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What Makes a Startup “Disruptive”?

disruptive startupsI had coffee recently with a VC who talked about how “disruptive technology” was a key part of his firm’s investment approach.

On the surface, it makes sense. After all, “disruptive” is impressive because it sounds like something that could make a difference and, in the process, attract a lot of users and be worth a lot of money.

But after thinking about it, I began to wonder what “disruptive” really means and, in particular, what makes a startup truly disruptive. Is it a product that leaps ahead of the competition in a major way? Is it a product that solves a problem or a need in a new or different way? Is it a product that’s easier to use or less expensive than what exists?

Is Wave Accounting, for example, disruptive because it launched a free online accounting service into a market in which most players were offering a fee-based service?

Is 500px disruptive because its elegant and service displays photographs so beautifully.

Is Engagio disruptive because it offers a “social inbox” at a time when people are getting messages from multiple sources.

In many respects, “disruptive” can be defined in many ways. This makes it an alluring but, arguably, difficult creature to discover and identify. For one investor, disruptive may be one thing but it entirely different from another investor.

The problem with “disruptive” is it’s a sexy term for entrepreneurs and investors to throw around. Suggesting your product is “disruptive” is easy to do and get away with because it can be difficult to argue otherwise because “disruptive” is so slippery. How many times have you heard an entrepreneur proclaim their technology is “disruptive”?

The reality is we love “disruptive” because it’s elusive, multi-faceted and difficult to pinpoint until a startup enjoys success. Then, everyone can confidently say: “I know Instagram/Pinterest/Path, etc. was disruptive when I first saw it”.

So, how do you define “disruptive”?

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  • http://askbox.me Jordan Coeyman

    Great article. I often think about this very topic, and glad you addressed it.

    I define disruptive as the thing that demands attention. It can be bad or good, but it demands attention to determine the outcome.

    Like being a disruptive student in a classroom.. Shooting my hand up and wriggling with excitement when a teacher is in the middle of a lecture.. I’m demanding attention in such a way that my peers notice, and I’m requiring attention from my teacher because of this disruptiveness.. Not necessarily a good thing, but it could be a great thing.

    Now, in my personal account, I either had a brilliant, life-altering nugget of wisdom I was dying to get off my chest, pointing out a flaw or a new angle of thought about the subject.. Or, most likely, my idea or suggestion was met with a stare and a dismissal, because it wasn’t practical enough.

    I’m one to question authority and rule- and I’ve always been known to be a disruptive human being.. Hopefully I can translate that into something positive for my future ;)

    • http://www.markevanstech.com Mark Evans

      Jordan: Thanks for the insight and the comment. I think that’s the challenging part about “disruptive” is it can be different things to different people in different situations?

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  • http://www.innovativedisruption.com thinkdisruptive

    When an investor says “disruptive technology” is a key part of their investment strategy, they mean one and only one thing. They are referring to the theory of disruptive innovation as described by Clay Christensen in “The Innovator’s Dilemma” and “The Innovator’s Solution” (and in a half dozen other books that have followed). It describes a predictable process and pattern by which upstarts are able to introduce products to market that attack incumbents (usually) from below with inferior technology targeted at low-end or less desirable segments that those that the incumbents depend on for their bread and butter. After gaining a toehold, the challenger moves upmarket to higher margin segments until they squeeze out the old and become the new dominant incumbent. There is a second form of disruptive innovation tagged “new market disruption” which targets non-consumers (i.e. a new market). A disruption can be low-end and new-market simultaneously.

    The word disruptive can be pulled out separately to mean other things that are suggestive of what the term disruptive innovation means, but that broader range of meanings has nothing to do with the VC’s investment strategy. The reason a VC would target disruption is that these are the products that displace what came before and in the long term command 40-80% market share. If 2 or 3 of every 10 investments becomes a disruptor, you will have portfolio returns that are order of magnitude greater than non-disruptive companies. Disruptors grow 10x or more faster than non-disruptors which is why the ROI on investment capital is so much greater.

    Google, Twitter, Microsoft, Oracle, Facebook, Apple are or were all disruptive innovators. If you were lucky enough to be an investor in all of these at their early stages, you’d be wealthier than Bill Gates or Mark Zuckerberg. That’s why investors care about disruption.

    In my experience, when startups describe themselves as disruptive, it’s like someone in high school telling you that they are cool. Almost by definition, they are not. Disruptive isn’t a sexy descriptor that means “advanced” or “high tech”, and if people are trying to imply that by describing themselves as disruptive, then they are misusing the term as empty hype. Being disruptive doesn’t imply advanced, or better, or breakthrough, and doesn’t even require technology. It can be done with a very small incremental innovation and a new business model, for example (e.g. Netflix). And, it most certainly doesn’t convey a customer benefit, and truly disruptive innovators will be precisely targeting unmet or under-served market needs and focused on customer benefits, not whether or not they are disruptive.

