Clayton Christensen  (Harvard Business School Professor)  |  May 10, 2013

Disruptive innovation, a term of art coined by Clayton Christensen, describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.

As companies tend to innovate faster than their customers’ needs evolve, most organizations eventually end up producing products or services that are actually too sophisticated, too expensive, and too complicated for many customers in their market.
Companies pursue these “sustaining innovations” at the higher tiers of their markets because this is what has historically helped them succeed: by charging the highest prices to their most demanding and sophisticated customers at the top of the market, companies will achieve the greatest profitability.

However, by doing so, companies unwittingly open the door to “disruptive innovations” at the bottom of the market. An innovation that is disruptive allows a whole new population of consumers at the bottom of a market access to a product or service that was historically only accessible to consumers with a lot of money or a lot of skill.

Characteristics of disruptive businesses, at least in their initial stages, can include: lower gross margins, smaller target markets, and simpler products and services that may not appear as attractive as existing solutions when compared against traditional performance metrics. Because these lower tiers of the market offer lower gross margins, they are unattractive to other firms moving upward in the market, creating space at the bottom of the market for new disruptive competitors to emerge.

On Crowdfunding

"I do think it can be disruptive (depends on the business model, and the target market). For now, as it takes root, I think that the disruptive crowdfunding opportunities are targeting non-consumptive areas – consumer being one. The sorts of opportunities that KickStarter targeted being another example.

These are companies or projects that otherwise struggle to get funding. While I wouldn't say that most entrepreneurs find it easy to get funding, there are certainly more people out there funding technology and healthcare companies than in other areas. So I think that crowdfunding platforms in those spaces (technology and healthcare) will find that they have a harder time (since they're essentially taking on incumbent seed and angel investors), and face other complicated issues, like adverse selection (only go to the crowdfunders after they haven't been able to get well-known angels or angel groups to invest).
I would say that for now the areas where it has the most opportunity to disrupt is by taking root in these underserved areas that traditional financiers have traditionally found unattractive. This is a classic entry point for disruption – expand participation in the market by lowering cost at the low end of the market, where incumbents don't see profit opportunities. Later, as the platforms gain scale, then they may start to add scope, or may start to add later-stage funding opportunities. That's likely where all of this goes next."

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