The Picks and Shovels Strategy

By Ray DePaul

I was reading Fast Company and came across an article that reminded me about the "picks and shovels strategy". The strategy is rooted in the gold rush of the mid-1800's. There were hundreds of thousands of hopeful gold miners heading west to find their fortunes. Of course, not all of them would be successful, but the sure-fire way to profit from this gold rush was to sell the prospectors gold mining tools - picks and shovels.

The Internet was another modern gold rush. While there were some that found gold, the real winners were those that figured out how to sell tools to those rushing to this new opportunity. This strategy positioned Amazon and eBay (and recently, Shopify) as the winners in ecommerce largely because they didn't have to make bets about which products might sell on the Internet (outside Amazon's brilliant bet on books, of course). If bejeweled iPhone cases took off, they profited; if they didn't, then they would find their profits from some other vendor's crazy idea. You could argue the same is true of Apple's App store and Google's search.

A few pages later in the same Fast Company magazine was an article about chatbots - those human-like programs that you can ask questions and retrieve specialized information over your favourite messaging app. Some are betting that chat is the next user interface for smartphone access to all information (Facebook, Kik, Slack), while others are betting heavily on voice (Google, Amazon). Like most potential gold rushes, there are people building special purpose chatbots such as personal assistants, flight data and weather information, in search of success. But my 15-minute long memory didn't fail me and I asked myself what a pick and shovel strategy might be for chatbots.

In 2016, there were 34,000 chatbots launched on Facebook's Messenger interface. I'm guessing most of them (like most Apps) failed to gain any traction. What if you could sell a tool to all the prospectors wanting to make a chatbot? You would profit off the failures and the successes. Just when I was feeling smug, I googled "chatbot tools" and realized I was already way behind the curve.

Hopefully there are two takeaways from my morning of reading Fast Company. The first is that consuming new forms of information will open you up to new ideas. The second is that there are ways to make money during the inevitable hype cycle of new technology. If you're looking at commercial drones, the Internet of Things, the connected home, blockchain, or augmented reality, consider how you might sell picks and shovels to the throngs of innovators trying to deliver on the hype. Like all strategies, this isn't foolproof. I'm oversimplifying, but a large contributor to the demise of Nortel was that they sold picks to the far too exuberant builders of cellular networks. When those companies stopped buying networking gear, Nortel was caught with a massive pick and shovel store and no customers. I never said it was going to be easy.