    I suggest rather than debating what a disruptive innovation is, your readers pick up Clay’s books and learn about the theory first hand. It’s important, precisely because it has predictive value for identifying market winners and knowing why they will win.

  • http://www.markevanstech.com Mark Evans

    Thanks for the insight and the comment, one of the most thorough that I’ve received in a long time so much appreciated. I love the line about startups who call themselves “disruptive” being like people in high school who call themselves “cool”. :)

    Mark

  • http://www.innovativedisruption.com thinkdisruptive

    I probably should have said that for a VC to say their strategy is focused on disruptors is like saying I drink water to survive. Whether they say so or not, and whether they really know what it is or not, all VCs are looking for the big winners to balance out dogs in their portfolio that don’t do as well. Not every one does it as well. Kleiner Perkiins and Sequoia, for example, have a pretty good track record (still nowhere near perfect, but much better than most others). There’s a bit of self-selection going on there as well, since the real disruptors often end up on their doorsteps first, either because they already have relationships there, or are referred in.

    The trick is having either a really good intuition, or a strong set of predictive tools based on disruption theory. If you know what you’re looking for, you can be highly accurate in making predictions — not enough have the right abilities or tools to assist in making that determination, as you can tell by some of the idiotic ideas and me-too types of companies that get funding.

  • http://www.xero.com Jamie Sutherland

    This is a topic that fascinates me. At Xero, I can’t help but think that what we are building–a global web-based small business accounting application–is exactly like what Christensen terms a disruptive innovation.

    Christensen describes disruptive innovation as “a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.” He explains it even better in a short video here: http://www.claytonchristensen.com/disruptive_innovation.html

    Christensen co-founded a firm called Innosight. Innosight spends time working with larger corporations on how to introduce disruption from within their organization. I have been through this process and agreed with almost everything that was proposed from Innosight. The problem was it was hard to implement.

    Incumbents almost necessarily need to cannibalize some of their existing revenue lines and truly invest for the future in order to execute this strategy. However, the wide reach of their legacy products and large customer bases make increasing price or selling more products to their current customers the more economical route. As a result, the door opens to more nimble, forward-thinking companies to take root at the lower end of the market and move up.

  • http://engag.io William Mougayar

    I think Disruption and “Disruption potential” are 2 different things. Engagio could become disruptive if the social conversations space continues to gain ground and becomes significant. Then, suddenly we’ll be on top of that wave. But it’s too early to tell.

    We’re still trying to operate at the ‘thin edge of the wedge’ before we get into the sledge hammer mode.

  • http://www.innovativedisruption.com thinkdisruptive

    @William. Yes, and you’ll note that I carefully used disruptive and disruptive potential in differing ways to indicate exactly that.

    For the most part, disruption isn’t knowable until after the fact. It is more dependent on management strategy than anything else, and it is difficult for an outsider to know what management will do, whether they’ll fall into disruption by accident, or whether they have the skills, insights and guidance to achieve it by design. You also can’t know a priori how well they will execute, whether they have sufficient cash and investor confidence to go the stretch, or if something else will come along that blows them away before they have a chance to get established.

    On the other hand, many of these things are probabilistic and can be predicted with a fair degree of certainty, given the current state of the market.

    You’ve done a pretty good job with Engagio, and it definitely has disruptive potential, but there is a question whether someone like Disqus will see you encroaching too much on their space and respond. It would have been better had you gotten well-established before poking a finger in their pie. There are strategic decisions you could take right now that would push you much closer to being disruptive, and assuring success.

    @Jamie. You definitely are not disruptive, although you may have been 4-5 years ago. I will come back and elaborate later. But the question I’d have for you is that unless it’s an intellectual exercise that you are trying to learn from, why does it matter to you? It doesn’t, or shouldn’t directly affect anything that you do day to day in your role, and describing yourself that way in marketing communications would be a big mistake — it’s meaningless in than context, and no customers are ever going to say “I want some disruptive innovation” — it conveys no benefit.

    • http://engag.io William Mougayar

      That statement about Disqus and Engagio is not correct and far from reality. We have a different customer target. We are complementary to their approach, and vice-versa. You’re making uninformed assumptions.

