Creative Destruction and Disruptive Innovation
By John Murray, Research Director, Linqto Inc.

In the mid-twentieth century, political scientist Joseph Schumpeter developed the theoretical basis for the business phenomenon that he called “creative destruction,” where technological advances launch game-changing disturbances that cause significant business upheavals and introduce new patterns to traditional corporate activities. In doing so, he carefully drew a distinction between the fundamental notions of classical Marxism and old-school Capitalism, and identified the modern concept of Entrepreneurship as a third force that drives economic performance.

Schumpeter defined entrepreneurship as “the doing of new things or the doing of things that are already being done in a new way” — in other words, “disruptive innovation.” He noted that “the spirit of adventure and the element of innovation” are essential features of entrepreneurs, who he characterized as people who see new possibilities and can deal with the resistance that “doing new things always meets with outside of the ruts of established practice.”

At Schumpeter’s time, most key innovations required significant financial support, at least in his eyes. So the funding needed by the entrepreneurs came from those who controlled the capital, in other words the venture investors. As an economist, he saw these professionals as allocating resources to optimally balance their risk of loss and maximize their return. With access to multiple potential ventures, they would constantly seek out new information to enhance profitability.

Fast-forward several decades to the 1960s, and we begin to see signs of the emergence of the modern-day start-up culture, especially around Silicon Valley in the information and communications technology sectors. In comparison with many entrepreneurs in Schumpeter’s time, it was now becoming feasible for pioneering innovators to get viable new ventures off the ground with relatively modest early-stage funding.

The opportunities presented by the twin patterns of creative destruction and disruptive innovation attracted a new breed of risk-taking pioneer — the angel investor. Unlike the professionals who manage venture capital funds, angels are generally putting their own personal funds at risk, and doing so at an earlier stage than the larger investors. This pattern usually leads to a different type of relationship with the entrepreneur, one where angels take on roles as advisers and mentors to the fledgling enterprise.

This close partnership between angel funders and visionary founders is richly described in a new book just published by Fifth Era Media. The Intelligent Investor — Silicon Valley: Practical wisdom for investors and entrepreneurs presents extensive insights from fifty hands-on high tech pioneers, written in their own words. Here are some salient quotes from the contributors:

“The Valley is a holistic environment that accommodates innovation in a powerful way. Having all the elements of support be so proximate (money, thought leadership, universities, previously successful entrepreneurs, flexible legal and accounting talent, and incubators and accelerators that are world-renown), encourages startups to dive in, and when they run in to trouble, there is a community of empathy to work with them.” — Mary Jo Potter, Angel Investor, Keiretsu Forum.

“Don’t build a new company, build a new category. Curiosity and tenacity are the most important traits of a tech entrepreneur. The level of curiosity here is obscene. It does not matter the industry, from funerals to farming, crypto to camping there are entrepreneurs trying to work out how to innovate to build a business. The more obscure it is, the more interesting.” — Duncan Logan, Incubator Founder, Angel Investor.

“One of my worst investments happened because I fell in love with a business model, but I became blinded to the shortcomings and lack of experience of the team. Your failures teach you to make sure that the founders have both the courage to defend their own ideas but also the wisdom to be coached and listen to others’ input.” — John Ricci, Managing Director, US Angels

“When I started my first business, I didn’t apply any creativity to funding. I was fearful of losing control and decided instead to grow it slowly and organically. There are so many other ways to fund a business that I never considered, such as innovation funds, accelerators, grants, etc. I could have accelerated much faster with outside funding that would have still allowed me to apply a thoughtful, planned approach to growth and exit.” — Charlotte Yates, Entrepreneur and Venture Capital Partner
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