Section 1: How to Think about Disruption:
Steve Jurvetson, DFJ: Why Disruption Matters
Steve Jurvetson, DFJ5
Why are disruptors so important?
Leaders may not realize an important megatrend that is currently growing and will continue to grow. I would say that all meaningful change and progress comes from disruptive innovation led by entrepreneurs and new entrants.
If you look back at history, a recurring pattern shows two types of innovation, incremental and disruptive. I will focus on the latter, the types of breakthroughs that history books are written about: the types of things that matter. This is something attributed to a person or company, rather than just gradual progress. No history book will be written about a company that finds a way to improve drilling for oil by 10%, whereas the things that Steve Jobs or Elon Musk have done are great examples of taking industries which had not seen innovation for decades, and then a new entrant comes in and shakes things up.
Today, we are seeing a tangible, accelerating change of technology, which is connected to Moore’s Law (Figure 1). Our capacity to compute and store information has been compounding for over 100 years, and it has nothing to do with the semiconductor industry as the driver. In the context of Moore’s Law and accelerating technological change, we are seeing entrepreneurship and investment become more and more powerful, and so it disrupts more and more. An example of this is in the evolution of agriculture, which information technology is [involved in], in profoundly powerful ways. As an industry moves from laboratory experiments of trial and error to computer simulation testing, the pace of innovation tracks with Moore’s Law. Remember that airline manufacturers previously relied on air tunnels to test wing and fuselage design, but now all designs and testing can be done on simulations, ever since the development of the Boeing 777. Engineers can now think about improvements and iterate at a rapid rate while simply sitting at their desks. That is now the story of industry writ large. Every industry on our planet is going to become an information business. Farmers may still do their farming, but if you ask farmers in 20 years’ time about how they compete, they will say that they are dependent on how they use information rather than just their workmanship. That applies for every industry.
There will be laggards, of course, but you can see how the disruptive force of information technology is reaching into industry like never before. Even the automotive, rocket, satellite and chemical industries are starting to feel the interesting and peculiar force that new entrants and competition bring, which is unfamiliar to these industries. For the incumbents, it has been a while since they last worried about new competitors. This exemplifies that there is no longer just a business-as-usual environment for the largest enterprises. With 10 or 20 years of Moore’s Law, the great new ideas and new opportunities to reshape business will come, and they will always come from the new entrants and never the incumbents. That is one reason why big governments and big companies should be interested in how they can nurture disruptive innovation. They effectively need a constitution that enables and encourages the new entrants to have a chance, because that is who the future belongs to.
Figure 1: Moore’s Law over 110 Years
Source: Kurzweil, Ray, as published by Jurvetson, Steve, in “Disruptive Innovation”, presented at TTI/Vanguard’s [next] conference, San Francisco, 10 December 2013, http://www.slideshare.net/BryanFox2/steve-jurvetson
Obviously, that’s easier to recognize in retrospect. When you look back 20 years ago, there was no Google, and Apple was almost dead. It’s clearly a difficult proposition to predict, given this example of the two largest tech companies today being almost non-existent so recently. That truth applies when you look forward 20 years from now. In 2040, what will be the most important company in the world? What will the history books be written about? I would bet that company doesn’t even exist yet. It hasn’t even been thought of yet.
What are the integral factors which are now creating large disruptive leaps?
There are two organizational advantages in start-ups. One is that they have no sacred cows. The second is that they start with a small team. A small team of five to seven people is really the secret sauce of innovation. Nothing profoundly innovative can be done in a large committee. Twenty people in a room cannot do anything creative. Therefore, a start-up has an inherent advantage, which big companies do not. There are exceptions, including Apple, where Steve Jobs was famous for kicking people out of meetings because he didn’t even want meetings of more than four to five people, and Google takes a similar approach.
Part of the secret is that they think far into the future and see something inevitable. These entrepreneurs don’t ask “if”, but they ask “when”, “in what sequence” and “how”.
Disruptors also have a different approach to pricing. In many of the start-up businesses that we invest in, they often significantly change the pricing dynamic to get traction with the customer. They make the product valuable to the customer, instead of maximizing profit. That’s painful for incumbents because they are concerned about their existing market share. People were impressed that Hewlett-Packard entered the printer business in the 1980s. It’s true that their inkjet printers undercut the profitability of competitors because HP didn’t care about the existing market, unlike the incumbents making money from their existing technologies. That demonstrates how the new companies create innovation. But HP has done nothing innovative in computing or instrumentation since then. Similarly, Apple has done nothing radically innovative in PCs or laptops for the past decade. This suggests there is a cycle of how new businesses enter a market, change that market, but ultimately become incumbents in that market.
