We have been living in the age of startup disruption. While well-established firms have been struggling to grow and survive, tiny Startups have been experiencing exponential growth—taking over the market of proven businesses and products.
Incumbent high-performing firms have been paranoid due to the disruption threat being posed by startups. Over the last four decades, we have witnessed spectacular examples of startup disruption. For example, Facebook has risen, causing disruption to our old way of socializing, photo sharing, and exchanging greetings. Similarly, the rise of Microsoft is marked by disruption to the typewriter and minicomputer industries. Startup disruption refers to the rise of startups due to the success of unleashing Creative Destruction waves of reinventions on demand of matured products and businesses of incumbent firms profiting from them, creating Disruptive Innovation effects.
Startups are not like any other small businesses leveraging technologies. They create Wealth by destroying the market for mature products, creating a startup disruption effect. The underlying force has been the rise of Reinvention waves due to the change of matured technology cores with emerging ones. For example, the Internet has been a powerful technology core for reinventing our means of sending information. Hence, the businesses of postal services, fax machines, and many others have been disrupted. Along the way, tiny startups have grown into mega-corporations.
Recently, startup disruption has gained significant momentum due to the Internet, smartphones, and cloud computing. Besides, the growing availability of venture capital funds, reaching above $300 billion in 2023, has offered much-needed risk capital to pursue startup disruption. However, technology possibilities and availabilities of risk capital for offering subsidies are insufficient to create wealth and grow capital through startup disruption. Hence, to avoid irrational exuberance, this article sheds insights that are often invisible from the surface.
Examples of Unfolding Startup Disruption
- Fintech—due to the growing ease of digitization of money and online payment, the financial service industry is poised to suffer from disruption. While established banks have been suffering from toxic assets, online payment platforms have been experiencing growth in market capitalization. Hence, there has been a surge in Fintech investment. For example, according to a report by Statista, global investment in fintech ventures reached $168 billion in 2022. Some estimates suggest Fintech adoption has grown by 64% globally since 2015. On the other hand, Statista projects Digital payments to reach $8.7 trillion in value.
- Electric and autonomous vehicles—While American behemoths like GM and Ford were struggling to remain afloat, tiny Tesla experienced exponential growth in market capitalization. The underlying cause was that Tesla was pursuing the reinvention of gasoline vehicles by changing the mature internal combustion engines with electric batteries to unleash creative destruction waves. Another wave of startup disruption has been gaining momentum in the automobile industry. This is about autonomous vehicles. However, despite widespread speculation that the autonomous vehicle market is projected to reach $556.67 billion by 2026 (Statista) and more than $80 billion in investment, autonomous vehicles have yet to cross the chasm—let alone unleashing startup disruption. On the other hand, after initial success and excessively inflating Tesla’s stock price, the electric vehicle (EV) wave recently slowed down before unleashing startup disruption. Besides, a growing number of EV startups have been declaring bankruptcy.
- E-commerce—due to the rise of e-commerce, conventional retail businesses are under the threat of suffering from disruption. For example, according to Statista, the global e-commerce market is expected to reach $6.4 trillion by 2024. Consequentially, it’s no surprise that Amazon’s net sales rose by 38% in 2022, reaching $386 billion (Amazon Investor Relations). However, not all e-commerce startups are success stories; many have declared bankruptcy.
- Digital health– according to CBI insights, investments in HealthTech startups exceeded $30 billion in 2023 due to the significant potential of digitization of healthcare services. According to the estimate of Grand View Research, the global digital health market is projected to reach $504.4 billion by 2025. However, despite such possibilities, IBM gave up AI-centric cancer prescription, absorbing $2 billion in loss.
- Generative AI—Starting from management service and newspaper reporting to creative arts, many industries are paranoid due to the likely disruption to be unleashed by Generative AI. According to some statistics, the global generative AI market size was USD 43.87 billion in 2023. It’s projected to grow USD 67.18 billion in 2024 and USD 967.65 billion by 2032. Such staggering growth will come at the cost of destroying existing markets for mature products, professionals, and businesses. Consequentially, society will suffer from a significant disruption. However, to reach such a staggering volume, generative AI technology has yet to cross the threshold by avoiding the chasm.
Emerging Technologies Fueling Startup Disruption
There have been many technologies fueling startup disruption. However, the following appear to be highly powerful:
- Internet and Mobile Communication—due to low latency, high bandwidth, and ubiquitous access, Internet and mobile communication have formed a powerful technology core to reinvent an array of products and processes.
- Smartphone—mobile phone handsets are no longer mere communication devices. Due to the growing role of software, cameras, and many other sensors, the smartphone has become a technology core that has reinvented several products, such as scanners and payment devices.
- Software and Cloud Platform—The ease of developing and running a software application on a cloud platform, as well as their fusion, has become a powerful technology core.
