How do you recognize disruptive potential in companies?

Three months ago, I was having lunch with a start-up advisor and talking about start-ups, building companies and the experiences of doing so. He asked me: “How do you choose the start-ups you get involved in?”. When I tried to give as comprehensive an answer as possible, I realized that I actually have very clear rules, but I formulate them so clearly. What applies to start-ups is equally relevant to the innovative capacity of companies already established on the market. Here is a take.

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Innovative companies vs. sham innovative companies

If you search for the definition of an innovative company on Google, you get things like this:

You still hear this kind of verbiage a lot and it is not very helpful when it comes to innovation in companies. What exactly does “a company is already designing its products and processes with the future in mind” mean? Or “complex systems that change quickly”? The former is a matter of course, the basis of all entrepreneurship and the latter, well, isn’t our whole life complex and changing quickly?

It is therefore often the case that symptoms of innovation are equated with innovation. The table football table in the office (don’t worry, it’s at one of my companies too) symbolizes a culture that gives room to ideas and agility. In very few offices where these symbols can be found, however, have I been able to detect a spirit of innovation.

“Companies are innovative when they constantly incorporate new technology and methodology to improve at a fast pace in their field. Yes, it’s that simple.”

From innovation to disruption

Now this gradual improvement, this innovation, is precisely what interests me least about start-ups. Innovation in the classic sense is something that is important for established companies, because on the one hand they already have a market share that they have to defend, but on the other hand they have to constantly develop further in order to, in the best case, be able to expand their position.

Start-ups generally have no significant market presence, which is why classic innovation per se is not important.

What really matters with start-ups is the disruptive potential. I have already described the difference between innovation and disruption in detail here.

 

The three parts of “disruptive potential”

I know, you’re going to think it’s yet another bit of wordplay. Let me explain it to you:

I believe three parts are crucial when assessing the disruptive potential.

No 1: The “technological bet”

I believe the underlying main driver of any radical innovation is always

• a new technology or
• an existing technology that is currently undergoing major improvements
• or a new possible combination of different technologies

It is irrelevant whether the company drives and develops the technology itself or whether it can simply make use of it. This underlying principle should be a bet in the sense that the technological development is foreseeable for experts with a certain reliable probability, but is not known to the general public.

One such bet could be the following: “I’m betting that technological improvements in battery technology will progress so quickly in the next few years that completely new applications will become possible in industry X, Y and Z.”

You are simply betting that you will be able to solve a problem fundamentally better in 5-10 years with this technology. In my opinion, fundamentally better in this context should always focus on the commercial aspects. Additional non-monetary advantages are certainly helpful, but in the end, commercial advantages are always the deciding factor.

 

No 2: The team

This is what venture capital firms preach all day long: We invest in the team (in fact, very few of them really do, because most of them understandably simply invest in “commercial facts”). The following applies to the team: a bad team cannot build up disruption potential based on a good “technology bet”. On the other hand, a good team cannot build up disruption potential based on a bad technology bet. Opinions differ as to when a team is good. Personally, I think it’s a good sign if the team can argue about things with great commitment to the cause, but after a relatively short time, they can agree on a common denominator and build on it. If there is always peace, I become skeptical. This is usually a sign that there is not enough consistency.

In addition, a good team is certainly characterized by complementary skills. At the end of the day, every company, really every company, is a group of people who are trying to create a defined change together for different motivations. I always argue that the team, and therefore the company, should be glorified into something that it ultimately is not: an independently acting entity. That’s wrong, in the end it’s always just a group of people.

No 3: Market potential

Market potential is probably a familiar term to everyone. Unfortunately, it is often misunderstood from an entrepreneurial perspective by analyzing a current market and then coming to the conclusion that the market for XY has a certain size. Disruptive solutions, however, largely create new markets or change the rules of the game in existing markets in such a way that “legacy providers” lose their competitive edge.

“There is always considerable market potential for companies that build on a solid technological bet and have the team to implement this vision. The only question is when this will happen.”

Basically, I can only advise you not to pay too much attention to existing market conditions, but to keep a close eye on developments. Growth rates are much more important, even if they are still small. If the growth rates are high and dynamically positive, there are many indications that this development will “follow through”.

It is surprisingly easy to assess the market potential of completely new solutions through surveys. I am still amazed that this is not done more often.

Timing

Well, the key to bringing these three components together is, logically, the right timing. Firstly, a team that is as well put together as possible must be able to take care of a “technological bet” at the right time. That is quite rare. It is even more difficult to establish this link to market potential. Investors quickly become skeptical when it comes to investing in something today that will only become relevant for a market tomorrow.

Paradoxically, it actually becomes easier (but not cheaper) if you yourself are the driver of this technological development. Things become more predictable, the pace is easier to control.

 

One technological bet – many verticals

In order to better recoup the costs of technological development, it makes sense to scale the benefits of the technology in different use cases in parallel. This is why radically innovative companies are often soon active directly or indirectly in different domains.

 

Disruptive start-ups

What interests me about start-ups are precisely these three components. It’s the reason why I build new companies in the first place and try to move forward with them. Conventional companies or start-ups with a “me-too” character never interested me. However, I had to find that out along the way. In the end, I think there is nothing more exciting than building something truly new. Things that accelerate a paradigm shift. They are our future.