Derek Van Bever: [00:02] Hello, and welcome to the podcast. My name is Derek Van Bever and I'm here today with Matt Christensen, the CEO and managing partner of Rose Park Advisors, an investment firm that specializes in applying the theory of disruptive innovation to invest in companies whose business models are well-suited to take advantage of industry change. Matt's last name is no coincidence to students of disruption. His father, Clay Christensen, is the co-founder of the firm and is our guiding inspiration here at Harvard Business School as we seek to better understand how to spot and apply the theory of disruptive innovation in our professional and personal lives. Matt, welcome.

Matt Christensen: [00:41] Thank you.

Derek Van Bever: [00:41] A little back story on today's podcast. In Clay's course that we teach here at HBS, called Building and Sustaining a Successful Enterprise or BSSE, we work with our students to help them understand how to apply predictive theories like disruption in their work as managers and as leaders. Across the course of a term we work our way through a set of about 20 such theories covering a range of marketing and operations and strategy issues. Each semester a number of our students devote their final papers to applying disruption and others theories to investing, and for several years now we've promised them that we'd get Matt into our studio to share his insights. So that's what we hope to do today, to explore with Matt how he came to this work, how he applies the theories of our course to investing, and maybe most specifically, how you might get better at spotting when disruption is afoot and when it's not. Let's dive right in. I wonder if we might start by learning a little more about you and how you got into this line of work. Was this always your plan?

Matt Christensen: [01:39] Kind of. You know, I started my career at BCG like my dad and had a wonderful experience there in a diverse array of industries, so first in agrochemicals and then in telecom and then in fleet auctions and in the end industrial batteries. I loved learning about new industries all the time. I left then to join another consulting firm that some of my dad's former students had started, called Innosight, and took on a bit more responsibility there and learned in my time there that the power of your ideas is part of what sells the consulting engagement, but there are other things. And I didn't enjoy the other stuff as much and really felt like if my ideas were good, then I should succeed, and if they aren't, I'm happy to go hungry. And decided that investing put up a score card a lot more like that and so thought, "I can continue to learn about new industries and new companies, but outcomes were a little more binary." And so decided then that that's what I wanted to do, so after Innosight I went to HBS and we started Rose Park right after that.

Matt Christensen: [02:43] We had started, my father and I, while I was at BCG, to just invest in companies we thought were disruptive just with our family's money, so not with anybody else's, but that went really well. So when I was wrapping up at HBS we kind of thought we could take this show on the road and open that up to outside investors. It's gone well since. It's kind of an interesting ... I don't know if it's an irony, but the subtitle on the Innovator's Dilemma is something like when new technologies cause great firms to fail, and I think for both of us, because we had spent a lot of our career consulting for those large companies, we just thought about disruption from the perspective of incumbents. And it took almost a decade for us to start to think about it from the perspective of entrance. In that regard I think other people were thinking about it that way a lot faster than we did, at least in detail.

Derek Van Bever: [03:37] Super interesting. Our students have a pretty balanced perspective on this these days. A lot of the work in the course is focused on the incumbent companies and how they're trying to manage these phenomena, but the students are really picking up in terms of their interest and seeing if they can spot disruptive potential early. Ergo, I think, the very great interest in our conversation today, so this is a really big but obvious question. Is there a set of theories from the course that are your go-to, day to day as you either are trying to spot promising investments or as you're counseling the CEOs of portfolio companies?

Matt Christensen: [04:18] Yeah. By far the most important framework for us is disruptive innovation. Strictly speaking, the fund we manage is called the Disruptive Innovation Fund, and I think that just the 25 years' worth of research that has happened that we've done in that area makes it really rigorous and robust in ways that some of the other frameworks just aren't yet but I think can be. The one that we use probably the second most is actually an example of one that I think has a lot of room to progress with jobs to be done. I would say has probably had five years of concerted development. The original idea is older than that, but as ideas have proliferated, no one idea has been given concerted effort. I think that there's a tremendous amount of power to that, but it is not as rigorous in my view at this point as disruption, which has very specific, clear definitions, which definitions will be familiar to the alumni of the course.

