Clay Christensen Tells Startups How to Deal with Disruption

BY L.A. LOREK
Founder Silicon Hills News
wx7iaAt Startup Grind, Clay Christensen decked out in a business suit with tie, looked like he was about to address his Harvard Business School class.
Instead, Christensen, perched on the arm of a leather chair, spoke plainly and authoritatively, to an attentive audience of technology entrepreneurs, angel investors and VCs at Startup Grind, a two-day technology conference focused on startups held on Tuesday and Wednesday at the Computer History Museum in Mountain View, Calif.
Christensen covered a lot of topics including how entrepreneurship is becoming a more predictable path to success through pattern recognition and that it’s no longer a trail and error process.
He also predicted major disruptions in education, smartphones and the venture capital industries.
“Just as I pray for Harvard Business School, I pray for Apple,” Christensen said.
And in the wake of recent suicides in Silicon Valley and the technology industry, Christensen also discussed his latest book How Will You Measure Your Life? The book focuses on integrity, happiness and living a balanced life.
For the first half of his talk, Christensen spoke directly to the audience. During the second half, Mark Suster, venture capitalist, quizzed him on a variety of topics.
Christensen, best known for his 1997 bestselling book The Innovator’s Dilemma about disruption in traditional industries, spent a great deal of time talking about how disruption breaks traditional businesses and spawns new ones. Disruption occurs when companies spend too much time focused on their existing business and fail to adopt new technology to meet future needs.
Christensen’s theory of disruption allows companies to predict “whether you will kill the incumbents or whether the incumbents will kill you.”
In one example of disruption, Christensen recounted his youth and his love of transistor radios because they were portable and allowed kids to listen to rock and roll music outside of the earshot of their parents. His parents had a large RCA radio equipped with vacuum tubes.
Transistors eventually replaced vacuum tubes in electronics because transistors were the superior technology. But they were also disruptive because they created a new marketplace.
Christensen explained that disruption occurs when incumbent industries respond to new competitors. He advised entrepreneurs to go after the bottom of a market and to work their way up. He also advised them to go after markets that have no customers. He used the example of a vendor selling solar TVs to the two billion people in Asia and Africa who don’t have electricity. They are thrilled with the devices. But people accustomed to high-quality TV in a market like the U.S. would not be as thrilled.
The path for entrepreneurs has also evolved from one of trail and error to an industry focused on pattern recognition.
“Most VCs still live in a world where they think it’s unpredictable to pick winning companies and entrepreneurs,” Christensen said. They still trust their gut instinct instead, he said.
That’s one reason why the venture capital industry is ripe for disruption, Christensen said.
“As a group, there are fewer venture capitalists that have read my research than any other group,” Christensen said. “They still think entrepreneurship is in the realm of intuition.”
“The Theory of Disruption” is what Christensen is best known for, he said.
Intel’s Co-founder Andy Grove, a fan of the Innovator’s Dilemma and author of Only the Paranoid Survive, told Christensen he should call the theory the “Christensen effect” because people would not understand what he meant by disruption.
“Everyone uses the word disruption but very few of them really understand what it means,” he said. “Disruption is what the competition will do in response to what you do.”
That’s why entrepreneurs should always move up from the bottom of the market in pursuit of profit, Christensen said. The existing market will flee up market.
“That’s actually quite important if you want to succeed,” he said.
He also advised startups to compete against non-consumption markets.
“When you have a new product it’s important to target people whose options are none,” Christensen said.
Tesla Motors makes $100,000 electric cars but that doesn’t fill a very big market niche. Instead, an electric carmaker should market a car that doesn’t go very far or very fast and sell them to the parent’s of teenagers, Christensen said.
Apple makes its iPhone and other products with proprietary technology, whereas the Android Operating System is built on open architecture. That makes the smart phone industry ripe for disruption, Christensen said. The marketplace will go to the cheaper Android-based smart phones.
Online education is leading to a massive disruption in the higher education industry. Christensen predicted 15 years from now half of all universities will go bankrupt including state institutions.
Lastly, Christensen explained how the venture capital industry will be disrupted, but not through crowdfunding. The VCs focus too much on large investments and they should be looking at the smaller deals too, he said.
He said that royalty-based financing, popular in Austin, has become a viable alternative to venture capital. Royalty-based financing gives an entrepreneur money in exchange for future repayment but doesn’t require any fixed payment schedules or amounts.
Christensen also talked about how an entrepreneur can find out if a customer is going to buy their product or not.
“What causes us to buy a product or service is stuff happens to us everyday,” Christensen said.
Understanding the cause and what motivates people to buy improves the probability of success to a much higher level, he said.
But the customer is the wrong unit of measurement, he said. Instead, an entrepreneur must understand the job the customer is trying to do.
Christensen recounted a story about a fast food restaurant that studied why customers bought milkshakes in the morning. They discovered that people who “hire” or buy milkshakes in the morning do so to keep themselves occupied on their drive to work because it lasted 25 minutes and satisfied their hunger. They occasionally “hire” bananas, donuts, bagels and coffee, but the milkshake did the job better than the others.

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