What the Gold Rush Can Teach Us About Business Success

gold rush

Quick – what do you think of when you hear about a “gold rush”?

Does getting rich come to mind?

Or do you think of a swarm of people wasting their time, thinking they are going to become rich?

For most people, the term “gold rush” has come to represent failure. It’s more about trying to get rich and failing than it is about succeeding.

The California Gold Rush of 1849 was the origin of the term, but in modern times we’ve had a series of gold rushes – from the dot-com bubble, to the real estate bubble, to even investing in gold itself.

It’s ironic that such a significant historical event based on the discovery of a rare precious metal became short hand for failure.

What Businesses Can Learn From the Gold Rush

I bring this topic up because I recent spent a week on vacation in California’s gold rush country, which is the area south and east of Lake Tahoe in the Sierra Nevada foothills. My wife, our young son and I stayed close to famous old mining towns such as Angels Camp, Murphys and Twain Harte.

These areas once housed thousands of men all hoping to strike it rich. Now they mostly house a small fraction of the number of people they once held and largely depend on logging or tourism for their local economies.

Spending time in this area gave me the opportunity to reflect on how the “gold rush mentality” from the California Gold Rush of 1849 and subsequent gold rushes can affect individual businesses and business owners.

Entrepreneurs tend to see opportunity everywhere they look, so when a gold rush comes along, it’s no wonder entrepreneurs come running. However, history has taught us that often a gold rush produces very few millionaires and a lot of disappointment. And even lost fortunes.

Here are a few of the lessons we can learn from the Gold Rush.

Don’t Put All Your Eggs in One Basket

Gold Rushes change markets, which can create a dangerous situation for your business. Your business may have to change to adapt to the new market condition. Even if your business does not change deliberately, your business may change subtly over time.

During the dot-com boom in and around Northern California and Silicon Valley in the late 1990s, there was a huge demand for residential real estate in the south of Market area of San Francisco, which was where many of the dot-com businesses were located.

As a result, real estate developers over-developed the south of Market area of San Francisco with trendy condos and lofts.

Many developers stopped building other kinds of real estate, such as single family homes in the suburbs or commercial office space in other parts of the city.

When the crash came, many of these developers were overly dependent on this one real estate product. What was once very profitable suddenly couldn’t sell. Many were forced out of business.

These developers could have lessened their problems by giving up a little profit during the boom years and diversifying into less profitable but more stable other areas of the real estate market.

Even if your business is profiting from a gold rush, you may be wise to diversify your business to other areas for if and when the rush ends.

Don’t Follow the Gold, Sell to the Miners

Often the most successful entrepreneurs are not the ones who go after they gold. They are the merchants who sell goods and supplies to the people who are chasing the gold.

One of the many businessmen who got their start during the California Gold Rush was Levi Strauss, who found success selling denim pants to miners around San Francisco.

In today’s world, we’ve all heard stories about companies such as Goldman Sachs that made money by selling financial products to investors investing in real estate, and then made more money as the mortgage market came crashing down. They profited from both the run up, and the run down.

The similarity between Levi Strauss and Goldman Sachs is they both sold to the miners. They didn’t go after the gold.

How will your business sell to the miners?

Times of Change Produce Opportunities

Gold rushes produce massive changes to existing markets, which tend to upset the old order and create new opportunities.

The key point though is that most of these opportunities do not come from the market-changing “gold rush” event itself. The opportunities come from the way the changing market overturns the old way of doing business.

During the California Gold Rush of 1849, San Francisco initially was hard hit as many of its residents joined the masses in the Sierra foothills. However, the population soon rebounded and in not long, San Francisco was booming.

Imagine the initial reaction during the time. No doubt some residents thought the gold rush was going to hurt San Francisco. In the initial reaction, some residents may have overreacted.

Instead, the city was one of the greatest beneficiaries of the boom, profiting from the influx of people and money that came in from around the world and from the Sierra foothills.

The key is to not reach too quickly and wait for opportunities to develop, and then to pounce.

Watch Out for The Backlash

After the initial Gold Rush boom was ending, there was a backlash against the influx of foreigners who had flooded the state. There were many anti-foreign and racist attacks, and California passed new laws and stiff taxes which were aimed at foreigners who had arrived during the boom.

The U.S. real estate bubble of the 2000s similarly resulted collateral damage. Professions such as mortgage brokers and independent financial advisers now have stricter regulations and testing requirements which they must comply with to practice their profession.

The lesson of these experiences is if you find yourself in or around a gold rush, even if you think you won’t be affected, you should watch out for collateral damage.

How will you make sure your business profits and doesn’t suffer from the next gold rush?

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Photo credit: Flickr/Mykl Roventine

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