It’s a gold rush. No doubt about it.
In the last few years, the number of people opting to build their own startup has grown dramatically. A quick cut of Crunchbase data suggests that outside of California, the number of firms starting-up and finding seed funding grew by almost 700%.
There are plenty of structural reasons for this change. Over the past 25 years the internet has begun to come into a period of relative maturity. The promise of the late 90’s is finally a reality with a good deal of global infrastructure in place. Now more than 40% of the world’s population is on a relatively standard and stable communications infrastructure, allowing entrepreneurs to build digital services that can rapidly affect the lives of billions.
But the change is also cultural. Startups are cool. Entrepreneurs have displaced rock-stars in the minds of many of today’s youth. And many clamor after the pot of gold at the end of the rainbow (a fact we can derive from the swathes of Harvard MBAs heading to Silicon Valley in record numbers).
Without judging the reasons for the gold-rush or taking a position on its sustainability, its easy to agree that it’s underway.
And in any proverbial gold-rush, there is one easy way to make money; sell shovels.1
Selling shovels means delivering critical infrastructure for those attempting to strike it big. And given the massive shifts how we develop applications today, the rapid changes in our macroeconomic environment, and the proliferation of new business models, there is plenty of new infrastructure to be delivered.
Some of the beneficiaries of the second Internet-boom’s shovel selling strategy are already established. For example, AWS is growing substantially on the back of not just enterprise customers but any business looking for infrastructure at scale. Twilio is delivering the critical communications infrastructure that underpins companies like Uber and Opentable. Sendgrid is powering an ever growing array of applications that send you automated emails to confirm purchases or application registrations. But there are many others as well.
While there are an immense number of new opportunities in shovel selling, there is also an increasing risk that the types of projects being undertaken can’t sustain meaningful scale. As many of the core pieces of digital infrastructure start to solidify, many young companies have sprung up building out much more niche solutions; services that enable a much smaller market to flourish. The risk to the entrepreneurs in these spaces is that they think they’re starting a shovel business, when they’re really delivering left-handed pickaxes optimized for miners with vertigo. Something that’s necessary for a few - but won’t support growth.
In attempting to come up with a better framework for entrepreneurs, I find it important to consider two ways a “shovel” strategy can provide the foundation for something great. By delivering something that goes broad or goes deep.
A service that goes broad, can deliver value in a variety of circumstances. VOIP, for instance, can be used to enable everything from call center operations to food delivery services. Many of the vendors that developers know today are broad. A developer thinks of AWS, for example, every time they build a new application.
The challenge with breadth is that the flexibility needed to be broad often requires sacrificing personalization. AWS might be flexible, but it’s not perfect for business data - hence the success of Force.com. This lack of specified capabilities results in commoditization and price pressure. Companies that win with broad “shovel” services understand this tradeoff - focusing on constantly delivering great product at competitive prices.
Deep services are those that deliver against critical and specific business process. Checkr, for instance, automates background checks and security screening for on-demand service vendors. If your value proposition is in providing reliable on-demand service, the decisions you make around in-sourcing or outsourcing that screeding capability become core to your business.
This criticality makes deep services sticky, enabling entrepreneurs to wedge in additional products. For instance, Square has such incredible attention because there is a strong belief that once they’re in the door as the POS provider, Square will be able to provide a bunch of other related services to small retailers. Micros has proven that it’s not so easy to rip out your POS system.
But the challenge to deep services is two-fold. First, not all services are really sticky. In a world of APIs, it’s easier than most think to replace commodity software. Second, vendors offering deep services to a small number of customers run the risk that those customers will decide to home-grow capabilities for even better configuration.
Since depth and breadth ultimately enable a company’s ability to grow, being thoughtful about how you stack in a shovel business is critical. Companies with broad and deep solutions are few and far between (and most of them didn’t start that way). Companies with a broad strategy need to be the rails, thoughtfully enabling a massive wave of transformation for a wide variety of customers. Companies with a deep approach to the market need to be thoughtful about how they wedge in new products. How can they land some meaningful customers and slowly add incremental services to grow their revenues in a big way.
What entrepreneurs need to avoid is building something basic solutions for a small group of gold-miners. It’s here that you might find a number of early customers, but you won’t find sustainable growth. This is the gimmick. The flash-in-the-pan. The product that won’t scale. The acqui-hire, not the acquisition.
With critical infrastructure being provided daily, the number of obvious holes to fill in are diminishing. But there are still plenty of opportunities out there these days. If you plan on taking a shovel strategy, be considerate of which path you’re traveling and make sure that you go either broad or deep. Avoid being a flash-in-the-pan. Build something great.
Or pick-axes in Chris Dixon’s words