Paradigm Shifts: Ten Winning Strategies for Disruptive Innovators
“There is nothing more difficult to plan, more doubtful of success, nor more dangerous to manage than the creation of a new order of things … Whenever his enemies have the ability to attack the innovator they do so with the passion of partisans, while others defend him sluggishly, so that the innovator and his party alike are vulnerable.” Machiavelli, The Prince, 1523
We can learn much about disruptive innovation by studying paradigm shifts. Derived from the Greek word for pattern, the French first applied paradigms to entrepreneurs in the Middle Ages. In science, paradigms refer to concepts or theories that a scientific discipline regards to be true.
Paradigm Shifts: How Prevailing Wisdom Changes
In The Structure of Scientific Revolutions, Thomas Kuhn introduced paradigm shifts to explain how fundamental changes occur in science. Most scientists, Kuhn observed in 1962, dedicate themselves to testing, affirming and elaborating dominant paradigms. When anomalies arise that an existing paradigm cannot explain, scientists undertake “extraordinary” exploratory research that either reaffirms the existing paradigm or offers new theories that better fit observed phenomena. Scientific revolutions occur when new theories gain enough adherents to force a paradigm shift and supplant existing theory. In the long run, the new paradigm dominates and becomes institutionalized in textbooks obscuring the revolutionary process.
Paradigm shifts in science are infrequent but revolutionary when they occur. Wikipedia lists only nine in the past century in the natural sciences. Notable examples include:
· Heliocentrism (1543): Copernican theory replacing earth as the center of our galaxy
· Evolution (1859): Darwin’s theory of natural selection counters creationism
· Germs (1884): Pasteur and Koch champion germ theory of disease over miasma
· Quantum Mechanics (1905): replaces classical mechanics at microscopic levels
· Relativity (1919): replaces Newtonian gravity theory
· Plate Tectonics (1965): supplements continental drift for large geological changes
As paradigm shifts suggest, truth traverses three stages: it is ridiculed, then opposed and finally accepted as self-evident (see Figure 1). Nobel Laureate in Physics Max Planck observed that science progresses one funeral at a time. Paradigm shifts occur not by convincing the science establishment but rather through the passing of a generation. While self-evident today, these paradigms were hard fought over many decades and, in some cases, centuries. Early sponsors were often ridiculed and suffered for their views. Galileo faced the Roman Inquisition in 1633 and forced to recant his heliocentric views a century after Copernicus first proposed them. In 1838, Louis-Daniel Beauperthuy first proposed germ theory to explain malaria but the official commission discarded his views and his theory was ignored for another fifty years.
Figure 1: Three Stages of Paradigm Shifts
Disruptive Innovation: Parallels with Paradigm Shifts
Based on my study of recent unicorn IPOs, disruptive innovation and paradigm shifts have several common traits.
1. Radical innovation is initially dismissed as ideas are unproven and unconventional. Nearly half of all recent disruptive unicorn IPOs initially had difficulty raising financing and were dismissed by incumbents. Amazon took a year to raise its first round. Others that initially had difficulty raising funding include AirBnB, Gitlab, Peloton, Pinterest, SquareSpace, Toast, Uber and UIPath.
2. Radical ideas typically come from industry outsiders. Among recent unicorn IPOs, 62% of disruptive startup founders had no prior industry experience, while 85% of founders promoting incremental innovation came from within the industry.
3. Radical ideas are rarely born beautiful. Nearly half of all disruptive unicorn IPOs pivoted significantly before finding Product Market Fit. Slack started in gaming before moving to corporate messaging. Duolingo offered translation services before shifting to language learning.
4. Radical innovation takes time. Despite accelerating adoption rates, major recent platform shifts such as the Internet, cloud/SaaS software and smart watches averaged 40 years from first prototype to mass adoption. Few see the primordial soup of research and development before a product achieves a dominant design and hits consumer radars.
5. All promising disruptive innovators eventually attract vigorous responses from incumbents. As illustrated in my article on Social Capital, incumbents typically first try to preserve market leadership by blocking startups and only later compete directly with startups who survive.
Winning Strategies for Disruptive Innovators
Paradigm shifting founders must navigate two startup stages: (1) marshalling resources and converting stakeholders when they are initially dismissed; and (2) scaling to market leadership during a contested phase among incumbents and new entrants. Following are ten strategies relevant to launching and then scaling paradigm shifting startups:
1. Stealth Mode: Generals on battlefields go to great lengths to achieve a surprise attack. Decoys and subterfuge are key assets in the art of war. Entrepreneurs may be tempted by marketing campaigns to lure customers, but they also attract attention from potential competitors and incumbents. Secrecy is better until your technology is proven and, ideally, until you have secured Product Market Fit.
