Disruptive (or radical) innovation - as opposed to incremental innovation - refers to a type of innovation that creates new markets and value networks, eventually disrupting existing markets and potentially displacing established players and competition.
The key characteristics of disruptive innovation include:
Simpler and more affordable solutions: disruptive innovations are often simpler, more accessible, and more affordable than existing solutions. This is typically made possible by digital technologies and through simplification of the features and functionalities provided. Disruptive innovations typically start with lower performance compared to existing solutions, but they improve over time and gradually move upmarket.
New market segments and niches: disruptive innovations tend to target new and more focused market segments, which are not well served by the existing products and services. These niches might be composed of customers who are price-sensitive, less demanding in terms of performance, or have specific needs that are not met by the dominant solutions. Over time, disruptive innovations gradually capture more customers beyond the initial niche and gain market shares from established players.
New business and revenue models: disruptive innovations are typically supported by new business and revenue models, for example by replacing a one-shot acquisition price with recurring fees and subscription schemes, or by replacing variable commission-based price with fixed price schemes.
For established companies, disruptive innovation is vital for several reasons:
Sustainable growth and market expansion: as markets evolve and customer preferences change, companies that solely focus on their existing products and technologies may find themselves losing market share or becoming obsolete. Embracing disruptive innovation allows established companies to stay relevant, serve new customer needs (e.g., new generation of clients) and continue to grow. Disruptive innovations often create new markets or reach underserved customers. By leveraging these innovations, established companies can tap into new revenue streams and expand their customer base.
Competitive advantage and defense against disruption: by being proactive in exploring and adopting disruptive innovations, established companies can maintain a competitive edge. This helps them to stay ahead of newcomers and potential disruptors and protect their market position. By introducing disruptive innovations themselves, established companies can prevent new entrants from gaining a foothold and disrupting their markets. This is known as "disrupting from within" and can help safeguard the company's future.
Innovation culture and talents’ engagement: embracing disruptive innovation fosters a culture of innovation within the company. This can lead to a stronger employee engagement and the ability to attract talents that otherwise wouldn’t be eager to join the company. Disruptive innovation also leads to more effective internal processes and a more dynamic and responsive organizational structure.
However, disruptive innovation can be challenging for established companies and is very hard to deliver from inside the company. For several reasons:
Focus on running current business often prevents fresh perspectives and new ideas: over time, established companies have created processes and structures that are optimized to run their current products and markets. Pursuing disruptive innovation requires to be open to new ideas, embrace risk, and sometimes even cannibalize their own products in the short term for long-term gains. It’s (almost) impossible to have the same teams running the current business and disrupting themselves with innovative ideas.
Lack of the skills, resources and mindset required for disruptive innovations: disruptive innovation typically materialize through quick and iterative cycles, which allows to rapidly build, test and scale new solutions. This building approach requires specific competencies and mindsets (including creativity, entrepreneurship, business design and prototyping, risk-taking) which are often rare or absent in established organizations.
Organization and tech-landscape inertia: political frictions, resistance to change, and poorly evolutive IT systems often represent a major obstacle to disruptive innovation. On the opposite, disruptive innovation requires quick decision-making, high willingness to modify the traditional ways of working, rapid integration of new techs and IT solutions.
Risk aversion and reputational concerns: established organizations often shy away from radical changes due to the potential threat to their brands and reputation. A clearly separated, independent and “secured” environment is often required to build and test disruptive innovations.
Venture Studio effectively enhances and complements existing structures and setups.
In the age of rapid technological evolution, innovation has become a top-tier priority on every executive's agenda.
A multitude of strategies have emerged in corporate spheres to tap into this wave of innovation:
Open Innovation Programs: Collaborative frameworks to integrate external ideas and technologies.
Research Labs & Incubators: Dedicated spaces for experimentation and nurturing early-stage ideas.
Acceleration and Intrapreneurship Programs: Platforms to speed up idea validation and foster internal entrepreneurial spirit.
Corporate Venture Capital Arms: Direct investments in external startups to gain insights and potential returns.
