Cool Tech or Meaningful Disruption? The Dilemma Of The Venture Investor
16 January 2019
As you can imagine, working as a VC means the word ‘disruption’ crops up pretty regularly. From disruptive business models to disruptive technologies and disruptive conferences, the startup world is so hooked on this Silicon Valley buzzword, that it’s almost ceased to have any meaning. It leaves you with the aftertaste of a flat beer. Not exciting, not refreshing and you quickly regret drinking it!
Disruption overload led me to question what we actually mean when we use the term and whether disruption is even the right thing for us VCs to be focused on. After all, at its root ‘disruption’ is a negative term, implying noise, conflict, confrontation, destruction. Not exactly what we’re looking to achieve.
Disruption or disruptive innovation?
First of all, it’s important to separate these negative connotations of disruption, from what we’re really looking for in the startup world, which is ‘disruptive innovation’. In a nutshell, that’s any innovation that leads to the disentanglement or the disintermediation of existing business operations, and by doing so, drives efficiency and opens new market opportunities, while challenging incumbent players.
By their very nature, disruptive innovations are not served by large corporates, either because they’re currently unprofitable, too risky, or because they’ve simply been overlooked. Disruptive innovation is, therefore, the ideal fit for risk-taking entrepreneurs eager to experiment with new technologies and business models. And these entrepreneurs need cash, hence why we see so many ‘disruptive innovations’ land in our inboxes!
Technology isn’t the be all, end all
But another important area of distinction is in separating disruptive innovation with disruptive technologies, as in most cases one doesn’t immediately follow the other. To give an example, the startup world started getting excited about mobile internet as early as 2000, but the technology didn’t actually take hold until 2007 when Apple launched its iPhone. At that point, it delivered a whole world of opportunities for disruptive innovation, but plenty of investors who took a punt in the early 2000s technology lost a lot of money in the process.
It’s a similar situation with autonomous cars today. The technology may be hugely innovative, but it’s still in its infancy and we’re yet to see whether it will, in fact, disrupt the automotive market and, if so, when, and by who. It’s not a disruptive innovation (or a good investment) if you have to wait 20 years to go to market.
When it comes to disruption, the key for VCs is, therefore, spotting the difference between a cool, innovative technology and an innovation that’s going to make a meaningful difference to an industry or target market – and soon. The technology involved doesn’t even need to be that innovative in itself, it’s how that tech is being used to drive efficiency, reach new markets, cut costs, empower consumers etc.
In fact, in many cases, disruptive innovation can be as much about brand and targeting underserved consumer groups in new ways, as it is about technology. This is particularly true amongst the Millennial and Generation Z demographics, who frequently feel disenchanted by incumbent players and are instead looking for cool, authentic brands that they can identify with and feel part of.
Getting the timing right
But above all, as a VC you need to get the timing right, by analyzing trends and adoption rates in different sectors and markets, so as to make a call about the various ideas and innovations that land on your desk. In some cases, it could come down to a piece of legislation that makes entering a new market easier or, on the flipside, that prohibits a certain industry or piece of technology, or makes it harder for consumers to use.
Right now, for me, meaningful disruptive innovation is happening in sectors that have traditionally been slow to innovate and that are therefore undergoing rapid change. For example, insurance, logistics, and health, where supply chains are being made more efficient, helping businesses to cut costs and therefore enabling a much-improved experience for the customer.
So, while they might not be rockets or flying cars, these changes are making a meaningful difference to those sectors, in a way that is scalable, and promises return on investment in the not too distant future. And for me, that’s disruption that makes sense.