2. Expert Advisors: Skeptical customers and investors are an existential challenge for paradigm shifting startups. As prosecutors call expert witnesses to convince skeptical juries, expert advisors may legitimize startups. Expert advisors have played key roles in the success of my portfolio companies. Deep tech startups often include university professors on their founding teams. LegalZoom recruited Robert Shapiro, a celebrity lawyer, as cofounder to gain access to leading law firms.
3. Killer Apps: Many intriguing technologies languish in search of killer apps. Founders were often lead users for their own products. In my study of unicorn IPOs, over 40% of paradigm shifting startups solved pain points for their founders. John Foley, an avid cyclist, founded Peloton for regular workouts as an executive in New York. Tony Casalena founded website design firm Squarespace to help him build his own website. Uber and AirBnB were founded to find rides and rooms that were in short supply. Regardless of startup origin, a 20 second elevator pitch is a good test whether an idea is clear and compelling.
4. Speed, Adaptability: A sense of urgency and agility are prized traits in any startup founder. Agile, fast-moving startups are especially well suited to navigate uncertainty endemic for paradigm shifting entrepreneurs. Lean startups use rapid prototyping as market needs and user requirements are rarely understood for novel products. Pinterest started in collectibles with little traction before shifting to images. Uber initially focused on limo rides and AirBnB required air mattresses before broadening their offerings.
5. Minimum Viable Traction: Three delighted, referenceable customers bode well for any startup but only if they use the same product for the same purpose suggesting product market fit. Early customers have disproportionate influence and can make or break a startup, especially if they demand customized solutions. Founders eager for validation often attract customers they later regret. Three is the minimum threshold to validate a trend and test any hypothesis as they can help mediate varying viewpoints while two customers risk stalemates when opinions differ.
Successful startups inevitably attract competition or opposition from incumbents and new entrants. The challenges of scaling in a contested market differ fundamentally from winning stakeholders in an overlooked, unproven market as Figure 2 suggests.
Figure 2: Winning Product Market Fit Then Scaling the Business
Source: Chris Zook and James Allen, The Founder’s Mentality
Incumbents enjoy home field advantage with established customers, suppliers, investors and political allies. But incumbents are also distracted by managing large, legacy businesses with entrenched practices, quarterly financial expectations and longer decision cycles.
Following are five strategies for paradigm shifting startups to neutralize incumbent advantages, exploit weaknesses and scale to the opportunity:
6. Social Capital: Startups can shift incumbent home field advantage by altering the playing field. Startups can do so by redefining the network architecture of an industry. As I discussed in Social Capital, Uber coalesced a ride hailing marketplace and leveraged customer advocacy to offset local government threats to ban its service. Disruptive innovators often identify holes in a market or operate on the fringes of two existing markets. By bridging these gaps, disruptive startups create a superset of customers that converts a potential threat into a competitive advantage.
7. Strategic Partners: Aligning with powerful allies who have a shared interest in dethroning incumbents is another way of leveling the competitive playing field. IBM lost a majority market share in computers when Microsoft and Intel formed the “WinTel Alliance” allowing clones to compete. Lime won leadership in micromobility by partnering with cities to offer green, inexpensive and healthy ways to reduce congestion and commute times.
8. Channel Strategy: Startups sell directly to prove customer demand and respond quickly to their needs. Once at critical mass, channel sales accelerate growth through distributors with established customer relationships. Channel selling offers access to new market segments, offsets incumbent distribution networks, and deters potential competitors.
9. Open Innovation: Incumbents often prefer closed networks to reinforce discipline and lock in proprietary advantage. But closed networks are permeable and hard to maintain. Digital platforms enabled with open innovation are more scalable, lucrative and defensible. When iPhone launched in 2007, Apple redefined the market and won software developer support with its Appstore. Digital platforms enjoy significant network effects, as Salesforce has shown with its Dreamforce annual conference, which attracts over 180,000 attendees.
10. Supercharge Growth: Disruptive innovation is capital intensive. The growth of the venture industry has enabled startups to disrupt industries that were previously out of reach. Startups should eat when served and build in a margin for error to respond well to both opportunity and unforeseen challenges. Each of our unicorns at NGP Capital have raised far more funding than anticipated to accelerate growth, expand into new markets and offset incumbent responses.
Paradigm shifts highlight two challenges for disruptive innovators: they are first ignored or dismissed and then vigorously attacked. The nature of these two challenges is fundamentally different. This article observes five strategies for disruptive innovators during each of these two phases: first to win support from skeptical stakeholders and then to supercharge growth once the opportunity is validated.
I hope that these strategies will help increase the likelihood and magnitude of your startup success!
