3.3 Literature Review: Disruptive startups potential
The current fertile environment warms up the interest for startups to test their ideas and to challenge the status quo.
It’s hard to be named “disruptive” before actual market disruption happens and, moreover, there is no necessity in it: first, because it is not the goal of a disruptive startup; secondly, it looks like claiming to be “cool” — the more it is claimed, the less likely it is to be true. Therefore, a disruptive potential is more relevant to startup’s early stage that can be enhanced by the following guidelines.
The industry experts from startup incubators and accelerators mostly see disruptive potential in the problem a startup tries to solve and in a team which is capable of showing their roadmap of actions rather than promises. “We look for some form of progress because we believe that entrepreneurs actually do things, rather than just talk about doing things,” David Cohen Founder, CEO, Techstars says (Garcia et al., 2015).
Saul Klein, a Partner with Index Ventures, generalized the common opinion on this issue as the following list of disruptive criteria: high market opportunity, strong leadership, and a product that fundamentally changes the customer experience within that sector. But these assessment criteria can be referred to all startups.
Paul Paetz in his book Disruption by Design (2014) outlines three principle factors that create the opportunity for disruption:
In Figure 7 default incumbent’s management behavior and their human nature as opportunities for disruption are obvious. They show the fact that big companies’ reaction process in the case of new disruptive products is almost invariably slow and ineffective; therefore, the way to make it more effective is actively discussed in articles and books. In this case, for a startup it is enough to embrace this opportunity, but not take it as the golden rule. The most interesting factor is Scarcity that was also noted in Christensen’s Disruption Theory and Big bang Disruption, but hardly focused in professional industries’ guidelines.
The concept of scarcity underlines the latent demand which surfaces whenever there is any good opportunity for disruption. Scarcity can be thought of as an artificial or temporary condition, usually caused by:
- Lack of alternatives
- Monopoly or limited control of supply
- Cost to produce the good in question
Digital disruptors do one or more of the following:
- Cause a major shift in the supply curve through increased productivity
- Create alternatives that are good enough to address unmet needs of a larger percentage of the population
- Significantly lower the price, making goods affordable to low-end customers
A significantly lower price also shifts the demand curve because it makes it possible to serve low-end customers who can’t afford the existing market solutions, or it attacks monopoly control of supply by creating new sources and new substitution alternatives for products in different categories. Thus, the result of disruption is always to create abundance from scarcity.
Airbnb is one example that supports this principle. Created by designers Brian Chesky and Joe Gebbia — roommates who could not afford the rent of their loft in San Francisco — the Airbnb startup entered the market with low-end price connecting people to rent out their dwellings and customers.
Another classic word-of-mouth example — Henry Ford, who is widely thought to have been the inventor of the automobile, although he wasn’t even the first U.S. carmaker. Karl Benz in Germany was the first to create a commercially viable car. Yet, popular belief is that it was Ford who started it all. In fact, Ford’s contribution was mass production via the mechanized assembly line and the division of labor into small repetitive tasks combined with offering twice the prevailing day’s wages to keep skilled labor from leaving. These innovations made Ford Motor Company far and away the most efficient and most productive car manufacturer, able to produce eight times the output of other factories in the same amount of time. Ford’s philosophy was to deliver the product as cheaply as possible to disrupt the automobile market.
The problem of potentially disruptive startups following this concept of scarcity is that their disruptive potential is not always recognized in their early stages and sometimes needs several years to disrupt the market — as happened with Airbnb. Disruption is like finding a black swan metaphorically compared to in Beyond Strategy by Michael M. Andersen. If it were that easy, everyone would be able to do it.
But due to such case studies already recorded by history, the following disruption fingerprints as a pattern can be defined:
- inferior in comparison to alternatives
- initially targets a small market niche and specific audience
- the target audience potentially doesn’t attract incumbents because of the low margin and low-income.
- created by outsiders from other industries
- has one or more advantages to the new user — ease-to-use, simplicity, low price, convenience.
As a potential disruptor all the energy needs to be directed towards meeting customer’s needs with proposed value.
