and energy. If you are an entrepreneur thinking about starting a company around these trends, consider selling pickaxes.

* Note that there are many great B2C YC companies, so the list of exits will no doubt change and probably skew more towards B2C over time.

36 thoughts on “Selling pickaxes during a gold rush

  1. Dwayne A. Roper says:

    Great post Chris. I’ve been considering the very same dynamic recently and your thoughts help in shaping my thinking. Thanks!

  2. Hi Chris – that’s nice, and very apropos for me. Building apps is *such* a crapshoot. It’s hard to resist having a go sometimes, but as you say, there are higher-probability ways to make even more money. That’s hard too, of course. I’ll say more in email soon. We have a line of beautiful new pickaxes just coming out in time for the latest Gold Rush (data)…

  3. @cdixon pretty sure the gold rush is the start-up bubble and the pick axes & blue jeans are video production/content creation. So call me “Levi”.

  4. There are two kinds of suppliers. The contract companies like Pivotal Labs do contract work to build the websites. Then there are folks who are tool providers. Two very different kinds of suppliers.

  5. agree. good point. service providers like Pivotal tend to be quicker to
    profitability but have less equity value (as they say “the equity walks out
    the door every night”). Tools providers require more investment up front
    and are slower to profitability but tend to have sustainable equity value.

  6. There will be more companies that are master tool users (often with their own tools or enhanced versions of open tools) especially in areas where mastery of the available toolsets and/or specialized technical knowledge is difficult or costly to achieve for most internal development teams. I see it at Voxify in the area of speech recognition applications. Deep linguistics understanding helps enormously when designing prompts and grammars. I haven’t seen tools that make all the right speech design decisions for you, just like I don’t see tools that make all the right GUI design decisions for you. I think that analysis of “big data” is an area of great opportunity for master tool users. There are a lot of great tools out there, like the Hadoop family, but it’s a long way from installing Hadoop to doing scalable, meaningful analysis of very large proprietary data sets.

  7. sinzone says:

    Wherever there is a business, there is always an underlying architecture that power that business. As you said, people and press tend to see just the “visible” part cause is easier to understand for the mass and yes, is sexy.

    However I think that in the future more and more power (in terms of data) will be allocated to those companies that work under the ecosystem. As an example we can go back to well established companies like Oracle and CISCO to the newer Factual, Simplegeo, Twilio and so on.

    Exactly as an Iceberg, people will see the tip of the iceberg, while the biggest part is hidden under the water.

  8. A reminder of a great fundamental business lesson, Chris. The gold rush metaphor applies well to tech startups, as evidenced in companies such as Critical Path, which as you likely know created and supported mobile apps as an outside contractor. After creating ebay’s very successful mobile app. ebay decided it better to fold Critical Path into the company so that they’d not be “using an outside company” for their app dev. Of course there are many examples, whether boasting an exit including a buyout, etc. or continuing a solid business model supporting some “heroic” and very public entity. The outfitters for the Alaskan gold rush as well as those who supplied efforts on the Alaskan oil pipeline provide similar examples.

  9. David Beyer says:

    Great. I’m at Chart.io (YC Summer 2010). We help SMBs understand/analyze their data. While it isn’t a sexy consumer product, it’s definitely sexy in the context of business. The meta-trend we’re riding is the Data/Big Data arc. In fact, big data splits into consumer and business. One of the winners at the Strata startup showcase this past week was billguard.com, which uses big data to help protect consumers from credit card fraud. One could argue that data has always been a trend in the sense that computing is based on data. But the prevalence and abundance of data in recent years has made the need to make use of it that much more pressing.

  10. That is why we started Mollom; a web service to filter comment spam, profanity and other unwanted content from user-generated content. Every site is adding commenting, social networking and other social interactions (gold) but few are providing the tools to help keep these sites and networks clean (pickaxe).

