Due diligence for an early stage investment

Disruptive innovations: Don't try for overnight success




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Disruptive innovations: don’t try and predict overnight success

Since Harvard Business School’s Clayton Christensen coined the term ‘disruptive innovation’ it has become the favoured, and many would say overused, buzzword of the tech community, by investors and entrepreneurs alike.

Since 1997, when Christensen published the The Innovator's Dilemma in which he outlines his definition of disruptive innovation, it has been adopted, tweaked and distorted in ways that leave it far from its original meaning.

In its original form, disruptive innovation describes the process by which a low-quality, innovative product enters the market at the bottom, often with simple, price competitive applications. A disruptive innovation has little concern about competition from incumbents whose products are often too complicated and expensive for the majority of the market to adopt. The disruptive innovation eventually moves up the market to displace established competition.

Disruptive innovation opposes the idea of sustainable innovation, which focuses on making incremental improvements on an existing product or technology.

Christensen’s definition was rooted in technology businesses but it has been applied to almost every industry since - take Airbnb, eBay, Uber or Netflix as the most commonly used examples. These businesses are by definition hugely valuable and so there is an obsession with finding such rare innovations.

 

You never know with an early-stage business if it will be disruptive - it is further down the road you realise its disruptive potential".

 

But there is a word of warning for investors seeking out these high-value propositions - it doesn’t happen overnight and you certainly can’t predict it.

This is the advice of engineer, entrepreneur and self-proclaimed cynic Adrian Griffiths, MD of Recycling Technologies. His business has created a potentially game-changing way to transform waste plastic into a clean hydrocarbon wax they call Plaxx™ that is truly cost-effective for business. However he claims that on first assessment, the full value of the innovation was far from obvious.

“It was certainly interesting, but it was a nice to have. It was only through a growing understanding of its value to the market that it became clear that it had huge potential to be a game changer in the recycling industry; not only to benefit the environment but to achieve huge financial gains for commercial partners.”

Griffiths is sceptical of the idea of an overnight success: “You never know with an early-stage business if it will be disruptive - it is further down the road you realise its disruptive potential.

“Any business that sets itself out from day one as being ‘disruptive’ or any investor seeking only disruptive businesses is kidding themselves. You simply don’t know the full potential of something to be disruptive until it has gone through successive refinements.”

A crucial part of this development is the commercialisation of the potentially ‘disruptive’ idea. According to Griffiths, many potentially ‘disruptive businesses’ never even make it out of the concept stage because they aren’t framed within a context that will offer value to investors or partners.

“One of the main problems with University start-ups - which is where many disruptive innovations emerge - is that they haven’t thought about how their idea will make money. The academic outlook is grounded in research, and produces interesting technologies. However, you then end up with an idea which has to find a relevant market.

 

“Any business that sets itself out from day one as being ‘disruptive’ or any investor seeking only disruptive businesses is kidding themselves. You simply don’t know the full potential of something to be disruptive until it has gone through successive refinements.”

 

“The alternative, and the more successful approach, takes a high-potential idea and focuses it to really understand how it can make money, developing it with a commercial goal in mind. Other larger scale operations have attempted to do what Recycling Technologies do but by making it accessible at a commercial level we have found where the potential really lies.”

This idea of commercialising the potentially disruptive idea is crucial to success for entrepreneurs and investors alike.

“Anyone with such a disruptive idea has to partner with people with commercial experience and with businesses to cook up the idea a little more and make it appealing to investors. Then they’ll see that it isn’t just interesting, but valuable too. The old saying is invest in the man and not the plan – investors like to invest in a team that has a balanced view to a technology, that understand the route to make money and that are not just excited by the technology”

Griffiths’ firm view is that you simply can’t predict an overnight success.

“Every investor wants to invest in potentially ‘disruptive’ businesses as part of their portfolio, but no-one knows which businesses really have that potential until further down the line. You’re only ever making judgements about the ones least likely to fail.

“Early-stage investments are inherently risky whether they’re disruptive or not. But as they say, nothing ventured, nothing gained.”


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