Great explanation of “disruption” – and why investors dislike startups that meet expectations

“Disruption” used to be mentioned frequently as the thing that every company wanted to be (urged on by investors).

But what is it, really? I’ve met lots of people who believe it’s “a fancy word for ‘innovation'” – but if that’s all, it would be pretty pointless and vapid.

This post from 2011 gives a great explanation based on simple concrete ideas. It explains why disruption is interesting to companies and managers.

What about investors?

It’s a great explanation, although it’s mostly from the perspective of business owners / management. Why do investors – especially startup / VC investors – care about disruption?

The key here is Des’s paragraph about share price:

“Microsoft’s share price hasn’t moved. This is because they are precisely predictable. Their shareholders have gotten exactly what they paid for, and not a penny more.”

A share price that doesn’t move *still provides profit to shareholders* (in the form of annual dividend). In fact, it often provides rather a nice sum of money – just like the rental income from owning property).

…but: Angel/VC investors make the bulk of their profit from changes in the share-price, not from dividends. Two reasons:

  1. Startups usually choose NOT to pay dividends – the money is reinvested into the company instead, to try and grow even bigger, even faster (pour gasoline on the fire of your success, make it burn faster!)
  2. The returns from dividends are – like rent on property – a small fraction of the investment. The returns from the share-price changing are – like betting on a horse-race – a substantial multiple of the investment

If you run your startup perfectly …

If you do everything you said you would do …

If nothing goes wrong …

… your investors may class you a failure. And they’d be right to do so. They didn’t invest for the dividends, they invested for the “surprise me” factor.

(which should, perhaps, give you pause for thought: if they’re “right” to pan you for achieving your aims … are/were you “right” to take their investment?)

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