  11. As a tools vendor in the linguistics space I have to say that it is important to get the right level of granularity for the tool. So the folks casting the pick and carving the handle maybe don’t do as well as the seller of the complete pick axe. In NLP, most graduates are snapped up by Google and the like and regular developers can have a horrible time managing the challenges of building and tuning NLP systems–they can’t put the pick and handle together. Better analogy might be that they can’t sew denim into pants.

    Running with the analogy further, as a denim provider, we have decided that teaching people to sew is the right option. A disastrous move for selling to gold miners but what is necessary for creating tailors out of skilled hands craftsmen. .

  12. This is exactly why we built mailgun.net. We got tired of configuring email servers for web apps so we decided to productize it and offer it to developers.

  13. tedstockwell says:

    I think your point is true, but I expect there will always be some tilt towards B2C. An entrepreneur must first have an idea, and we all have broad experience as consumers. For infrastructure, it takes more experience to innovate or recognize the value of a novel idea.

    I’ve found when networking or trying to add to an incomplete founding team, I get fewer blank stares with a B2C idea, because it draws on experiences that are more universal.

  14. When you decide to start a company for the first time, most of the categories and classifications are something you may have come across only once (niche, horizontal, platform, B2B, B2C). After a year or two of exploring, my heart and mind are aligned with tool companies all the way. They’re my favorite products, and the empowerment/force multiplying role they serve is philosophically attractive (help other folks build awesome stuff).

    What are your favorite tool/companies today?

    Heroku is drop dead simple deployment for rails, sinatra and other framework applications. Hosting/Cloud: Amazon, Rackspace, Slicehost, and Google all have potent tools and varying levels of support to enable companies focus on product and more easily grow their information infrastructure.

    Github is an amazing code sharing gravity center. I can’t imagine not having this as a learning and collaboration tool.

    Twilio is to phone networks what cones are to ice cream. It’s the easiest way to get a handle on automated messaging networks.

    jQuery and similar javascript library toolkits make front end coding and cross browser compatibility sane.

    Persistence companies: Everyone needs to store data. 10gen/mongodb (data reliability vs speed trade), Couchbase (membase/couchio hybrid), and many other companies provide excellent support and service .

    Mobile platform toolkits: phonegap, Appcelerator, Rhomobile, and the killer cross platform app HTML5 (jquery mobile is young but looks good)

    Maps: Googles got a killer API for maps amongst their other fantastic developer tools.

  15. Finally got a chance to dig through much of Fluid’s documentation. Mostly, I want to understand how your company’s toolset can affect information design patterns.

  16. I must +1 your statement, “when you start a company, the most important consideration should be working on a product you love (a startup can be a 5+ year endeavor so if you don’t love it you probably won’t be able to endure the ups and downs).”

    When I am considering starting a new project, I try to determine how passionate I am about it by imagining myself doing it 5 years later, and then, 10 years later. If my response is, “well, if it’s going to take 10 years to achieve it, that’s not going to work for me,” then I become aware that — while I may be *interested* in the project — I’m not passionate enough about it!

    { twitter = @danenow }

  17. + 1. I always wondered why, especially in the NYC tech scene, “start-up” is generally equated with B2C, social networking, etc. All industries need innovation and entrepreneurs, and B2C actually seems to be an especially boring area in comparison (informing your friends that you became “mayor” of your local bar isn’t exactly advancing humanity).

    Btw, I like how you implicitly predict an end to the B2C craze: Levis jeans are still around, but nobody is digging for gold in California anymore.

  18. Th idea of creating “a consumer product (mining for gold), or by creating tools to enable consumer products (selling pickaxes)” makes a lot of sense, and it spares you from having to compete with the big corporations.

  19. JamesHRH says:

    Chris – agree strongly about aligning the skills of the founders with the need of the opportunity. Often, it seems, people love something they are not very good at (maybe because they are not very good at it). It is very difficult to get someone to see this situation (they love what they are doing) and to take action to resolve it.

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