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BFS Capital Blog

How to Pay for a Disruptive Business Model

May 27, 2017

Developing a disruptive business model and being on the cutting edge of disruptive innovation is everything in the world of business today. If your business can somehow earn the title of “disruptive innovator”, you’re well on your way to owning your own yacht in Sardinia. Ok, maybe not that extreme, but the point is disruptive businesses are all the rage now, and it’s small businesses like yours that are leading the way in creating them.

What is a Disruptive Business Model?

The term itself was actually coined by Harvard Business School’s Clayton Christensen in his book “The Innovator’s Dilemma.” And while he defined it simple as “innovations that create new markets by discovering new categories of customers,” economists and business experts have refined the term exponentially since then.

disruptive innovation now is one that reshapes an industry. It creates new customers where there weren’t before, steals customers from existing leaders (or “incumbents” as they’re called) and serves customers in a way they haven’t been before. Sounds simple enough: Just think of a new idea and execute it, right? Now where’s my yacht? Not so fast. There are a lot of things you must look at in order to come up with a disruptive innovation idea.

First, look to see if there is a market that is being OVER-served. That is, the incumbents are offering more product – and more expensively – than your average person needs. Budget airlines are an excellent example of this, where innovators saw people didn’t need things like “assigned seats” or “free water” to travel, and developed a low-cost model made accessible to a greater number of people. Southwest Airlines was the first to do this (minus the water fees, but you get the idea) and was the only airline turning a profit during the mid-2000s.

But it’s not always about doing something cheaper. Disrupting a market is more about making a product available to more people than it ever has. Which can include making it more affordable, but could also mean putting it in more places, with more frequency, with greater convenience, and in more languages. Though the market was disrupted over 30 years ago, PCs are an excellent example. Mainframe computers had been the norm for decades, but PCs put that technology in the hands of the masses.

You can also look to see if there are incumbents who have a pseudo-monopoly on an industry but don’t serve it well. Essentially, any time you find yourself shrugging your shoulders and saying “Yeah, but who else are you going to call?” you’ve got a market ripe for disruption. Taxis are the most obvious example of this, who were notoriously dirty, hard to reach, and rude. Then along came Uber, and now taxis have lost the monopoly and are scrambling to catch up. But above all, being disruptive is about giving the people what they want. Mark Zawacki of 650 Labs says that in order to be disruptive a business must “deliver a rare trifecta, simultaneously: what customers want, what they need, and what they expect. And it has to be all three—delivering only two isn’t enough.”

And how do you know what people want? Do your homework. Big data exists so that you can figure out everything you need to know about your market. Also, use your business experience to figure out what needs people have, and how you can address them.

How to Pay for a Disruptive Business Model

A lot of people look at disruptive business models like Twitter and Facebook and say ‘How do they make all their money?” And, invariably, somebody shrugs their shoulders and says “advertising,” everyone nods, and it’s not brought up again. You don’t build $40 billion dollar businesses on selling 2-cent-per-click ads and depending on that revenue in early stages is why a lot of startups fail. The business funding process is incredibly complicated, but essentially you need investors. A lot of them. Because if you’re trying to launch an app or website, chances are you’ll be giving it away for free. So that investor money is how you pay your bills for a long, long time.

The idea is to use that money to get your business well-known. Then when the money runs out, go out and raise more of it. Figure out how much you’ll need – known as your “burn rate” – and work within that budget. The idea is to build the brand enough that you can demand a high price for advertising and premium services, and eventually bring in a substantial cash flow, finally giving money back to your happy investors. But overestimating the cash you’ll bring in initially can be a death knell to even the best ideas.

If you do find yourself burning through investor funds too quickly, well, BFS Capital exists to help businesses grow and prosper. We understand it takes time to disrupt a market, and can help you get the capital you need to make it happen. Just don’t forget about us when you finally get that yacht.