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Entrepreneur Office Hours - Issue #141
A little disruption never hurt anyone, right?
“Disruption” is one of those startup phrases entrepreneurs love using, but I’m not sure most of them know what it actually means. That’s why I was excited to answer this issue’s Q&A. It’s from an entrepreneur who wants to know what VCs think about “disruptive” startups.
Also in this issue, I’ve got a couple articles for you. One is about the best business model for startups, and the other is about the first challenge every entrepreneur has to overcome before building a successful company.
There’s one pricing model that, as a consumer, I’m sure you hate. But, as an entrepreneur, you’d be crazy not to find some way of using it. Do you know what it is?
Every entrepreneurial journey is different and unique, but they all follow a similar patter. Understanding that pattern can help prepare you for the challenges on the road ahead.
Office Hours Q&A
How do VCs see disruptive company startups?
I wanted to tackle this question because it highlights a common misunderstanding in the startup world in relation to the concept of “disruption.”
The concept itself comes from a concept called the “theory of disruptive innovation.” It was first popularized by former Harvard Business School professor Clayton Christensen in a book called The Innovator’s Dilemma. If you haven’t read it, you really should. If there was a mandatory reading list for entrepreneurs, I’m pretty sure The Innovator’s Dilemma would be on it.
Despite the fact that disruptive innovation is a concept every entrepreneur should know and understand, it’s worth pointing out that Clayton Christensen’s target audience for the book wasn’t entrepreneurs. His target audience (and his clients) were big businesses. He wasn’t interested in helping startups disrupt massive industries and take down enormous companies. He was focused on the opposite. He was getting paid to help big companies avoid being disrupted by new technologies.
Regardless of what or why Christensen wrote what he wrote, the core concept of disruptive innovation is still important to understand. But you have to understand that it’s not a concept related to any particular startup. Even though we tend to refer to startups as “disruptive,” the concept is actually related to disruptive technologies.
I point this out because you’ve asked about how VCs view disruptive startups. For the most part, I assume VCs don’t care about disruptive startups, per say. Instead, they care about disruptive technologies. In other words, VCs are very aware of what disruptive technologies are on the horizon because they realize companies are going to deploy those technologies and (hopefully) take a significant chunk of the available revenue from within an industry. Knowing this, they try to find and invest in startups that are best positioned to deploy and monetize on those technologies.
Let’s take self-driving cars as an example. It’s clearly a disruptive technology, and lots of VCs are investing in startups trying to leverage it. But we can’t forget that large, well-established companies are trying to leverage the new technology, too. Because of this, VCs need to prioritize more than just startups deploying a disruptive technology. They’re also looking for the one thing I always emphasize when I teach people about fundraising, which is traction.
Traction, traction, traction!
Traction is and always will be the most important factor in fundraising, not technologies or products.
So… to answer your question… VCs care about companies leveraging disruptive technologies only to the extent that those VCs probably have a thesis about the potential of a specific disruptive technology and are actively looking for a company (or companies) deploying it. But they’re not going to invest in a company just because it’s “disruptive.” They still need to see significant traction that proves the startup is going to be successful capturing the market.
Got startup questions of your own? Reply to this email with whatever you want to know, and I’ll do my best to answer!