Derek Van Bever: [05:19] Yeah.

Matt Christensen: [05:20] But not the public in general, and I think is one of the things that both gives us opportunities and frustrates us from time to time. The use of the phrase "disruptive innovation" may have reached a crescendo at this point, but I'm not sure understanding of the framework is anywhere close to its usage.

Derek Van Bever: [05:38] I wanted to drill down on that, because one of the very first things that we do in the course, as our alums will remember, is essentially to put disruption back in its box and to try to get, to rein in the students' understanding of what disruption is when it's afoot. I know you said to me that you often have to do that with managers of companies that come to you suggesting they're disruptive and you're like, "Well, actually, maybe you're not." What do people get wrong? Why do people mistake this phenomenon so often? And what are some of the most common errors people make?

Matt Christensen: [06:17] Yeah, so I'd say there are two modes. One is that I think most entrepreneurs are just convinced, either just reflexively or because they've been conditioned to tell people, that what they're doing is somehow bigger, faster, or stronger than what everybody else is doing and therefore they will win. And by the way, we're going after this enormous market, and so even if we just get a small piece of it, you should make oodles of money. As people who've studied the research know, disruption is not bigger, faster, stronger initially and there is some compromise, and sometimes it takes a lot of arm twisting to get an entrepreneur to confess that in this regard what I'm doing isn't as good. But here's the attribute that I get by making that compromise, and that's why I have a competitive advantage that'll help going forward in creating a new market and then eating away at the low end and so on. It just isn't the conventional thought process, and ultimately part of the power of the ideas here is that they're unconventional and counterintuitive, and that just is constantly in evidence to us.

Matt Christensen: [07:36] The other way that I think people mess up in their use of disruptive innovation is just conflating it with shaking things up, challenging yourself, rocking the boat, all kinds of clichés and just perfunctory phrases that mean something to the effect of, "Win or do things differently." People will use disruption in that sense as well, and that is pretty easy to dismiss or identify quickly and move on from. The former category that we talked about, that takes a little more work, but there have been companies we've invested in where people have started off by saying, "What we're doing is better than everybody else," and after about three hours of work on it, you can kind of see, well, here's how it actually isn't as good as what other people are doing but here's the attribute or the asset they gain by making that compromise.

Derek Van Bever: [08:47] So that, it's interesting. The natural inclination of a management team would be to talk about how strong their offering is or how large the addressable market, but you're saying that sometimes what catches your eye is when something is not good enough yet or when it's attacking a market it has to carve out as opposed to an established market. Can you give our listeners some ideas of companies that you have listened and said, "Ah, now that's disruptive. That's interesting"?

Matt Christensen: [09:23] Yeah. One that we're really excited about, we were the first investors, and it is shockingly a company that was started by graduates of the Stanford Business School. It is one of the few things any of them have managed to do correctly.

Derek Van Bever: [09:39] The lines are not good enough yet. They try, so ...

Matt Christensen: [09:43] But a company called CircleUp was founded by two classmates from Stanford GSB who identified that in consumer private equity there's just a gap, or historically there's been a gap from kind of zero to 10 million in revenue where companies don't get financed. If the four of us in the room wanted to start a fintech company, we probably wouldn't need to leave the basement of [Oz 00:10:12] hall to get financed. Angel investors who throw money at tech grow on trees, but if the four of us decided that we wanted to start an organic pet food company, we had better have wealthy relatives, because nobody invests in those things initially. Ryan Caldbeck, one of the co-founders there, who had spent some time working at consumer PE funds, would go to trade shows and see very promising companies that have seven million in revenue but can't get financed because they haven't quite yet hit that $10 million floor in revenue rate.

Matt Christensen: [10:48] And it's not an unreasonable practice on the part of the PE funds, right? In order to write a check size large enough to justify the costs of the transaction and the sourcing efforts and so forth, you have to have a certain size company and below 10 million isn't that size. But these companies had lots of promise. Couldn't get financing. Ironically, without the financing they can't get to where they need to be to get financed, so it's kind of a classic chicken and egg problem. He felt like there was a market of non-consumption there that he could target, and did that with a marketplace-based solution that initially drew on individual investors for the most part. Kind of almost a crowdfunding type of concept to fund these companies, and initially every one of the companies that would get on the platform had to be manually screened by Ryan and his colleagues, because they knew that if investors come to the website and all the companies are terrible, they'll never come back, so it has to be curated.

