How to think about Disruption | Data Driven Investor
Every startup is trying to disrupt. The common belief is that something can be created that will alter people’s behavior, change a market, and trigger new usage. Every startup is looking for that shift.
Let’s start with a statement. I personally do not believe in disruption as a shift, I believe in technology trends and market evolution. I do not think that disruption occurs quickly and rapidly like magic.
If you created a technology startup, you might believe that what you are building can permanently change things. You see that market problems are poorly addressed, and you think you can push out the incumbent. The reasoning is often to build a first feature that might open the door, and then with time, add functionalities to make the solution even more relevant to the point where the old solution is replaced. Think of Netflix with streaming from your home, but with little catalog in 1997, against Blockbuster with a large catalog but you had to go to the store. As Netflix grew the catalog Blockbuster became irrelevant. That’s how disruption occurs, right? Not so fast…
If you look at it through the length of time, disruption is a long process and it does not involve the emergence of a star product only. Take Zoom. Most might think that Zoom is disrupting communication, remote work, and so on. However, Zoom is nothing more than Skype. Skype was created in 2003, 17 years ago. What is making Zoom a phenomenon is the conjunction of multiple things. For once, Skype and the likes have been educating the market for the last 17 years. The evolution of networks, better bandwidth, and software at large, helped Zoom create a better experience. The weaknesses of competition opened the door, i.e. Skype would have been flawless, Zoom would not thrive. And finally, Covid-19 forced people and corporations into using a remote communication system. So Zoom is not disrupting, it is in the right place as multiple things converge.
Disruption is more likely the moment when things converge to impose a new behavior. It’s not a fracture in time where suddenly new things happen.
Can we predict it? Predicting when disruption will occur is very challenging but strategically essential. So let’s analyze the key ingredients that could foster changes.
Technology itself is an enabler, and a breakthrough in technology might prompt new usage. Understanding technology cycles is key, specifically hardware cycles. Think about the emergence of the Cloud, Drones, the Internet of Things, Artificial Intelligence, Crypto, 3D sensing cameras, 5G, or Quantum Computing (not yet, I know :-)).
Customers will embrace something new more easily if what they have is becoming obsolete. Customer fatigue could also manifest if a supplier is providing a poor service with no replacement solution in sight. So look for markets that have been the same for a long time and where the status quo is the norm.
3-Weakening of Competition
Weakening competition is always a good sign. Take companies that established quasi-monopoly, and because of it became less diligent on customer satisfaction. They tend to milk the cow and lose sight of product innovation. So look for unhappy cohorts of customers stuck for lack of alternatives.
4- New Business Models
Changes can also occur via a change in the business model. Xerox became dominant because it introduced the ability to lease a copy machine to make it mainstream. Nespresso remained the main coffee distributor because they locked their clients with a Nespresso machine. Uber did not disrupt the taxi business with new cars, but rather by revolutionizing the customer experience and providing a platform to enable the sharing economy.
So combine the technology cycle with customer fatigue, weakening of competition, and new business models to anticipate the force of disruption.
This should become a fantastic framework when it comes to starting a new project. I’m not saying it’s easy, to the contrary, it is overwhelming but really worth the effort.
We all know that investors are looking for startups that could become disruptive. They rarely ask themselves, is the product disruptive, but rather are they too late or too early. To answer that question the analysis of multiple trends needs to take place. If you want to raise money try to answer why now is the right moment for your startup, which will go a long way with investors.
So I know that most entrepreneurs are product-centric, that’s what they like and know better. They often underestimate the competition, run a quick and dirty market analysis, thinking let’s build it the world will come. I simply think this is wrong. Market and technology trends are critical. Being in the right place at the right time is what triggers success, not a great product.
Food for thought…
Originally published at https://www.datadriveninvestor.com on June 18, 2020.