I would challenge anyone to name a more universal law in business than the statement that big business never radically disrupts or innovates in their core business. People generally don’t believe this statement because if they work for big businesses, then they don’t like to think that they aren’t innovative. That’s a really unpleasant admission. That’s not because these people are any less creative, capable or innovative. However, organizational constraints make that impossible unless they peel off into small groups. These small groups can then ask themselves: What is our core capability or the insight that lets us move into an adjacent market? What’s roughly related to what we do, and where do we have some professional perspective? Great things can happen from that starting point.
Progress is accelerating because every idea is a combination of previous ideas; innovators often call this “standing on the shoulders of giants”. Breakthroughs are a combination of other sub-ideas that previously existed. This is why major innovations tend to be “ripe”. There is effectively a moment when something can be invented simultaneously by different people across the globe who barely know each other. The incandescent light bulb and radio transmission are examples of that. It’s true for almost all of science and engineering; when the time is right, it happens within the same year, or even the same month.
To see how the combinatorial explosion of possible idea pairings leads to accelerating change, imagine that the number of existing ideas equals N. Then imagine what happens when all ideas are recombined to create more ideas. This concept of sub-group scaling is explored in Reed’s Law (Figure 2), which states that we have a 2n phenomenon; as N grows, then the possible sub-groupings grow at the order of 2n. As the number of technology ideas grows, then the number of possible sub-groups that could arise experiences a combinatorial explosion. As N grows, the possible recombinations of N grow exponentially. This is a reflection, or maybe even refraction, of the bigger trend of the accelerating pace of progress.
Figure 2: Reed’s Law
Source: World Economic Forum
That’s the truth of history until today, but now we have an extra factor: the internet. People can now initiate ideas like never before. Previously Nikola Tesla and Guglielmo Marconi could communicate, and they could argue about who ripped off whom, but look further back at the development of agriculture and people were not communicating across continents. Therefore, ideas were partitioned, so the success of nations and regions pivoted on their own innovations. Richard Dawkins states that in biology, it is genes which really matter, and we as people are just methods of conveyance for genes. This parallels with ideas. We humans are vessels who hold and communicate ideas. Now we can do this globally, and so today there is a global pool of ideas. That is exciting and it adds a turbocharger to change, and to the businesses that have global span that can now reach a breathtaking scope of vision.
Looking at the next six years, we will have something unprecedented in history. Three billion people will enter the global economy from their currently isolated pools in rural areas of the developing world. Why? These 3 billion people will come online for the first time via cheap smartphones, connecting to the global economy. They will be potential consumers and entrepreneurs, and they will have access to online education resources like no one has had before. That is incredibly exciting from the point of view of more ideas coming together from more minds across the globe.
What are the characteristics of individual disruptive entrepreneurs?
Part of the secret is that they think far into the future and see something inevitable. These entrepreneurs don’t ask “if”, but they ask “when”, “in what sequence” and “how”. Elon Musk and electric cars is a concrete example. It is unthinkable that we will always have internal combustion engines that burn oil. Even car companies admit that will end within 500 years, although they can’t agree on the next 50 years. Similarly, we can imagine that we will have colonized Mars within 500 years. Someone like Elon will chain back from that end goal to the present and begin to seriously ask, how will we get from here to there? He’s already thinking, how can I do thousands of round trips to Mars? Can we process the local Martian resources to create the rocket fuel for the return (better switch from kerosene to methane)? He bets the company on solving problems that no one else is solving. Elon wants to colonize Mars, and nobody in the traditional aerospace industry takes those risks; they just incrementally improve the current business of launching satellites into orbit around the earth.
When the issue is examined from that perspective, everything changes in your design phase; otherwise, you wouldn’t have the motivation to overcome the individual barriers to success. That requires entrepreneurs with stars in their eyes and a distant dream of where we are heading, so that they can break out of the local optimization loop and move innovation beyond just doing what we do today, but better. Most big industries aspire to 2% improvements in their processes and technologies, but the 10-time and 100-time improvements come from the explorers who are looking at the horizon. They really are humanity’s greatest asset.