Disruption vs. Enablement
“The point of industry analysis is not to declare the industry attractive or unattractive but to understand the underpinnings of competition and the root causes of probability.”
Michael Porter, Competitive Strategy
Founders often ask what we invest in, whether we like specific categories or align to a thesis. Our answer is that we invest in companies that disrupt or enable traditional industries. Now, I’ve learned to always follow this up with a smile and the clarification that this is quite broad and almost anything can fit into that thesis.
After our rebrand and thinking about how I approach this thesis, the truth is I have realized that our approach is slightly more nuanced than it first appears. I spend a lot of time learning about these industries and the dynamics at play through my own research and discussion with domain experts. Some important questions I like to think about are:*
- Where did past value creation come from? What was the path dependence that led to where we are today?
- What’s changed recently that makes the path dependence of yesteryear less important today? This can be a technological advance, shift in consumer behavior, or a regulatory arbitrage (or as my friend Nikhil Krishnan from CB Insights refers to as “opportunities at the edge of regulation”). Does an opportunity exist here?
- What moats do the incumbents have, where did they come from, and how have they defended those moats to date? Are there structural misalignments, inefficiencies, fragmentation, or consolidation that creates a potential vulnerability in the market that a startup can take advantage of?
- What are the incentives of the stakeholders involved and how might they react to the startup’s positioning in the market? If it’s a negative reaction, will it matter and if it’s positive, can that lead to future value creation?
Answering these questions allows us to make predictions about whether new technologies can create defensible, venture-backable businesses. If that potential does indeed exist, then the key question becomes whether the strategy of disruption or enablement provides the highest probability for success in this market.
To better understand how we decipher whether or not the startup’s approach is the right one for their specific industry, it’s important to clarify how we delineate between the different models.
Let’s start with “disruption”. The term is overused in our industry and as a result can be a pretty vague descriptor. This definition describes the strategy of serving a previously under-served market (using technology to provide a product or service to an end customer who previously couldn’t or struggled to access it due to either the type of product or service it is or the industry’s current makeup) or targeting an over-served segment by delivering a better or cheaper product. In the process a company might be creating a new market, serving customers that previously weren’t part of this market, aggregating disparate parts of a market to create better economics or a better experience, or siphoning away customers from incumbents with an alternative that is better because it’s more efficient, faster, cheaper, serves their needs or wants better, etc.
As information costs (and fixed costs more broadly) continue to decline exponentially and transparency becomes the norm, it can appear to founders and investors alike as if is disruption can develop in just about any market. However, in some markets there are industry dynamics at play that make this a very difficult (if not impossible) undertaking. In these markets, what we’ll call “enablement” is the best strategy for a startup to succeed. These companies build products to improve processes and provide tools that existing companies are unable build in-house because it doesn’t make sense financially, an inability to hire and retain technical talent or because the startup can provide access to a data set or a number of data sets that aren’t easily accessible.
In a series of posts over the course of the next few weeks, I’m going to walk through different several different strategies with detailed explanations and examples of industry dynamics in which I believe the approaches work best.
Within these two approaches, I’m going to lay out the industry dynamics that are best suited for certain types of companies as well as market characteristics that hinder the possibilities for the following business models:
Disruption
Enablement
- SaaS
- API
*I recommend that anyone interested in learning more about these frameworks read Michael Mauboussin’s paper from July 2013 on “Measuring the Moat”.
