March 24, 2021
Turning Cold Into Gold

In the early 1800s, a New England entrepreneur named Frederic Tudor built himself a $200 million fortune from scratch by selling a product that was already:

How did Frederic pull this off? Steven Johnson's book 'How We Got To Now' tells the story.

In it, Johnson covers Frederic's big business idea, the struggles and humiliation he faced, and the move that helped him turn a worthless product into a global business empire.

Frederic Tudor's Big Idea

In the year 1800, at the age of 17, Frederic made a trip to visit the Caribbean. The humidity was almost unbearable coming from New England, and it gave him an idea.

What if he could transport ice from his native New England to people in the Caribbean? Surely there would be a market for it in the sweltering heat. All he needed to do was get it there before it melted.

Turns out, it wasn't that simple, but Frederic Tudor went for it anyways. He purchased a ship called the 'Favorite' for $4750, and in the winter of 1805, set sail for the West Indies with 80 tons of ice blocks.

Johnson writes:

"Despite a number of weather-related delays, the ice survived the journey in remarkably good shape. The problem proved to be one that Tudor had never contemplated. The residents of Martinique had no interest in his exotic frozen bounty. They simply had no idea what to do with it."

He continues:

"Sometimes the sheer novelty of an object can make its utility hard to discern. That was Tudor's first mistake. He assumed the absolute novelty of ice would be a point in his favor. He figured his blocks of ice would 'out-do' all the other luxuries. Instead, they just received blank stares."

Nugget of Gold: "If you're building something new, you must teach people how it works"

Frederic Tudor's Struggles

Frederic lost $4,000 on his first trip, and continued losing money on subsequent trips as local Boston newspapers ridiculed his idea.

In fact, he had lost so much of other people's money that he spent parts of 1812 and 1813 locked in a debtor's prison.

Nevertheless, Frederic remained focused on his ice shipping business, a business that offered Frederic two real advantages over competitors located elsewhere:

Still, Frederic struggled to turn a profit because of two disadvantages:

After years of ice shipments, the residents of Martinique slowly began to appreciate the potential use cases for ice, but it was one final storage innovation that turned Frederic's struggling business into a profitable one.

Frederic Tudor's Stroke of Genius

Johnson writes:

"New England's economy generated another product that was equally worthless: sawdust - the primary waste product of lumber mills. After years of experimenting with different solutions, Tudor discovered that sawdust made a brilliant insulator for his ice. Blocks layered on top of each other with sawdust separating them would last almost twice as long as unprotected ice. This was Tudor's frugal genius: he took three things that the market had effectively priced at zero - ice, sawdust, and an empty vessel - and turned them into a flourishing business."

Nugget of gold: "Worthless products may be worthless in isolation, but valuable when combined"

After 15 years of shipping, Tudor finally made a profit in 1820. From there, Tudor expanded all over the world, shipping ice as far away as India on his way to building his $200 million fortune.

My Take

Building a business using worthless products isn't common, but it's a great way to build a cost advantage over incumbents:

In fact, even the books section of my personal website earns money using the same principle. Book recommendations from the world's top entrepreneurs and investors are free for anyone to access, I've just collected them all in a useful format.

But even better than leveraging one worthless product, is combining multiple worthless products in a useful combination.

This idea shares some similarities with the 'skill stacking' approach Scott Adams advocates for in his book 'How To Fail at Almost Everything and Still Win Big'.

Instead of trying to become the best in the world at one specific thing, Scott says, try to become good at a variety of skills that work well together.

Frederic Tudor wasn't the best in the world at anything, but he knew just enough about cutting ice blocks, international shipping, and heat dynamics to be a dangerous entrepreneur.

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