Selling pickaxes during a gold rush
– Chris Dixon is co-founder of Hunch and founder of Founder Collective, and an investor in many early-stage companies like Skype and Foursquare. Previously he co-founded Siteadvisor, which was acquired by McAfee. This blog originally appeared on cdixon.org. The views expressed are his own. –
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 in 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 an exit of more than $200 million*).
When you start a company, the most important consideration should be working on a product you love (a startup can be a five-plus 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: there are many great B2C YC companies, so the list of exits will no doubt change and probably skew more towards B2C over time.