After every disruption, a second wave of startups emerge that adopt similar strategies to transform different industries.
Fast on recognizing the first wave innovators, smart investors are convinced to pour money into cross industry clones to scale disruption across markets.
Startups are funded on the premise of having a sustainable competitive advantage, that impacts certain components of the value chain so permanently that it changes the rules for a whole industry.
Nearly every major startup success is built on the principle of deflationary economics at certain parts of the value chain. Hence, companies are not disrupted but certain parts of the value chain are.
Digitalization and internet shifts what has traditionally been protected by incumbents, through disassembling the value chain and redesigning its essential distribution channel.
Startups are able to break up business components to isolate opportunities that remain invisible for incumbents when looking at their business as a whole.
As incumbents fail to realize the change in customer behaviour, startups are fast to replicate it in different areas and smart VCs capitalize on the disruption that turns an industry on its head.
Taking advantage of innovation is different than just replicating it. Smart VCs do not invest in video based mobile social networks just because Snapchat is on the rise, or subscription based razor services after hearing about the Dollar Shave Club.
VCs Leverage Disruption
It’s important to spot disruptive trends with an opportunistic mindset before it shakes a whole industry, especially if the hit is coming due to a change incustomer behaviour rather than a scientific breakthrough or innovation in the core underlying technology.
Leveraging certain consumer patterns present significant opportunities for startups to compete against the incumbents and create even more effective businesses.
Assuming that customers are the only reason a business exists in the first place, VCs observe the shifts in consumer demand. These VCs aggressively fund companies that are adopting them in previously untouchable industries.
These funded companies are as diverse as education (udemy), hotels (AirBnB), insurance (Oscar) and even government (OpenGov).
Cross Industry Disruption
Investors place their bets in companies that are leveraging newly emerging customer behaviour trends to re-define major industries,
History doesn’t repeat itself but it often rhymes — Mark Twain
Core Business Framework
The business model shift from sales to subscription based economy re-defined the customer behaviour and destabilized every industry. New-age startups fastly adapted this century old model to differentiate from their traditional competitors.
These companies are now shaking clothing (Rent The Runway or Stitch Fix), entertainment (Netflix), music (Spotify) and fitness (Classpass).
Catching the trend early on, Andreessen Horowitz backed subscription companies that are disrupting beauty (Julep), personal care (Walker & Co), vitamins (Nootrobox) and apparel (Le Tote).
A similar business model transformation happened when Google released Adwords and disrupted the ad supported broadcast and print media through providing a free service to its users, in exchange for their data.
Google adapted this strategy throughout its products including Google Analytics, Gmail and Android OS. This business model became the backbone to many of the internet giants, like Facebook, Linkedin and Snapchat.
Sequoia earned good multiples as an early investor in Google and continued investing in the ad and data supported business models with Instagram, Tumblr, Linkedin, Yikyak 🙁 and Whatsapp.
The Art of Business Strategy
Creating a direct-to-consumer channel to bypass the pricey middlemen has been a leading business strategy since the early days of the internet. Targeting the customer directly, startups are able to provide better service and experience at a much lower price to create a loyal customer base.
This disintermediation gave birth to big companies in health (Zocdoc), organic clothing (MORI), general clothing (Bonobos), personal care (Harry’s) and banking (Atom).
Forerunner was bullish on direct-to-consumer model since its inception with more than 50 (!) portfolio companies that are targeting almost every single industry from luggage (Away) to outdoor apparel (Cotopaxi).
The marketplace model is more than 20 years old, started with ultra successful early examples like Amazon and Ebay.
Since then, startups tried to apply the model to real estate (RealtyShares), funding (Kickstarter), lending (Lendingclub) and even science (Science Exchange) — all backed by Union Square Ventures.
The rise of mobile gave birth to the on-demand economy reinventing the customer expectations for transportation (lyft), delivery (Postmates), labor (TaskRabbit) and travel (Airbnb): not surprisingly all funded by Founders Fund.
Similarly the bottoms up sales approach, business to developer tools (and open source) and migrating to cloud have all been experimented by startups targeting different sectors.
Remodeling the Customer Interaction
Interface disruption occurs as new consumer interaction mediums emerge with progresses in technology and new businesses adapt the new UI to meet the growing demand.
The early mobile first startups disrupted the first generation technology companies in the financial sector (Robinhood), payments (Braintree), language (Duolingo) and business tools (Evernote) as the first-movers in the newly created medium.
NEA caught the wave early on and backed many of the successful mobile-first companies including before mentioned examples.
The explosion of usage in chat services proved customer adaptation to conversational UI and was immediately applied to transform other verticles.
In came newcomers like Slack, GoButler, Digit and Intercom. General Catalyst, Boost VC and Accel Partners already placed a number of bets across different industries in the conversational interface.
Lastly, Facebook (Messenger, Instagram and Whatsapp) is not the only company mimicking Snapchat’s success with bringing video into everyday use.
Videolicious (sales), JobToday (recruitment), Joyus (commerce) and House Party (chat) emerged differentiating their offering through live streaming and video features. Similar market wide trends emerge with public adoption in VR and AR technologies.
Capitalizing on Customer Expectations
Changes in customer behaviour due to business model, business strategy and user interface disruptions do not require deep technical expertise to adapt and experiment.
Smart entrepreneurs catch these trends and simulate them in different areas while incumbents fail to meet the new customer demand and their grounds start shaking.
Smart investors spot the disruptions in the key components of the value chain that re-define the customer expectations and capitalize on it across industries.
“We’re just clones, sir. We’re meant to be expendable” — Sinker