It may seem odd in a period when the stock markets are gyrating wildly and people are running scared, panicking about their 401(k)s, possibility of losing their job, companies failing, the banking system apparently on the brink, to want to talk about innovation and disruption of a different kind. However, I think this is exactly when disruptive innovation is most important.
Yes, a lot of people are going to be hurt by the current financial crisis. Yes, we're all going to be paying for the misdeeds of government bureaucrats, corrupt executives, negligent overseers, and tens of thousands of individuals who bought homes they couldn't afford and leveraged them beyond their value (even before the calamitous drop began), all on the belief that what goes up always goes up. The pain is going to last a long time as we rebuild confidence and fundamental value in institutions and systems that once seemed unshakeable and now seems unsalvageable.
The True Engine of Value and Growth
Credit and equity markets need to start functioning again, but make no mistake, they are not the engine of growth, and they will never pull us out of a crisis. The best they can do is stabilize, and restart the smooth flow of capital -- important and necessary, but not wealth building.
The only way out of this mess in the long term is through innovation, because innovation creates growth, creates new jobs, and builds competitive advantage and wealth where it didn't exist before. So, now more than ever, it's important to examine innovators, the nature of their innovations, the sustainability of their businesses and who is most likely to help us rebuild the foundations of our shattered economy.
To Disrupt, or Not to Disrupt, That is the Question
But the nature of the innovation is itself important. Disruptive Innovation matters because it is more about inherent value than about roller coaster rides, because disruption creates real growth, and that is the truest source of value for investing. Disruption doesn't depend on demographic trends, artificial supply shortages, arbitrage, political interventions and subsidies, technical trends, unemployment figures or even weather patterns. With the exception of demographics, which are fairly consistent and predictable, investing based on any of these other things is really just gambling by another name, and after the nonsense in the mortgage markets which has caused the crash we are now experiencing, you'd think most rational investors would have had enough of that.
So, I'm going to continue on with my plan for this blog to keep focused on disruptive innovation, the value it creates, and the business strategies that enable it. The next series of articles was always intended to examine, evaluate and score disruptors using my Disruption Report Card.
Since this financial crisis has us mostly concerned with American innovation and fixing our own economy first (hard to worry about anyone else's when yours is badly broken), I will skip over those companies that are only sold on foreign exchanges -- i.e. I'll only be discussing companies on either the NYSE or NASDAQ.
I will also note that, for the record, and at the risk of overstating the obvious, these are extraordinary times. We don't know if the worst is yet to come, or if it has already passed. In ordinary times, we wouldn't worry about disruptive innovators like Google (OK, I spoiled at least one surprise) losing 40% of their value in a few weeks or months. That the most important company of the internet age has dropped to a P/E ratio that would qualify it as merely a little above ordinary in ordinary times is an indicator that no matter what the future performance and innovation strengths of these companies, virtually all are vulnerable to dropping further, and virtually all will eventually rebound after reaching bottom and show above average growth in valuation for a while.
A lively discussion about the Flip Video camera is happening at The Anti-Marketer. My friend, Sean Howard, began it by guest authoring a post where he described qualitatively why he believes the Flip is probably a disruptive innovation. Although Sean and I aren't in complete agreement about the subjective criteria he uses, we do agree that the Flip is a cool device and I thought it worth running a Disruption Report Card™ to get an objective grade to add to the convo.