- Machine Learning and Large Language Model (LLM)—Due to the growing power of GPU, neural network-type machine learning tools have been gaining momentum to enable machines to learn through training samples. One of the notable applications has been the Large Language Model, which offers the generative capacity of digital content such as texts, images, music, and videos.
- Sensors and Robotics—once sensors are added to machines, embedded software allows the imitating of humans’ sensing, perceiving, reasoning, and decision-making capabilities. Consequentially, conventional products show the possibility of being reinvented and making them AI robots. Of course, such a possibility offers startup disruption opportunities. However, many reinvention efforts are caught in chasm and hypes, from household robots to autonomous vehicles.
- Semiconductor- at the core of the above technologies is the semiconductor. Its immense scale of making devices smaller, better, and cheaper has been at the core of unfolding startup disruption over the last 70 years.
Dynamics of Startup Disruption—the rise of creative destruction waves by new entrants
At the root of startup disruption is the fueling of the reinvention waves of matured products by the new entrants. It’s worth noting that new entrants prefer to reinvent them instead of competing with incumbent high-performing firms in making an entry and taking away market shares of highly profitable matured products. To our surprise, reinventions emerge as primitive alternatives, facing rejection by the mainstream market. Hence, startups begin pursuing reinvention waves at a loss, serving only a few customers. Despite this, why do startups succeed in unleashing disruptions on incumbents and succeed in rising as large and even larger firms?
Incumbents’ Dilemma to Pursue Reinvention Waves
Due to the inferior emergence of reinventions and rejection by the mainstream market, incumbent firms do not find the rationale for switching from profit-making matured products to loss-making uncertain ones. On the other hand, they also face a mismatch between existing competence, facilities, and business models and what is needed to pursue reinvention. For example, digital cameras started as a loss-making business and did not match Kodak’s capacity. Besides, not all reinvention attempts succeed to take over the market of matured products. Furthermore, at the initial stage, the rise of reinvention waves does not reflect on the balance sheet of incumbents, as the mainstream market remains untouched for quite a long time. Hence, incumbent firms profiting from matured products face a decision-making dilemma to switch to new wave of reinventions.
Attackers’ Advantage
In attacking the reinvention wave, unlike incumbent firms engaged in the business of matured products, startups do not suffer from past liability. They begin in a humble form and keep growing along with the rise of reinvention waves. Furthermore, R&D productivity in the early stage of the technology life cycle is far higher than what incumbents experience in advancing their matured technologies. Besides, although the mainstream market rejects reinventions at the early stage of the life cycle, due to uniqueness, startups find the non-consumption market as a stepping stone to establish a foothold, gain momentum, and launch an attack on the stronghold of incumbents’ mainstream market of matured products. Hence, startups are better positioned than incumbents to face the risk of pursuing reinvention waves. Consequentially, an opportunity of startup disruption arises.
Technology Waves Underpin Startup Disruption
Startup disruption happens at the intersection of two technology waves. Although ideas are important, great ideas are not enough for startup disruption. For example, many startups have pursued the idea of an electric vehicle over the last 100 years, but startup disruption is still yet to unfold in the EV race. The underlying reason has been the continued performance growth of gasoline vehicles and Premature Saturation of battery or fuel cell technologies.
Technologies have an S-curve-like life cycle. Despite greatness, emerging technologies show up as inferior alternatives to their matured counterparts. For startup disruption, emerging technologies must grow at a far faster rate than their matured counterpart and cross the threshold. Hence, both mature and emerging technologies’ R&D productivity and growth behavior play a vital role. Startups must carefully assess how much room for further advancement for mature technologies is left and what R&D productivity is in exploiting it. On the other hand, how much additional progress is to be made in emerging technologies and how it is feasible to cross the threshold are relevant to startup disruption.
Challenges to Unleash Startup Disruption
Although getting excited about pursuing disruptive innovation has become quite popular, unleashing startup disruption is not a straightforward process. There have been many issues facing startup disruption. Some of them are explained below:
- Incumbents pursue through separate units—to overcome the dilemma of switching from matured products to their reinventions, incumbents may pursue reinvention for gradual migration through setting up separate units. If incumbents do so, startups have little chance to cause disruption.
- Incumbents take the hybrid option—if incumbents find a gradual transition through a hybrid approach as a better alternative than the complete replacement of a mature technology core by an emerging one, startup disruption will face a high barrier. For example, Toyota’s hybrid approach to transitioning to electric vehicles appears to be a significant barrier to Tesla and other EV startups to be disruptors.
- Premature technology saturation—unless reinvention waves cross the cost and performance threshold set by the matured products, startup disruption cannot take place. Although subsidies are being used, the ultimate fuel for crossing the tipping point is the advancement of the adopted emerging technology cores. In many situations, despite showing early progress, preferred technology cores run the risk of suffering from premature saturation. For example, many high-profile AI applications are stuck due to premature saturation.