While each of these avenues holds merit and serves distinct strategic goals, they occasionally fall short in catalyzing disruptive innovations that retain value over time.This is where the Venture Studio approach emerges as a game changer.
Unpacking the Venture Studio Model
Venture Studios, also termed Startup Studios, operate as independent entities tied to their parent corporations, built to systematically ideate, develop, and bring ventures to fruition. This structure offers several advantages:
1. Cultivating Disruptive Innovation Beyond Product-Market Fit
Traditional methods like open innovation and incubators excel at ideation but can falter in scaling ventures
Venture Studios provide an insulated environment, devoid of the day-to-day distractions of the parent corporation. This ensures that emergent ventures aren't stifled by resource allocations biased towards established revenue streams.
2. Talent Acquisition & Retention
Where traditional innovative strategies tend to foster innovation and agility across the whole organisation, required skill set and mindset for nurturing a fledgling venture highly differs from managing established corporate operations.
Venture Studios attract entrepreneurial minds, offering them dynamic projects, fostering a sense of ownership, and ensuring optimal talent application to navigate ventures to profitability.
3. Prioritizing Venture Needs Over Corporate Constraints
Conventional innovation avenues, rooted in core business, often grapple with organizational politics, resistance, and infrastructural limitations.
In contrast, Venture Studios prioritize the needs of the ventures, streamlining decision-making processes, and facilitating adaptive and agile operational practices.
4. Safeguarding Corporate Reputation:
Disruptive innovations often challenge the status quo and may even be at odds with the core business.
Venture Studios act as a shield, allowing disruptive initiatives to operate independently and securely. This separation is often necessary to build and test disruptive innovations without jeopardizing the core business's stability and reputation.
In essence, the Venture Studio paradigm represents a comprehensive and forward-looking approach to corporate innovation. It provides the necessary independence, resources, and support for disruptive ideas to flourish and eventually contribute substantial value to the corporation. By embracing this model, corporations can position themselves at the forefront of innovation, ready to shape the future of their industries.
The venture studio model is proven and more successful than traditional approaches.
Venture studios are a growing innovation approach
The number of venture studios has grown significantly, offering companies enhanced methods to launch and expand new businesses models. From 2018 to 2023, the number of startup studios has doubled to 877.
Studio startups, for instance, reach seed rounds in half the time compared to traditional startups, taking just 1.49 years versus 3.03 years. Moreover, they require 41% less time to progress to Series A (2.75 years instead of 4.68 years), 44% less time to reach Series B (3.7 years compared to 6.65 years), and an impressive 47% less time to achieve Series C (4.59 years as opposed to 8.67 years). Additionally, when it comes to exits, studio startups prove to be more agile, taking just 5 years to be acquired, which is 33% faster than non-studio startups. Furthermore, their journey to an IPO is expedited, with a 31% reduction in time, requiring only 7.5 years.
A successful and profitable innovation model
Comprehensive Support from the Studio:
Startup studios offer extensive assistance, with each startup benefiting from the equivalent of 2-5 full-time employees provided by the studio team throughout their active studio engagement.
Studios typically introduce 3-5 new startups on an annual basis, and well-established studios can even target over 10 new ventures annually.
This hands-on approach leads to accelerated growth and development of startups within the studio ecosystem, resulting in a 30% higher success rate for venture studio startups compared to their traditional counterparts.
Studio startups reach their seed funding rounds in half the time compared to conventional startups (1.49 years versus 3.03 years).
They demand 41% less time to advance to Series A (2.75 years versus 4.68 years).
Startup studios streamline the journey to Series B by reducing the required time by 44% (3.7 years versus 6.65 years).
Furthermore, they significantly expedite the path to Series C, cutting the time required by an impressive 47% (4.59 years versus 8.67 years).
Higher IRR (Internal Rate of Return):
Startup studios provide an elevated IRR owing to the availability of more affordable equity at the outset, reduced dilution during exit events, and a higher frequency of exits.