      • http://www.innovativedisruption.com thinkdisruptive

        I’m not making any assumption. It is clear that you target slightly different spaces today, but not different enough. The appropriate response by Disqus to prevent you from becoming disruptive to them (which you will if you grow) is to either add functionality that does what you do, or to buy you.

        Disruptors always start with different targeted segments from incumbents, but if successful, they have no choice but to expand to adjacent segments to continue growing. If I were Disqus, I’d view what you’re doing as a potential threat. Not an immediate one, but one to which they need to pay attention to see how much traction you get and decide now whether to block you or create another means to do the same thing. That might even include contacting you to become a partner (many partnerships have been used to squelch competition or limit growth of the smaller company).

        You have to consider that it doesn’t matter whether you intend to encroach on their space (today), or whether you’re a direct competitor. It does matter that you are going after almost the same users with a slight variation of the same “job to be done”. That means that no matter what your intentions are, or whether you serve a different need today, Disqus needs to pay attention. If they perceive you as a threat, and act that way, it doesn’t matter what you do.

        As to ill-informed — I’ve been following both you (from your earliest comments on Fred’s AVC blog) and Disqus for a long time, and I spend most of my waking hours thinking about disruption, working with clients doing it, or writing about it. There are a handful of companies trying to do similar things in creating a single place to manage all your social media interactions, and another set who will or should feel threatened by your encroachment on their space.

        Can I predict a response with certainty? No. Are they probably aware of you and considering what your early success means? Absolutely. Should they increase the footprint of their product to stop you? Yes.

        • http://engag.io William Mougayar

          If you have been on AVC, then you would have seen the supporting commentary from Disqus about us. You’re wrong. I’m sorry that I can’t find a more elegant way to respond. I was at Disqus yesterday. We have been partners since day 1.

          • http://www.innovativedisruption.com thinkdisruptive

            As I noted, partnerships are often ways to monitor competition, or identify companies to buy. You are in adjacent market spaces, or there would be no reason to be partners. Long term, there isn’t a need for two different solutions to nearly the same problem. You may disagree with this contention, but it is a fact that most markets consolidate over time to create “whole products” to address the customer’s real “job to be done” fully.

            In any case, this is about being disruptive, or not. The closer you are aligned with Disqus, the less likely you are to be disruptive, and the more likely you are to be a Disqus “feature”. (Just as Tweetdeck was a feature waiting to happen in Twitter.)

            Anyway William, not trying to argue with you. I think we mostly agree, except you’re talking about product and I’m talking about market dynamics.

  • http://www.xero.com Jamie Sutherland

    No it doesn’t affect anything I do on a day-to-day basis. This post made me reflect on a previous experience working for a large corporation that struggled with innovation. It also made me think of how Xero is allowing a new population of accountants and small businesses access to tools that have historically been priced for larger companies (Clayton definition of disruptive innovation). I felt compelled to write and share my experiences.

  • http://www.innovativedisruption.com thinkdisruptive

    @Jamie. The whole market has reset based on SaaS/Cloud solutions, has it not? There is no single product or company disrupting your market, but a range of alternatives is available to address the problem, all with similar feature sets and business models. That’s the biggest obvious disconnect between what you do and Christensen’s theory.

    Sometimes incumbents die by a hundred pin pricks, with no single thing disrupting them.

    Sorry if I sounded harsh in my comment. In my experience, the term disruption is being thrown around far too loosely, with 90% of those who think they are disruptive actually not being so. If the market coalesces around your offering, or your owners make strategic acquisition decisions to become like Salesforce is to CRM, or Amazon is to online retail, then you would more closely fit the definition.

    You can be quite successful without being disruptive, but when you actually do disrupt, you usually end up garnering a near monopoly position (or strong oligopoly). There are many mp3 players. There was 1 iPod that at its peak had over 80% market share. There were at least 13 makers of mp3 players before Apple entered the market, but the disruption of the music industry didn’t actually happen until Apple also introduced iTunes (tighted coupled with the iPod) + legal sale and download of songs for $.99. All the other products were part of an overall market trend, but they weren’t disruptive. (And, it’s Apple itself that is disrupting the standalone mp3 player market, and finally, after a 10 year run, causing iPod sales to decline.)

    Usually when disruption happens, it is driven by a unique business model and supported/enabled by technology, but it isn’t the technology itself that is disruptive. It’s easy to make this mistake, and Clay’s early writing actually confused the issue because he originally described “disruptive technology” as the pattern, but then later generalized the term to “disruptive innovation” when he realized that the pattern was generally not driven by the technology. Innosight consultants, in pursuit of dollars and not wishing to offend big clients, have also created confusion and dilution of meaning.