Matt Christensen: [11:59] And we knew that the company couldn't scale if it has to be manually curated, every company that tries to get on it, but at the beginning that's all there was, is people. But as they started to do that, actually what ended up happening was companies were getting funded much faster than they otherwise could, so some companies in that kind of zero to $10 million range would hire brokers and go around and on average, just based on interviews we had with them, take 18 months to raise a few million dollars. On CircleUp they could do it in a third of that time or less. As word got out that that was possible, more and more companies would apply, and as more and more companies started to try to get on the platform, then the platform could start to do things like, okay, if you want to raise money on CircleUp, these are the terms. These documents are standardized or standardish. You can toggle a few different things, but we just can't be doing everything one-off.

Matt Christensen: [12:56] And what entrepreneurs really want to do is run their companies, not chase people around and ask them for money, so they would fit the form docs, basically, but as that standardization starts to happen, then more institutional investors could look at CircleUp and the platform and say, "Well, look, if you're consolidating in one place all these high-quality companies and you're standardizing the deal terms and making clear the financials and other things that companies have to provide to be on the platform, then actually we could write smaller checks in these companies." So they start to invest in them as well. Large LPs, who have invested historically in those PE funds, also start to say, "Well, look, we used to pay these guys humongous fees to find these companies, but now if they're all in this marketplace, we could do that too." And as word then gets out that more of these companies ... Or excuse me, or more investors are coming to the platform, then more companies come. As more companies come, then you can really start to do a lot to automate the screening and categorization of these companies.

Matt Christensen: [14:04] So you can say, "This guy should get on. This guy shouldn't." In some instances we could identify, actually, this kind of a company would be great and I bet somewhere out there there is one, and identify it proactively. Some of the date that they're able to get help some see that this company has for the first time sold a product in Costco, and because of that we can assume that they probably need some financing to pay for their load and inventory for Costco, so we can reach out just at the right time and say, "We'd love to help you. Congratulations." So it just has grown from this category of non-consumers, these companies who didn't have opportunities to get financing and really nobody had the opportunity to invest in them because it wasn't an asset class, so to speak, over time has grown to be something that's just a tremendously successful platform.

Derek Van Bever: [14:56] So if you were [inaudible 00:14:56] CircleUp and saying these are the ways in which it ticks the boxes of, I guess, new market disruption in our terms, you've talked about targeting non-consumption. What else stuck out for you as really special about this opportunity?

Matt Christensen: [15:09] Yeah, so non-consumption is one. Another is not as good as the alternative, so the alternative for these guys were just small brokers, right? That's not a business that would be attractive to an investment bank. Those brokers are tapping personal relationships. Can go take somebody they know out to dinner. Talk with them about the opportunity. The website has very little charisma, and so in that regard it is an inferior product for these non-consumers. As we would interview the kinds of companies that could raise on CircleUp, just in trying to identify is there a market there, is there a job, again and again and again what we would hear is there's a passion for the product and for their customers. And something between indifference and naïveté about how you finance that, and so they were ... This is a little hyperbolic, but they were dying for a way to just be able to run their business and happy to have it be easier, and would kind of do anything to make that easier and less painful. So it felt like, from a jobs' perspective, it ticked the box.

Matt Christensen: [16:27] Another one that gets covered in BSSE but Christensens can't claim ownership for it is discovery driven planning. That was something we were very proactive about in the early days of CircleUp, in trying to say, "We have a hypothesis about what should work, but we don't know, so how can we test these assumptions and iterate towards something that'll be productive and work well?" So that also was a big thing.