As an alternative to investing $500K for a 10% equity stake in a startup valued at $5M post-funding, you can deploy this capital to nurture a venture that achieves a $10M valuation within just 18 months, all while maintaining a 25% ownership stake. This strategy results in a 5x TVPI (Total Value to Paid-In)
We invite you to read the upcoming article that introduces a fresh perspective. As the corporate world faces the challenge of leveraging entrepreneurial energy, the emergence of hybrid start-ups presents a compelling solution. Through the fusion of internal strength and external dynamism, this article reveals a transformative path taken by leading companies to strengthen their market position and drive the digital revolution.
Let's delve into two striking examples that highlight the transformative potential of disruptive innovation driven by hybrid startups:
Revolutionizing Aerospace with Airbus's Hybrid Startup: UP42
Take the case of Airbus, a prominent player in the European aerospace industry. Airbus was already accumulating substantial volumes of high-quality data from satellites. With the democratization of digital platforms, barriers were lowered, granting access to external organizations, as well as enabling Airbus to synergize this data with industry information and partner-generated data. In response, Airbus conceived its hybrid startup, UP42, a platform spanning the industry. The objective was to tap into the latent value concealed within their existing assets. This ingenious move not only generated a fresh revenue stream for Airbus but also for its platform collaborators. Today, UP42 stands as a global provider, extending geospatial data, analytic tools, and applications to a diverse clientele.
Empowering the Real Estate Sector: First American's Endpoint
First American, a major player in the U.S. real estate arena, presents an exemplary case of deploying a hybrid startup to combat impending disruption. Recognizing the inefficiencies of the traditionally sluggish and bureaucratic real estate closing process, First American initiated Endpoint. The ethos behind this endeavor was to amalgamate the entirety of a corporation's arsenal—distribution networks, data resources, intellectual property, and other corporate assets—with the entrepreneurial acumen required to erect a novel business. Paul Hurst, Chief Innovation Officer at First American, succinctly articulates this concept, stating, "The objective is to blend the corporation's riches with entrepreneurial talent, setting the stage for a synergistic metamorphosis."
In both instances, these hybrid startups emerge as potent engines of disruption, showcasing how the convergence of corporate prowess and entrepreneurial zeal can spark innovation capable of reshaping industries and ushering in a new era of success.
Fusion Partners can help you set up the venture studio and operate it.
With our end-to-end solution, encompassing both business studio creation and operational excellence, we empower organizations to navigate and thrive in this landscape. The journey from ideation to realization presents challenges, but also great potential.
Whether you need help with implementation, operations or both, our solution is ready to drive significant change in your organization's trajectory.
Building the foundations for transformation
Adopting disruptive innovation starts with laying a solid foundation. Our approach focuses on creating an innovation studio tailored to your organization's specific needs and aspirations. This journey begins by defining clear objectives, identifying pain points to be solved and categorizing the types of startups likely to respond effectively to these problems.
Tackling the unexplored waters of innovation requires solid governance and organization. Our expertise extends to creating investment structures that align with your company's objectives, ensuring a harmonious allocation of resources. Building a committed team is essential. Together, we design decision-making processes that combine agility with a thorough validation mechanism, increasing breakthrough potential. Each step includes clear milestones and deliverables, serving as benchmarks along the innovation journey.
Operating the studio to realize potential
1. Exploration and analysis
The operational phase begins a journey of idea generation based on trends and pain points. We draw inspiration from emerging market trends and analyze the challenges facing your industry and organization. This generates a flow of ideas, each with the potential to disrupt norms. Rigorous analysis follows, assessing the feasibility and impact of these ideas, ensuring a focused approach.
2. Testing and vetting
The testing and investigation stage is crucial. We transform these promising ideas into tangible prototypes. Rigorous testing involving your company's customers not only validates and refines these prototypes but also involves confronting the market. This iterative process refines solutions, aligning them precisely with market needs. We also engage with potential target clients and partners, gathering invaluable feedback that informs the final adjustments.
3. Company launch
The solution gains momentum with the launch of the proposed business. Our teams work together to design the actual product, infusing it with the innovation cultivated in the previous stages. At the same time, we offer comprehensive administrative and legal support, streamlining the company's creation. As the company takes shape, strategic sales and marketing campaigns are deployed to attract the first wave of customers.
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