Selling Shovels in the New Startup Gold Rush
Back during the 1849 California Gold Rush, few prospectors struck it rich. Most of the people who made money back then were those who “sold shovels” (and jeans, tents, pickaxes and other supplies and services) to the prospectors who lived hard lives panning for gold. The perspectives of these two types of entrepreneurs (the shovel sellers and the prospectors) were different. The prospectors used their knowledge to stake a territorial claim and search for gold (which might or might not be discovered). Shovel sellers, on the other hand, sold to a defined market with serious needs who had money to pay.
Two of the better known sellers of shovels and promoters of the gold rush were Levi Strauss (sold blue jeans) and Samuel Brannan (owned a general store located at Sutter’s Mill, where he wanted to drive business).
You could say that the prospectors were going for broke, willing to take bigger risks, and in theory had a bigger upside. The shovel sellers were more likely to have less variance in their businesses but possibly were also less likely to strike it rich.
Is it any different today?
As a comparison, a recent gold rush is the Cryptocurrency / Bitcoin / Blockchain market. While the price of various cryptocurrencies is hard to predict and subject to wild swings, the tools that companies and individuals need to be involved in that market are easier to know. Rather than buy BTC, sell miners. Rather than speculate on crypto, build a tool to help people mint NFTs. Large companies including NVIDIA, Amazon (AWS), and more focus on selling shovels.
But as with many strategic questions, there isn’t a single answer that holds true all the time. You still need to think through it for yourself. Sometimes that’s easier than other times.
In the Gold Rush that is the startup scene, I’ve met two classes of shovel sellers over the time I ran a startup and operated incubators and accelerators.
Some Good or Unavoidable Shovels
- Pay for office space, naturally. If you have an office. The number of co-working spaces exploded over the last five years. In one extreme example, there was one co-working space in Hong Kong when I moved there in 2012. There were 100 co-working spaces there by 2017. Today there are multiple co-working spaces in many cities around the world.
- Pay for incorporating, when you do it. Unavoidable regulation but pretty cheap. While you might not incorporate until you get your work to a specific milestone, if that cost scares you, there’s something wrong.
- Pay someone outside your startup to produce something not worth doing in-house. For example, to outsource a logo or UI design. Depending on what you’re doing, going rate anywhere from $100s to many $1000s. Just have to make sure that results are on target. There are many services that do this today.
- Pay for off-the-shelf commodity operations, such as mailing list management systems, hosting, and payments. Things that really are cheaper for other companies to do. Again, there are many options today.
- Other newish sellers of shovels that can be good (do your due diligence) include infrastructure and devices for blockchain businesses or investors, companies that do design and packaging for food businesses (lots of growth in this industry), and growth marketing services to help startups scale their customer base.
Bad or Completely Avoidable Shovels – Here are a few of the more interesting bad ones I’ve encountered
- Pay for followers on Twitter, Facebook, and other platforms. The concept is you can instantly get thousands of followers if you pay for them. Not sure how it works. Years ago when I saw a new startup competitor of ours suddenly have 10,000 followers I wondered how that happened. They still have 10,000 today. And no one ever @ messages them. I don’t get the point. Getting these “followers” is cheap however. This is what I like to call a “bonfire sale of the vanity metrics.” I know a few people who game the system by making sure that they have tens of thousands of followers as a way to get better treatment at events (organizers assume that you command an audience when they see your follower count). That’s just not my scene.
- Pay for @ messages. Somebody tried to sell me access to people with large numbers of Twitter followers (Twitter might not be a big deal for your industry, but there are versions of this on other platforms) who I guess then tweet out their support. I guess that’s what it was supposed to be. Never considered it. Going rate was $5,000 for 10 power Tweeters. The potential deal was offered to me in the (actual) shadows of a startup happy hour by an otherwise upstanding member of society. The world would be better off if you gave that money to charity. A friend who took the deal saw no real impact on his business.
- Pay for introductions. The concept (from another upstanding member of society) was they would introduce me to people for money. I asked if they really meant a commission in the event of a sale, but they weren’t interested in that. They just wanted to monetize their address book. I thought this was so weird that I actually cold-called and set up meetings myself. So I channeled that one into something positive for me.
- Pay for money. I’ve never gone out to raise money but I’ve had people request to raise money for me for a fee. When I politely tell them that I’m not fundraising it breaks their hearts. Note that many investors look unkindly on this type of work. A percent of their investment shouldn’t go to a middleman.
- Pay for informal advice. Seems to be used mostly by those whose experience is from the ’90s bubble. Funny thing is, I usually have to fend off advice-givers. My perspective on the value of advice has also changed dramatically in the years since I wrote this post. This is obviously not the same as having a true advisor or board member who knows what they’re doing, contributes serious value, and who receives equity or other compensation.
- Pay to pitch. Going rates I’ve heard seem to be between $150 – $500. I just think that’s wrong, like asking a band to pay to play. Well, maybe if it were a really bad band… But even the times I’ve heard of good bands paying to play, they were able to collect money at the door to recover the cost.
- Pay to present. Slight twist on the above. Years ago I was invited to pitch my startup at a conference (for free) but then told there was a fee to present to investors. I’ll spare you the theater of the absurd conversation that followed. Again, that’s just wrong. I’ll be paid to speak publicly, not the other way around (though I have also accepted travel fees in exchange for speaking at an interesting event). Going rates between $200 – $2,000.
- Prey on students. I received multiple messages appealing to students of the university where I teach and run the Incubator, for them to apply to a week-long entrepreneurship course in Silicon Valley (operated by another upstanding member of society). When you go to the application… there is no application, just a form for payment. But celebrities will be in attendance. Is there content beyond the speeches that have been delivered many times before? Do the participating students actually change or just feel that they changed? Do they need to pay so much for a fun week? And doesn’t their university, where they already pay tuition, already provide versions of this education? (The SV founder later gave the school’s commencement speech.)
- Pay for rankings. On Product Hunt, for example, I received the following pitch when I posted a new product. “I just saw you guys launched on Product Hunt. Congratulations! I can help you with this. Our services: We offer a performance-based model where we’ll try to get you in the Top 3 spots for the day. 1st Spot: $2500, 2nd Spot: $2250, 3rd Spot: $2000, 4th Spot: $1750. If you place 5th spot or anything lower, our service remains completely free of charge.” This takes away the value of true audience rankings, but I can see some startups lured by it. Even as sites like Product Hunt have lost their value. Then again, if the fees work for the value of the attention you’ll get, why not?
Watching this has been fascinating to me.
Unlike the 1849 gold rush, when the easy gold was picked up early on, that’s not necessarily the case if you’re building a startup today. A market (and tech) often needs to develop a bit first. That’s why we sometimes talk about a first-mover disadvantage.
After reading this post, you might think that I advocate always selling shovels and never digging for gold.
I don’t mean that. There isn’t necessarily a single answer to what you should do. Also, the advantage can swing between selling shovels and digging for gold. At times, digging for gold is the right choice. You should absolutely go for it in those situations.
Also, I have to say, you can also choose to dig for gold because you just prefer that lifestyle (it can be more fun than shovels) or because you have an advantage against those other prospectors.
Hats off to you sellers of shovels for parting prospectors from their money. And to those of you looking for gold, keep your heads down.
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