Just about everyone seems to have the next great disruptive business idea that will make them rich and famous and transform the lives of millions of people. As the 19th century French writer Victor Hugo once famously said: “There is one thing stronger than all the armies in the world, and that is an idea whose time has come.” Unfortunately, however, many ostensibly brilliant business ideas – disruptive or not – barely get off the ground before they flounder and die. Often that’s because a lot of businessmen bite off more than they can chew. They’re not strategic thinkers who work through possible challenges and plot important moves and countermoves in advance of implementation. On a practical level, thinking through potential roadblocks, regulatory actions, the arrival of new competitors, etc. and how you and your team will tackle them should be an important part of your investor presentation. Those details will make you and your idea that much more credible when talking to the guys with the money. Most of the points below aren’t relevant just to entrepreneurs with big audacious ideas, but also to leaders of existing companies looking to disrupt one or many competitors, make a powerful impact on their industry or turn an organization around. There are also thousands of small businesses that are quite disruptive and successful by focusing their efforts on a very specific problem or activity like Sheila Lirio Marcelo who simply wanted to revolutionize how people get the right kind of medical assistance when they need it. Choose the company or industry you’re going to disrupt carefully. Fragmented industries with 10,000’s of small companies and just a few strong players are generally the most likely to be disrupted. Even better are industries that aren’t regulated or only slightly regulated. Industries that fit into both categories are gold mines for disruptive leaders and their ideas. Jeff Bezos’ first big idea disrupted small book sellers that were barely eking out a living and a few of the larger chains like Barnes & Noble and Borders. In addition, the government had bigger fish to fry than to slap sellers and distributors of books with myriad regulations. No wonder Bezos was so successful so quickly. On the other hand, Elon Musk took on not one but two extremely powerful industries – oil/gas and automotive – which are dominated by large incumbent corporations. powerful lobbyists and entrenched consumer buying habits. In addition, these are two of the most regulated (and unionized) industries that exist. No wonder Musk’s efforts haven’t been quite as successful as those of other great disruptive CEOs, even if he and Tesla galvanized the movement towards ecologically friendly vehicles. Be prepared to overcome hurdles and frequent attacks. Even if an industry isn’t highly regulated on the federal level, there might be significant state, city or foreign hurdles to get past. Even worse are new regulations put in place that could stop your efforts dead in their tracks such as changes to tax laws, licensing requirements, etc. Lawsuits are almost a given as disrupted companies fight for their lives and government officials face political pressure to halt or slow down the dramatic changes your idea is causing and which they may not even understand. The media might go after you, often fueled by inevitable challenges to accepted cultural norms or beliefs caused by a highly disruptive idea. Some of the biggest opposition can come from inside your own organization, especially in situations in which some or most employees will be impacted. Make sure the idea has a high level of attractiveness. We’re currently in one of the tightest labor markets ever. Although there are many ways to attract the best and brightest, your idea needs to be so compelling that your employees will do anything to help you achieve your vision and goals. In many cases, your idea and how well you present it will be the difference between failure and raising the money necessary to build the initial infrastructure and pay the bills. In the end it’s all about making money. If a disruptive idea can’t generate revenue early on, then it’s not an idea…it’s a fantasy. Profitability, on the other hand, is another issue. Some disruptive companies, (Amazon is the best example), can run at a loss for years if the story is good. If told well, narratives about using profits to grab market share or continuously investing the money back into the company can buy a new business the time it needs. If a disruptive idea can’t generate revenue early on, then it’s not an idea…it’s a fantasy. Profitability, on the other hand, is another issue. Some disruptive companies, (Amazon is the best example), can run at a loss for years if the story is good. If told well, narratives about using profits to grab market share or continuously investing the money back into the company can buy a new business the time it needs.
Every potentially successful disruptive idea faces one last big challenge: can it and its creator find the necessary capital to make the investments necessary to implement that great idea. In the beginning, everyone – including the greatest disruptive leaders – bootstraps their company or sells a limited amount of equity to friends and family. They may even take advantage of more sophisticated investment groups for “seed” funding. Either way, the sums such activities yield are relatively small and a fledgling company can burn through this financing very quickly. The fact is, in our advanced capitalist system—even with cheaper and readily available technology—nothing significant happens without money. And when I say money, I mean huge amounts of it. There are many reasons why raising money from well-known financiers in exchange for equity—or convertible notes—can be a smart move, despite all the difficulties in getting deals done: A first round of funding from well-known investors sends a signal that the successful company survived one of the greatest ordeals in business—convincing other people to give them money. Smart entrepreneurs make sure initial lead investors are well-known within the ecosystems and communities in which the company intends to play. Such investors bring not only capital but relationships, experience, knowledge, and insights that the leadership of the funded entity might need going forward. These marquee names help attract additional investors and propel the company toward a successful IPO. Rounds of early-stage funding are also key moments when a company’s value to an investor is professionally assessed, thereby answering one of the most important but difficult questions: If this company is going to make an impact, just how large and valuable will that impact be? Investors’ singular focus on financial returns imposes accountability and discipline on the leaders of companies they support. Even if Amazon was not profitable for many years, Bezos’ success as a CEO was due in part to his experience in finance and ability to convince his investors that he was reinvesting his profits wisely and for the long-term. Indeed, the numbers speak for themselves: In the period from 1994 to 1996 Bezos raised $9.5 million for his fledgling company, Amazon. By May 1997 he had turned that