Derek Van Bever: [16:52] Fascinating. In an interview that you did with Bloomberg a bit more than a year, which our listeners can access on the Rose Park site, you talked about something that we observe in class as well, which was that we see a lot more examples of so-called new market disruption than low-end disruption. You and I were talking before we started rolling today about an example of low-end disruption you've come across. I don't know that it's going to give rebar a run for its money, but it sounded like it fit the pattern pretty well. Could you talk about that?

Matt Christensen: [17:29] Yeah. Our most recent investment is in a company called Norsk Titanium, a company based in Norway that has operations in New York State as well. They 3D print titanium parts for commercial aircraft and they're the only company in the world that has FAA approval to do that. They sell parts now to Boeing and Spirit AeroSystems, that makes fuselages for Boeing and Gulfstream. The process is very unique. Probably everybody has seen video or in person seen what most 3D printers look like, where there's a basin full of some sort of powder. It could be anything from nylon, other resins, polymers, powdered metals. There's an energy beam of some kind of, an electron beam, a laser beam, whatever, and that centers a layer of the powder. The basin drops. A new layer gets deposited and centers that and slowly builds up, layer by layer, something.

Matt Christensen: [18:30] That has really come to take over the prototyping function in most manufacturers, because the minimum efficient scale is one, but there's very few things that are 3D printed in manufacturing, because it is agonizingly slow. Norsk uses a different process and it's wire-fed, and the parts that it prints are in what they call near net shape, so they aren't actually the shape it's supposed to be. For most 3D printing you would define quality in how much after the printing machining is required to make this actually something that someone would use. You can see, if you've ever done this on kind of a personal 3D printer or something and you 3D print a chess piece Yoda or something like that, it has ridges and things. That's not a great quality print, but there are some you could take it out of the machine and you could rub it against your skin. It wouldn't hurt at all.

Matt Christensen: [19:43] The Norsk pieces are in near net shape, not just the shape they're supposed to be, so they have to be machined, but they can print so quickly in near net shape that that printing, plus the after the printing machining, is much faster. Literally orders of magnitude faster than traditional 3D printing or the traditional manufacturing process, and so they do parts that are kind of the rebar equivalent in commercial aerospace. They aren't going after the hottest parts of the engine right after the [bat 00:20:23], that are the most expensive. They get consumed over time, and so over the life of an airframe you're replacing engine parts eight times. They're doing things that are kind of sold once and less attractive to the incumbents like precision cast parts. But just as the mini-mill story illustrates, where do you go from there? It's up market, and we really feel strongly that the opportunity is there. It's a really neat opportunity, but we don't see a lot of kind of classic low-end disruptions. Most of them are new markets.

Derek Van Bever: [21:00] As you were describing Norsk, I've got Willy Shih running a tape loop in my head. Willy is so fond of saying that what he really looks for is that trajectory of improvement, so he would love the idea that ... as with new corps, right? You're starting low end and you actually see both the path and the motivation for improvement across time. It's super cool.

Derek Van Bever: [21:32] A couple of last questions, Matt. I imagine a number of our listeners are in the process of shaping their own companies' strategies. They're trying to figure out, are opportunities for disruption available to them? What advice do you give entrepreneurs? Perhaps if they come to you and you say, "You're just missing this. The thing you need to do to be able to take advantage of the power of this positioning is X." What are some things that company founders should be thinking about as they try to shape their strategies to take advantage of disruption?

Matt Christensen: [22:17] Well, I think one is if you have an idea that has elements of it that are not as good as the existing alternatives and elements of it that you think help you create new markets, don't automatically treat your biggest problem as the ways in which you fall short relative to the incumbent alternatives. I know this is an example that has been used in BSSE for a long, long time, but in voice recognition software IBM always had framed the problem as the quality of voice recognition isn't good enough to compete with word processing, and so that was the focus. And they missed the opportunity that Nuance and others created in starting with press or say one, and kind of moving up market over time.

Matt Christensen: [23:13] I think what often happens is that as entrepreneurs look at their product or service offering and kind of ... We've all seen these PowerPoint slides where there will be features on one side of a chart and their company competitors in columns above it, and they'll have a quarter moon, half moon, three quarters full and kind of rate themselves versus everybody else. What they really want to be able to do is say full moon, full moon, full moon, full moon, full moon, other guys, one or two full moons, and then a bunch of quarters and zeros. So either they just sort of fudge or they just really focus on the areas where they don't measure up against their competitors and try to compete and be as good as them on that basis.

