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October 12, 2011

I’m going to do a new blog series on “Startup Jargon”.  There are some words that I hear all the time as a VC – both spoken by fellow investors and by entrepreneurs.  They are said so often that they have almost lost their meaning, and I find that unfortunate since many of these words reflect very insightful and important concepts.  It’s too bad that they get bastardized and used loosely and inappropriately.

So, I thought I’d do a little cliff-notes summary of some of these terms.  I’m not claiming any original IP, but hopefully will be able to pull together some good thinking on these subjects and add some precision to these words.  Some of the concepts/phrases I’ll  cover are:

  • Disruptions
  • Pivot
  • Viral
  • We’re not raising money…

I hope to add a few more as things progress, so please share your suggestions!

So, the first topic I want to bring up is “Disruption”

You hear people say “This is truly disruptive!”, “I’m looking for disruptive companies”, “We want to disrupt this market”, etc.

Aside from the actual definition of “Disruption” the word received a turbo-shot of in-vogue-ness as the work of Clay Christensen became popularized.  His seminal work, “The Innovators Dilemma”, talks about the concept of disruptive innovation.  Christensen defines 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.”

The underlying concept is that most industry incumbents are successful at delivering “Sustaining Innovations.”  These are like product improvements that satisfy existing groups of customers and improve against vectors that a company’s biggest customers care about the most.

The idea behind a disruptive innovation is that there are a whole host of other potential customers that might care about completely different attributes of a product or service.  The incumbents have a hard time addressing these customers because

  • It’s perceived to be a trivial problem
  • The target customer group seems too small
  • Delivering against those attributes would mean failing to deliver against other attributes that their big customers care about
  • Delivering against those attributes means a service with lower margin, thus, the effort never gets approved

Not all innovations are “disruptive innovations” by this definition.  “Disruptive Innovation” is not a catch-all for any innovative proposition that seems big and different.  Instead, it’s talking about a very specific kind of innovation that is made possible by very specific market dynamics.

How Does One Know If Something is Really Disruptive?

Based on Christensen’s work, there are certain things that you almost always see in disruptive innovations.  These are two questions that I’m asking myself when I hear the word “Disruption”.

Question #1: Are you going after non-consumers or low-end customers?

In disruptive innovations, the target customers are either non-consumers of existing alternatives or the unattractive customers of the incumbents.  You sometimes hear the phrase “low-end disruption” because the innovative company looks like a low-end product and targets the unattractive users of the bigger companies.  Let’s take the blogging CMS world for example.  WordPress is arguably the incumbent in this space.  They focus on tools that large scale publishers and/or bloggers use.  Tumblr, on the other hand, initially focused on the many casual bloggers that wanted to get started in blogging, but quickly abandoned their wordpress or Typepad blogs because it seemed to be too cumbersome of a task.  In a way, Tumblr was focused on WordPress’ low-end customers.

Questions #2: What attribute of competition are you going to excel at that others don’t care about?

Disruptive companies are explicitly striving for differentiation across a different plane of competition than the incumbents. You can think of a company as trying to deliver excellence across some attributes and not others.  You can’t be good at everything after all.  If you were to plot “Level of Excellence” on a Y axis and “Attributes” on the X axis in order of importance to the incumbent, you would get something like this.


 Now, the disruptive company comes along and decides “you know, I think there is a whole class of customers who only need a so-so level of attribute 1 and 2, but really really care about attribute 5.  In fact, being good at attribute 5 probably makes it really hard to be good at attribute 1, which is why the leader in the space doesn’t focus on it.”  So their graph looks something like this.

Let’s take WordPress again – while the company was trying to satisfy its larger, professional publishers by offering the most robust CMS with the most flexible features and most developer friendly tools, Tumblr came along and offered a very limited feature set that was clearly insufficient for many of WordPress’ best customers.  But they did deliver on excellent usability and design and a social reading experience through the dashboard so that even infrequent writers could get value from their service.

Parting Thoughts

  • Just because you are going after a non-consumer or low-end customer doesn’t mean that you will be disruptive in a meaningful way.  You actually do need to be right that a large market will be unlocked that care enough about the attribute of differentiation you are targeting to adopt your product en-masse and actually pay enough to build a real business.
  • Notice that in the example above, I didn’t say that Tumblr excelled on simplicity.  Simplicity is almost always an early trademark of the product of a disruptive company.  But that is not usually the root of the disruption.  Tumblr excelled at usability and aesthetics for casual bloggers, not on simplicity.  Simplicity is usually a mark of all disruptive innovation, but those products usually do become more complicated and still remain disruptive.  Put another way, disruptive products tend to be more simple initially, but simplicity does not make a product disruptive.
  • Make sure you are really targeting an area of differentiation that the incumbents can’t or won’t really focus on.  If you do, the existing players will typically win eventually.  One example of this is on the attribute of “service”.  Often, I’ll hear a startup say that they are going to win because of insanely great service.  That’s a nice idea, but I’m sure that the CEO’s of your big competitors have also read Tony Hsieh’s book and probably are trying to figure out how to deliver great service, propped up by their better cost structure and margins.  In some markets, this may be an avenue of sustainable differentiation (eg: airlines) but not in many, especially now that more and more companies are really focused on it.
  • All existing companies go through the process of going from being the disruptor to being pulled towards sustaining innovations.  So at some point, your disruptive company will in turn be disrupted by someone else.  Just as the incumbents struggled to keep pace with new entrants or dismissed them entirely, don’t think you are immune to this jus t because you are a startup.  As Ferris Bueller said: “Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it.”

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  • robgo
     - 2 hours ago
    I just backed BIBLIOTHECA on @Kickstarter http://t.co/Z7TAMMvzDX
  • robgo
     - 2 hours ago
    It's a greater threat for a VC firm to be stuck fighting yesterday's war than betting wrong on tomorrow's war
  • robgo
     - 7 hours ago
    wow.. currently on public wifi that actually works!
  • robgo
     - 12 hours ago
    I'm having a directionally challenged day
  • David Beisel
     - 14 hours ago
    .@bbohrmann: VCs can say "no" better by defining their firm, being transparent + constructive, and actually saying no http://t.co/Q20VszGh6B

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