    In fact, disruption is driven far more by marketing strategy (market segmentation, positioning, messaging, pricing, ecosystem, distribution, etc) than it is by the product, which by itself is neither necessary nor sufficient for disruption to occur. That’s because it is a theory about market dynamics driven by innovation, not about innovations per se, something that causes many to be confused.

    Netflix is a great example of this. They didn’t introduce a new product. They rented DVDs, just like Blockbuster. But, by eliminating the need for brick and mortar stores situated in thousands of physical locations around the country, and with them the need for huge amounts of under-utilized inventory, changing to a monthly subscription for content instead of individual movie rentals and using these advantages to eliminate the biggest friction point that customers had with Blockbuster (late fees). It was their business process, pricing, and sustainable lower operations cost that enabled them to kill Blockbuster. That, and the fanatical loyalty they had among customers who promoted their service by word-of-mouth, resulting in substantially lower marketing costs to promote their growth as well. (This is actually the biggest casualty of their ill-considered price changes, splitting and then unsplitting of DVD and streaming video lines of business, and dreadful corporate communications surrounding it. Their costs rose substantially while they bled customers at a time when they were extremely vulnerable to both the content supply being choked off and the owners of the pipes imposing caps and throttles on streaming content delivery.)

    The reason we care (and that it matters especially to company owners and investors) is that the majority of profits and growth ends up being controlled by a single disruptive innovator (who gets the business model right) and at most one or two other smaller companies, with another 10 or 20 little vendors competing for everything else. Since valuations are based on profits and growth potential, the investors are trying to identify the “Google” rather than the Alta Vista, Ask, Yahoo, Lycos, Live Search, Excite, and 40 or 50 others that thought they could carve out a piece of search.

    Ultimately though, what I said earlier is true. While markets are in flux, often the best you can do is a probabilistic prediction, or evaluate disruptive potential. The only way to know for sure who is disruptive and who isn’t is to look back after things settle down and a new status quo is achieved. I don’t like to make a strong prediction unless I’m at least 80% confident that a company fits the pattern and is doing the right things strategically to achieve disruption.

    You may wish to check out the LinkedIn group “Disruptive Innovation”, where there is often lively discussion (and frequent disagreements). Be careful not to be confused by the group “Disruptive Innovators”, which you might also find useful, but it’s far more oriented towards commercial activities and hype.

    • http://www.xero.com Jamie Sutherland

      At first you said that Xero may have been a disruptive innovation 4-5 years ago and now you are saying the only way to know who is disruptive is to look back after things have settled down. You have contradicted yourself.

      There isn’t much point continuing the conversation until I understand your concise definition of disruptive innovation. If it is different than Clayton Christensen’s then I suggest we base the conversation on Clayton’s given he coined the term.

      • http://www.innovativedisruption.com thinkdisruptive

        My definition is precisely Christensen’s. However, the 2 liner you presented earlier is not the full definition, but a high level synopsis. In other words, to appreciate that it is far more nuanced than what you stated, you need to read the books to get a complete picture of the attributes and patterns that define disruption. Also, as it is a theory, it is being evolved over time. You would find that many things are more refined and precise today than 15 years ago when the ideas were first described, and that it is still evolving (and will continue to, just as our understanding of marketing theory evolves).

        I haven’t contradicted anything. What I said is that today, you do not exhibit the characteristics of a disruptor. It is much easier to say who isn’t, than it is to be definitive about whether you are (unless it has already happened). Disruption isn’t an event, but something that happens over time. If the observable attributes say “not”, then you are unlikely to be disruptive. On the other hand, everything can align as a “yes” today, but we can’t know how management will change pricing next week (witness Netflix’s fiasco last year).

        What I also said earlier is that the determination of whether you are disruptive or not (in the present) is a prediction, unless the disruption is already complete. Predictions are probabilistic calculations, and some variables are unknown and unknowable. Even if I’m 99% certain, there’s still a 1% chance of being wrong. Generally, when most of us are more than 90% certain, we drop the “probably” and say “it is”.

        I should have avoided the word “definitely” although I am pretty certain of it, but if you re-read what I said, it is extremely consistent.

        @Mark. Thanks for starting this thread.

  • http://www.mifi.com.au/ Mifi

    A thought invoking article. In my view disruptive means something different than others or out of track or a trend setter. Or we can say that it belongs to a group but can’t be categorized by the common features of that group. Or it may bring some new taste to the conventional counterpart.

  • http://www.clickstudios.com.au/ Deepika

    Though disruptive is synonym to destructive, it is generally used in a positive sense. It means something new that challenges the existing ones.