The problems with picks and shovels business models

By Joseph Flaherty

Levi Strauss’ biography is the model for the “picks & shovels” business model.

He sold jeans to prospectors, and while most mining claims went bust, his tough trousers minted a fortune.

Many founders believe it’s better to be a toolmaker than a miner.

But is it?

In some ways, yes. For all the attention paid to consumer-facing startups, there are more than 2X as many public tech companies with a B2B focus. Helping businesses achieve their goals is a well-trod path to success.

There’s a debate if B2B = Picks & Shovels, but if you plan to pitch your business that way, here are two questions to ask:

👻 Do your picks and shovels have utility in a ghost town?

⛏️ If there’s gold in the hills, why aren’t you digging for it?

First, asking if your product has broad utility is helpful because it helps determine how robust your startup will be to shifts in the market. Ideally, a tool has utility in multiple applications.

Using the Levi’s analogy, even though many 49'ers left Northern California empty-handed when the boom went bust, riveted denim made for relatively comfortable and durable pants well-suited for a rapidly industrializing economy.

The best picks & shovels startups can pivot to a degree. Stripe serves any startup that handles money, Shopify packages ecommerce functionality for most small vendors, and Unity provides a menu of tools to video game makers — all fairly broad customer bases.

In Stripe’s case, an entire category of startups could crash, like boxed meal delivery, and there will still be plenty of other companies that will want to transact on the internet. Shopify can transact electronic hobby supplies or essential oils. These are authentic tools.

Many picks & shovels startups get into trouble by tying their fate to a single, nebulous category. These entrepreneurs often arrive before the emergence of replicable use cases or even a clear sense of who the target user would be.

That’s where the second question comes in. If there’s a gold rush afoot, are tools the best fit for your talents at this time? Or are they a way to get broad exposure to a trend/technology without taking the limiting risk of trying to build a specific product?

There were many startups in this mold during the recent crypto boom. The early days of digital health had a similar dynamic where startups scrambled to create a hub for health records with no practical sense of how to drive value for anyone but themselves.

Unless your product can save scores of workers from having to reinvent the wheel and wastefully recreate commodity-level functionality — now — there’s no certainty that your brand of picks & shovels will be helpful.

There are many good reasons to become a toolmaker, but it’s also a handy dodge for the indeterminately optimistic. If you are excited about some new technology but are unwilling to commit to pioneering the product category, it’s worth asking why.

Building tooling for a class of “jobs to be done” is a riskier endeavor than it may seem. Why not focus your efforts on a project with a less contingent path to market?

That said, if you’ve struck a vein and think you’ve found the mother lode of MRR, keep digging. But always be careful not to develop tunnel vision, lest you be left with nothing but fool’s gold at the end of a long labor.

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