Why Entrepreneurs Today Should Think About Transformation, Not Disruption

Perhaps it's time to develop a new framework for innovation -- one that doesn't require that a startup attack incumbents to be a success.

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By Tore Steen

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When Airbnb first skyrocketed to success, it seemed like the writing was on the wall for the traditional hospitality industry. As Uber had decimated the taxi business and Netflix had done away with video rental stores, so would Airbnb's short-term rentals soon replace outdated hotels.

Related: It's Not About Disruption -- Industry Transformation Is About New Markets

That's how things were supposed to work according to the theory of disruptive innovation, which was originally developed by Harvard Business School professor Clayton Christensen in his 1997 book The Innovator's Dilemma, and which has since been widely popularized in the tech press. By leveraging new technology, upstarts with low overhead and low prices should easily steal market share from slow-moving incumbents and quickly move in to replace them.

Airbnb has certainly become a success, with a more than $30 billion private valuation as of this writing. However, despite all the headlines heralding their doom, hotels haven't been replaced. Far from it: The hotel industry as a whole is projected to sustain a strong 5 percent to 6 percent growth through 2018, according to Deloitte. While Airbnb has certainly revolutionized the hospitality sector, it didn't do so by unseating entrenched incumbents. It did so by absorbing excess demand for their product.

Look more closely at many tech startup success stories, and you'll see a similar pattern. Very rarely does the model of "disruptive innovation" actually apply. Uber, Netflix, and Amazon notwithstanding, most successful tech startups don't replace incumbents, but coexist or even collaborate with them. One frequently cited study found that only 9 percent of Christensen's 77 companies "primed for disruption" actually followed all elements of his model.

The flaws of Christensen's theory have been widely reported on at this point. Most people in the tech industry are aware that disruption is the exception to the rule (or at least they should be). Yet, entrepreneurs, journalists, investors and everyone else can't seem to let go of the term. You read or hear it all the time in blog posts, in news articles, in speeches and at conferences including the aptly named TechCrunch Disrupt.

Related: What Every Disrupter Needs to Know About Transformation

Perhaps it's time to develop a new framework for innovation -- one that doesn't require that a startup attack incumbents to be a success. In fact, it might be time to acknowledge that startups might get better -- even more revolutionary -- results by collaborating with those incumbents to transform existing industries from the inside.

How startups and industry incumbents can work together to innovate

Today, "digital transformation" is as much of a buzzword in the corporate world as "disruption" is among startups. Large legacy companies are trying to figure out how to bring their organizations into the digital age by integrating cloud computing, data science and other modern business practices into employee workflows. It's an enormous cultural shift as well as a technological one, and many companies are struggling. One recent poll of U.S.-based executives found that half of them didn't believe their company was executing on 50 percent of their digital transformation strategies.

The problem is even more acute in highly regulated, opaque industries that are generally slow to adopt technology. Health care and financial services are often cited as sectors where regulation can impede innovation. Another, lesser known example is the industry in which I've built my current company, commercial real estate (CRE). Despite the fact that CRE is an enormous market, with transactions projected to reach $414 billion per year in 2019, most CRE developers and operators work the same way they did a decade ago. Beyond cellphones and email, new technologies have made relatively few inroads. However, that won't be the case forever, as increasingly tech-savvy participants in all of these sectors demand more convenient, seamless digital solutions.

The high barrier to entry in such complex and relatively inaccessible industries makes it unlikely that startups will replace incumbents with the same ease that Amazon replaced brick-and-mortar bookstores. However, that doesn't mean startups in those sectors can't be revolutionary. Many startups are making big waves by collaborating with incumbents in these industries today.

For example, fintech startups are making blockchain accessible for existing financial systems, so banks can carry out trustless transactions just as individual holders of bitcoin do. Healthtech startups digitize medical records and provide doctors with AI tools to make diagnosis easier. In CRE's case, in 2012 federal legislation opened the door to crowdfunding CRE projects for the first time; many digital platforms, including my own, have sprung up to help investors and developers participate in this all-online process. Together, startups like these are transforming the face of multiple industries by helping, not challenging, incumbents.

To make a long story short, the biggest opportunities for new startups today may not be "disruptive" in the conventional sense. More often than not, industries are best advanced -- and entrepreneurs are best rewarded -- by the addition of new ideas to existing frameworks. The only question is when the language we use to describe these innovations will catch up to reality.

Related: Want to Disrupt an Entire Industry? Here Are 3 Tips From the Future.

How to build a truly transformative startup

As the co-founder of a startup built on these principles, I've seen firsthand the power of transformation, not disruption, to revolutionize an industry. I've also refined a set of best practices for entrepreneurs along the way:

1. Seek out the right opportunity. There are dozens of industries that have yet to make the transition into the digital age. As developments in blockchain and automation continue, more and more markets will be open for both digitization and democratization. Entrepreneurs who are able to bring old-school ventures onto digital platforms, and make them more efficient and profitable, are invaluable. Keep your eyes open for entrenched, offline industries who need your specific set of skills and expertise in order to take advantage of tomorrow's technology.

2. Don't be afraid to adapt your pace. Too often, entrepreneurs approach these opportunities with a "move fast and break things" mentality. But, if you're working within pre-existing -- and slow-moving -- structures, you may need to adapt your pace to theirs. In highly regulated, opaque legacy industries, sales cycles are long and projects regularly get held up with red tape. You'll have more success if you plan for this in advance, rather than attempting to push potential customers along before they're ready.

3. Do your research. Whatever industry you're seeking to revolutionize, you need to understand its inner workings first. Make sure that your product solves a problem that industry insiders actually have, not one you've imagined for them. For us, that meant speaking with countless commercial real estate developers and operators in order to truly understand the challenges they were facing. This "research" process is also key to building trust with the companies you plan to serve -- they'll pay more attention to a newcomer who has done their due diligence.

4. Recruit from the industry you're transforming. Understanding the industry you're looking to transform, and the target market you're trying to win, isn't enough. You also need to take a cold, hard look in the mirror, and make sure you understand yourself. What do you, as a founder, bring to the table? What is your level of expertise in the field you're looking to transform? What wisdom and experience are uniquely yours to offer to that industry? Is there an area of expertise your background doesn't cover, but that is vital to your venture nevertheless? Then be smart, and bring in a co-founder with industry expertise, or add an industry veteran to your leadership team.

The idea that every successful startup needs to follow the blueprint of Uber, Amazon or Netflix is not only inaccurate, it's limiting. By thinking in terms of transformation, not disruption, entrepreneurs can open up possibilities they never otherwise would have imagined. The industries they impact will be the better for it, too.

Tore Steen

CEO of CrowdStreet, Inc.

Tore Steen is CEO and co-founder of Crowdstreet, a commercial real estate crowdfunding company. A business leader in the internet and software industries, he has deep expertise in strategy, business development, sales and marketing for both publicly traded and private enterprises.

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