“Disruptive” is a word that gets thrown around a lot in the startup world. Every startup wants to be the next disruptor, and every investor wants to get in early on the next disruptive innovation. Despite the word’s frequent use, genuinely disruptive technologies are rare. This week, we’ll be diving into what it really means to be a disruptor as well as how investors can learn to identify disruptive technologies and ideas.

What is a disruptor?

Disruptive innovation is a term that was originally coined by Clayton M. Christensen, an academic and business consultant, in 1995. In a 2020 interview, Christensen reflected on the term as it relates to the current landscape, defining it as: 

“…a process by which a product or service powered by a technology enabler initially takes root in simple applications at the low end of a market — typically by being less expensive and more accessible — and then relentlessly moves upmarket, eventually displacing established competitors.”

Boiled down, Christensen describes disruptive innovations as having humble beginnings – they are simple, easily accessible, and affordable. This is what, over time, allows them to disrupt existing markets or create new market segments.

Characteristics of a disruptor

So, how can someone easily identify an idea that has real disruptive potential? There are three things all disruptors do.

They solve a real problem

For any business to be successful, it must solve a problem. Disruptive innovations often innovate on existing solutions, removing existing consumer pain points. The critical thing to note here is that the new solution doesn’t necessarily have to be complex­–in fact, the simpler, the better, as these solutions are easier to adopt.

They alter consumer behavior

The most distinctive characteristic of disruptive innovations is that they cause a notable shift in consumer behavior. Once consumers have adapted to and embraced the disruptive technology, they often feel that they can no longer go without it. (Think smartphones). In this way, it has altered their long-term behavior.

They alter competitor behavior

Disruptors disrupt markets. They do this by thinking outside the box to find smarter ways to do things. This inevitably leads to changes in the behavior of competitors within that space. To keep up with the new paradigm, they must find ways to adapt to shifting consumer behavior.

Examples of disruptors

Smartphones

Smartphones illustrate the idea of disruptive technology perfectly. Before smartphones, consumers were accustomed to having their phone, email, computer, camera, etc., “unbundled.” Now, it’s hard to imagine not having access to a smartphone that houses all of these capabilities. Not only did the advent of the smartphone change consumer behavior and expectations surrounding phones, but it changed how we shop, how we socialize, how we take photos, and much, much more.

Netflix

When Netflix started out with its DVD-by-mail service, no one could have anticipated how its eventual streaming service would come to change the entertainment landscape. Netflix’s unexpected rise ushered in the demise of traditional movie rental stores like Blockbuster, but it didn’t stop there. The launch of its streaming service in 2007 was the beginning of a massive market shift towards video streaming, with countless imitators cropping up to this day.

Airbnb

After years of little innovation within the space the hotel space, Airbnb came along and turned the hospitality industry on its head through its simple peer-to-peer model. The company’s business model is a classic example of disruptive innovation–a simple solution that is affordable and accessible. While it began by targeting consumers seeking more affordable travel accommodations, it has since expanded its offerings and now can compete directly with luxury hotels for high-end consumers.

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.