- Competing technologies—in pursuing technology disruption, not all startups pursue the same technology cores. In many cases, multiple technology cores keep competing. For example, for display panels, plasma and LCD were competing technologies.
- Getting caught in chasm and hype—after showing initial success in serving the non-consumption market due to unique features of the emerging technologies, reinvention waves may stall before penetrating the mainstream market, creating the chasm effect. Besides, initial success may lead to hype, resulting in premature investment for scale-up.
- Lack of synchronization due to wrong timing—no great reinvention succeeds in isolation. For startup disruption, there must be synchronization among multiple factors. Hence, timing plays a vital role. For example, Netflix’s success in online video distribution has a substantial timing issue.
- Premature scaling through subsidies—upon getting excited with initial successes due to the uniqueness of reinventions, startups often get excited about the vast business opportunity to tap into. Hence, there has been a race of subsidy-led market capturing, resulting in premature scaling. Consequentially, a growing number of startups with the dream of unleashing disruption have been suffering from early deaths.
- Winner takes all—even if reinvention waves pursued by startups succeed in crossing the tipping point, all of them will not be success stories of causing disruption. There has been a natural tendency for the winner to take it all. As a result, along with mushrooming growth, the death rate of startups will also be growing.
Managing Technology and Innovation, Market Penetration, and Funding
Irrespective of greatness, invariably, all reinvention waves show up as inferior alternatives to matured products, resulting in ejection by the mainstream market of matured counterparts. Hence, the first challenge is to find the non-consumption market to penetrate by leveraging the uniqueness of the emerging technology core. However, the non-consumption market is not large enough for startup disruption. They must take over the mainstream market.
Although subsidy has got the focus for taking over the mainstream market of matured products, the ultimate success distills from the management of technology and innovation, making reinventions increasingly better and cheaper. The next issue is about funding. There is a need for risk capital for pursuing startup disruption; however, offering subsidies for creating a market for inferior alternatives does not create success. Funds must go to fuel the reinvention wave and win the race through superior performance in quality and cost.
Role of the Government for Leveraging Startup Disruption
There have been several roles of the government for creating wealth through startup disruption:
- Forbidding subsidies—there has been a growing trend of creating startup disruption in the digital space through subsidies. Such an approach is not only unfair but also harmful to the growth of innovation through a Flow of Ideas. Hence, the government should prevent it so that instead of distorting the mainstream market, startups can establish footholds in the non-consumption market and gain momentum through advancing technology and innovation to make their reinventions suitable for the mainstream market.
- Offering R&D grants—for nurturing the next wave, there has been a need for a flow of ideas and high caliber human capital. Hence, the Government can play a positive role.
- Performance-centric incentives—of course, some form of incentives are needed to grow the next wave of growth through reinvention waves. Hence, incentives could be relevant. However, they should be linked with the advancement of reinventions, as opposed to subsidizing them.
- As lead users, governments often have some requirements that mature products cannot meet. Hence, to benefit from uniqueness, the Government should adopt reinventions, which will contribute to the creation of a non-consumption market. For example, for the take-off of digital cameras, the Government’s adoption of early-stage primitive electronic image sensors for satellite imaging played a key role in digital camera disruption.
- Creating a market for infrastructures and externalities—often, major reinventions require new infrastructures and externalities. Usually, they are beyond the reach of startups pursuing disruptions. Hence, the government should play a role in stimulating cooperation to roll out positive externalities.
- Ensuring fair competition—as the race for digital disruption has a Natural tendency of monopoly, the government should ensure fair competition. Notably, the government should prevent subsidy-based customer acquisition and valuation races. Besides, the Government must prevent the buy-and-burry strategy of incumbents and startups to weaken the rise of the reinvention wave.
- Monitoring and sharing technology and competition insights—there has been a need to monitor publications, patents, technologies, innovations, moves of startups, incumbents, venture capital funds, and the government so that both changing opportunities and challenges are detected early. Often, it’s beyond the reach of a single startup. Hence, the Government should play the role.
Leveraging Creative Destruction for Driving Prosperity
In addition to the recent past, human history has been marked by creative destruction, powering startup disruption. For example, steam engines and mechanization unfolded the first industrial revolutions, causing disruptions to many products and industries. Similarly, Edison and Graham Bell unleashed startup disruptions from light bulbs, electrical energy, and telephones. According to the study Why Nations Fail, the answer is in the disparity of pursuing creative destruction. It happens that startups are better drivers of creative destruction, causing startup disruption. Hence, we need to leverage startup disruptions to drive prosperity.
Although there has been a flurry of interest in startup disruptions, great ideas, competence in emerging technologies, and seed capital are not good enough. As summarized in this article, myriad of issues need to be carefully understood and dealt with to turn the possibility of startup disruption into prosperity—through creating wealth out of destruction. Hence, the focus should be on understanding wealth creation dynamics out of technology possibilities and managing uncertainties for winning the reinvention race for making a success of startup disruption.
