Selling pickaxes during a gold rush

Selling pickaxes during a gold rush(cdixon.org)

101 points by riffer 15 years ago | 20 comments

maxklein 15 years ago |

The problem here is simple: The people buying pick-axes are much smaller than the people buying gold. If there are 1000 people buying gold, there are 100 people mining for gold, and 10 people selling pickaxes. So the pick-axe market is quickly going to be dominated by someone who executes well and can offer the best pick-axes at prices less than what anyone else can compete with.

It's like frameworks - only a few rise to prominence, and that's because they are constantly developed, well marketed, etc. There is little space for a lot of choice in the tools market. The winners take all.

In the consumer market, however, even if you don't make a blow-out hit, your chance of getting by are much bigger. Even if you find a little gold, you can always sell it off and survive. But if you're selling pick-axes and they are lower quality and more expensive than the axes of the other established players, you'll not sell anything and die quickly.

In both cases it just comes down to who is smarter and faster and can better manage their finances to expand wisely. Both the pick-axe business and the gold business need proper intelligence and good business sense, and those who can bring both will be successful in either business.

Another consideration is this: It's easy to find gold. It's not easy to sell pick-axes. For pick-axes you need a supply chain, a cheap source, a marketing strategy. Gold panning requires a pan and some luck. The people who go for the Gold rush are normal people hoping to get lucky. They lack the skills to actually produce and sell jeans. Even if they tried, most of them would not be able to sell pick-axes.

So you can't really advice them to go sell pick-axes, as that is a more skilled business than panning for Gold.

jasonkester 15 years ago | |

I think you missed the point of the analogy.

The "Miners" in this scenario are all the companies trying to cash in on the dot com boom. There are thousands of them, and only 14 are going to make it big.

Those thousands of companies will burn through tens of millions of consulting hours. Consider those hours to be picks, and hopefully you'll start to see what the analogy means.

If you sell 2000 hours of consulting this year, you're guaranteed to be ahead somewhere between 100k and 300k, depending on your rate. If you instead spend those hours building the next Twitter, chances are very good you'll end the year with nothing at all.

Just like 90% of the people who headed off to the Yukon with a shiny new pick in their hand.

maxklein 15 years ago | | |

I believe you miss the point of the analogy.

The analogy is not about people selling services to the gold diggers, it's about selling tools to the gold diggers.

The services market would be akin to the people who sell food to the miners.

joshu 15 years ago | |

This is important. The relative frequencies mean that observer bias cuts all the harder.

Additionally, it's very difficult to take the winner and back-calculate the particular winning strategy. The pick-axe sellers won in this case. But one story is not statistics.

Finally, it's important to note that the story sounds good and that makes us believe it even more strongly...

(I bet it's even better to be a banker at the time of the gold rush, incidentally.)

nl 15 years ago | | |

It's always better to be a banker.

ojbyrne 15 years ago | |

Except during a "gold rush." Then there's a 1000 people mining for gold, even though only a 100 are going to be successful. Which implies there's 100 people selling pickaxes.

tastybites 15 years ago | |

There is little space for a lot of choice in the tools market

Apparently not, as anyone in the enterprise software world can tell you. There's plenty of room for lots of shitty choices, almost all of which generate millions of dollars of "value".

I do agree with your final conclusion though, that it takes a higher level of competence and business acumen to start, say, an ISP than another run of the mill social network.

mhb 15 years ago |

Pickaxe factory factory factory is where the real money is. [1]

[1] http://discuss.joelonsoftware.com/default.asp?joel.3.219431....

cletus 15 years ago |

I haven't heard this particular phrase before vut I'm familiar with the concept. I've seen more than one show on the Wild West, various gold rushes and so forth. This concept comes up again and again.

One show coined this as "mining the miners", which I like.

There is a danger here though. If your business is selling pickaxes then it lives and dies by the mining industry. But I guess that applies to a lot of business types.

Another danger for B2B type businesses like Akamai is with no brand identity and loyalty you are in danger of being swapped and/or commoditized.

jorkos 15 years ago | |

To your point, i think the analogy holds when thinking about specific verticals. In fitness for example, sell bowflex or PBX90 where the gold is great fitness.

The analogy breaks down however when you see that in the B2C internet space, the issue is that you have to create the gold through your service; it's not known what everyone wants, you have to create it.....and thus the opportunity.

leif 15 years ago |

I definitely thought this was an article about minecraft. :-/

revorad 15 years ago |

A pickaxe marketplace. That's where the real gold is.

tastybites 15 years ago |

Usually in the bay area I hear this as "selling shovels to the miners". Here in LA a distinction is less often made because the tech scene is much less focused on hot web properties and there is a very large number of media companies that either do service-oriented things or produce tools.

the most important consideration should be working on a product you love

This makes for great blog content, but I fundamentally disagree with this. What's equally important is love just plain doing business. Do you think people with successful urinal cake distribution or timesheet tracking ERP companies love their product? The world is filled with unlovable, unglamorous businesses. The love of doing business (which is the politically correct way of saying making money) is equally as viable a path to success than loving your actual product.

beoba 15 years ago | |

It is also easy to love your work even if you aren't terribly interested in the industry. For example, urinal cake distribution sounds pretty awful until you think about the individual or team whose task it is to make it work as efficiently as possible.

nika 15 years ago |

I first heard this analogy in the 1990s with regards to the dotcom boom.

I've found that every bit of good investment advice I've seen is very applicable to startups. This is great training for weeding out ideas and thinking about business models.

So, all of the popular investing books are useful in this regard. For instance, you'd think Warren Buffett would not be useful for a high tech startup, but I find his philosophy extremely compelling when thinking about the startup business. (To that end, I recommend buffettology)

Further, all of the metrics one uses to evaluate the prospects of a company one is going to invest in by buying shares, are also applicable to valuation of your business when selling shares to investors, especially in later rounds when you have revenue and hopefully profits.

mkramlich 15 years ago |

I spend a portion of my year selling pick axes and another portion panning for gold. The cash I make from the former buys me the time and safety to do the latter.