Matt Christensen: [24:05] I just think that that leads you into head on sustaining competition much faster than you want to be doing that, and instead what you need to say is, "Here's what we're good at. Who does that appeal to and why will they care about it? What job do we do for them? And let's just do that well." Drive your own advantage up market and the trade-off usually kind of reconciles itself in the process.

Derek Van Bever: [24:27] In the article that your dad and Taddy and Karen published in HBR, at the time of the publication of Competing Against Luck, there's an interview in that article with the founder of the customer communications company Intercom. In that they talk about the absolute death of that kind of feature creep that comes from trying to fill out the full moons on each of dimensions against your existing competitors versus, as you say, figuring out where are the specific areas that are most important to our customers and making progress? And how do we focus on those? I'd recommend that article and that interview to our listeners.

Derek Van Bever: [25:16] Matt, just a last question. As many of our listeners will know, we close out all of our BSSE classes the way Clay does, by talking about what will you measure your life? How will you use these theories to help you to live the life that you'd like to construct versus the life you fall into? Any just closing advice for our listeners?

Matt Christensen: [25:44] Maybe two things, so some professional advice and some personal advice. I think for the professional advice, these will relate. When we're at HBS we have wonderful educational experiences. Then for most of us, we go away and we hope we apply a lot of what we learned, but it is pretty easy to just adopt the culture and thinking that's around us. I think it's worth going back and studying the things that impressed us at one point in the past and just making sure that we're familiar with them. It's been interesting for me from time to time to talk with people who've taken BSSE. The most frequent thing I hear from them is, "Oh, yeah. I remember that." But what they are actually saying is, "Oh, yeah. I had forgotten that and you just reminded me."

Matt Christensen: [26:42] So I think that, and probably not just the case with BSSE, but we learn lots of things and we hope we remember them, and some things stick and some things don't, but doesn't mean ... just because something didn't stick or doesn't stay with us the whole time, doesn't mean it wasn't important. A lot of times I think when we were here, we just didn't have to context to appreciate the importance, so go back and just review that you thought were interesting before, and the odds are you don't understand it as well as you thought you did. That'd be one.

Matt Christensen: [27:13] Then the second is related to that, I guess just as a personal piece of advice. I think that all of us have the opportunity to be happy and for all of us, that requires change. I think that we all hope to be better people in the future than we are now and we just need a way to identify how we are going to do that and to be, as you'd put it, deliberate about it. It is a question of resource allocation in a lot of ways, but we need to decide what will inform the deliberateness of our resource allocation, how will we decide what's important to us and what isn't. I believe that we can do that.

Matt Christensen: [28:05] I'm a devoutly religious person. For me that comes from my study of the scriptures. For other people who are religious I would advise the same. For people who aren't, I think you can find people around you and just talk with them about what's important in your life and what's important in their lives. Odds are that you keep those people around you because you respect them and they'll have a perspective on that. So, just go through life with the intention to be better and hold yourself accountable to that, and put your time and your energy behind making those changes.

Derek Van Bever: [28:45] Matt, I know a lot of the people who are listening to this podcast love your father and remember with great fondness the opportunities he gave them and us to do just that every day in the classroom and beyond. I hear that wisdom in you as well, and thank you so much for sharing your thoughts with us today. For our listeners, Matt and his dad plan to host a fireside chat on this topic on campus sometime this coming term, and we look forward to keeping our alumni informed about that, and to helping all of us cast back to BSSE to remember the lessons and their implications for us, and to keep on learning every day in this very important and timely area. So, thank you very much.

Matt Christensen: [29:40] Thank you.

Speaker 3: [29:42] You can find this and other episodes of the Capitalist's Dilemma Podcast on iTunes, SoundCloud, Spotify, and other major platforms. To learn more about the Capitalist's Dilemma, please visit fgi.hbs.org. Thank you for listening.