into $483 million when the company IPO’ed. Over the course of seven years (from 2003-2010) Reid Hoffman raised $85 million for LinkedIn which went public in 2011 at a whopping market capitalization of $4,500 million! But these examples are more the exception than the rule. What most young entrepreneurs don’t realize is these companies were already producing revenue when their founders raised their first rounds of capital. Reid Hoffman quickly grew LinkedIn to $500 million in revenue and Amazon started making revenue from day one. Without some sort of a track record, it’s virtually impossible to attract any funding, although profitability is not necessarily a requirement. While these days everyone with a disruptive idea seems to be preparing for a Series A round of financing, the truth is that often executives of a new company will waste so much time running after venture capital (VC) and private equity (PE) firms to raise money, they lose focus and often have to close the business when nothing comes of the effort. Going through a Series A, B, or C funding round is grueling, demoralizing, exhausting, and all-consuming. It’s a roller-coaster ride with more downs than ups. If the timing is off because the sector the company is operating in isn’t favored at the time, or if there are broader economic forces in play, even the best CEO or entrepreneur may not make any headway despite excellent efforts. But private equity and venture capital funding are not the only options available to entrepreneurs looking to build disruptive businesses who need large amounts of funding to grow. An often better and much longer-term approach is to find a strategic partner who takes a significant stake to propel the growth of a company while providing additional benefits. For one, investors don’t know much about running a business and are by nature risk adverse and myopic. They are also very short-term since most VC and PE firms look to sell their stake in a company within three to five years. If a founder doesn’t deliver the returns within the timeframe originally agreed to, their term will be up very quickly. All of which can mean years of agony if an entrepreneur works with the wrong investors. Strategic partners, on the other hand, know how to build and run a business, especially when the company they invest in is in their industry. They have a much longer-term horizon and often will slowly acquire the rest of the outstanding shares of a company over time. The biggest hurdle for most entrepreneurs, however, is the cultural fit with what are often very big, bureaucratic companies that are set in their ways and risk adverse.
Leaders committed to using disruptive management practices and techniques have to constantly assess every move they make. The ethical and legal issues they could get dragged into have the potential to derail their dreams and the companies they are leading. In addition, disruptive CEOs face high amounts of pressure from investors, the media, their employees, families, customers, suppliers – and of course other players in their markets they are forcing to change or go out of business. For these and other reasons, such leaders surround themselves with the skill sets and experiences they need to help them overcome obstacles and create great advances for their business and the world. However, they are happiest when they are working with like-minded souls who at heart live and breathe the same principals as they do. It’s not uncommon for such leaders to assemble a group of executives they know and trust that stays with them for decades. Not unsurprisingly, Bezos has proven himself to be a master at understanding and implementing the basic building blocks to put together a champion team using what we commonly refer to as “core values” or “leadership principles.” Even just a cursory look at Amazon’s fourteen leadership principles shows the extent to which Bezos’s values and beliefs have been codified, disseminated, and internalized by Amazon’s leadership team. Some of Amazon’s core values such as customer obsession, thinking big, and delivering results may sound generic to any well-run business. But there are a few eye openers on the list that are rather unique to Bezos and Amazon. These include principles such as frugality, understanding how to be right as much as possible, and diving deeply. It is these leadership principles that have contributed to making Amazon the huge success it is today. But not all disruptive CEOs understand the importance of core values and a thought-through culture and organization. The most glaring case of the ramifications of not paying enough attention to the “softer” aspects of business is Travis Kalanick and the company he led until mid-2017, Uber. Kalanick broke so many rules about basic organizational structure and culture as to call into question his ability to lead the company. Eight years after it was founded, the company was still operating without a CEO, COO, CFO, CMO or president. A cult of personality and ego which celebrated a highly aggressive culture had taken hold. On June 6, 2017 it was made public that twenty employees had been fired over harassment, discrimination, and inappropriate behavior several days earlier. This was the first public sign that Uber was trying to contain the fallout from a series of toxic revolutions. A week later Travis Kalanick was fired, although he still retained a seat on Uber’s board. His success and ego not only blinded him to the need to build a culture of accountability and ethics but also the need to adhere to local and state employment laws. A report into Uber’s problems with sexism tied most of the problems to Uber’s deeply embedded culture of “stepping on toes” and “always be hustlin’”. While these behaviors might work for a small startup they can also be highly destructive for a nearly 12,000-person company. Uber’s new CEO since August, Dara Khosrowshahi, faces a long list of challenges he rarely if ever faced as CEO of Expedia. Although he is rightly focused on creating a new culture and values system for Uber he also has to contend with an array of legacy issues and liabilities including multiple lawsuits. One lawsuit that is drawing public attention involves Waymo, a smaller competitor, which is suing Uber for stealing trade secrets from them. After a federal judge on November 28th discovered Uber had been withholding important evidence in the trial, he declared he could no longer trust Uber’s lawyers. Meanwhile, customers are choosing to ride with drivers of companies that might have grown slower such as Lyft but have also taken the time to build constructive and supportive corporate cultures. These rivals have been raising billions abroad and are banding together. In addition, important cities such as London and Montreal have threatened to either cancel or not renew Uber’s licenses. Several large Uber investors recently marked down their investments in the wake of the company losing $2.8 billion in 2016 as Kalanick drove aggressive growth. But the thing Khosrowshahi might have to be most concerned about it that with Kalanick on the board, he might just have a Steve Jobs’ type disruption on his hands if Kalanick makes a play to return to his old job of CEO.