ill Hambrecht is a paradox: a card carrying member of the investment banking establishment who is also a revolutionary.

WR Hambrecht’s OpenIPO^® is leveling the playing field among investors, issuers and the investment banks and has been called one of the few disruptive innovations in modern finance.
In addition to WR Hambrecht + Co, Bill co-manages WR Hambrecht Ventures I, LLC. focused on disruptive technologies and Hambrecht Geneva Ventures, LLC., which leverages the disruptive model in software venture capital.

We use the term “disrupter” in the same way that Clayton Christensen* does in his book, “The Innovator’s Dilemma.” Disrupters are companies that bring a very different value proposition to their customers than established competitors. My rule of thumb is to look for companies that provide 80% of the value for only 20% of the cost.

When I first read Clay’s book, it crystallized for me some of what I had learned in my thirty years of venture capital investing, but hadn’t yet been able to see as part of a larger framework. I had learned that venture-backed companies could find and exploit opportunities that their larger competitors couldn’t, and I had seen these small companies then grow up and crush the previous leaders in the industry, but I never really understood how the bigger companies could let that happen until I read Clay’s book.

What Christensen makes clear is that large companies can’t defeat a disruptive competitor without destroying their own, more profitable business model. Accepting lower profitability for strategic reasons does not go over well on Wall Street, to say the least!

Clay gives lots of examples in his book, but some of my favorites are Southwest Airlines, which has transformed the airline industry, Adobe Systems in publishing, and of course, WR Hambrecht + Co where we are disrupting the investment banking model.

Disruption is most often enabled by technology, but not always.  Any industry where innovation improves the quality of the goods faster than customers increase their

requirements is ripe for disruption.It could be the disk drive industry, local newspapers or the investment banking business.

I read lots of VC business plans claiming to invest in “disruptive companies” and it is clear to me they never read Clay’s book, or if they did read it, they didn’t understand it.  What I think they mean is they fund technological innovation. However, many big changes in technology are incremental improvements that may create a sizable lead initially, but without a disruptive business model the incumbents can still catch back up.   Unfortunately “disruptive” has become a bit of a buzz word in the [Silicon] Valley and has the lost the power of its original meaning.

Because disruptive companies deliver sustained performance for their investors over very long periods of time.  Southwest Airlines has been gaining market share in the airline industry for thirty five years and it is not done yet! If you bought 1000 shares in Southwest about 25 years ago, you’d have made $2 million while most of the other airlines have become bankrupt.

Even great technological advances only give a company a temporary advantage until competitors catch up, cut prices on existing products or leverage other strengths -- they way IBM beat Apple in PCs. But a disruptive company starts a process of innovation and change that builds momentum to the point that it cannot be stopped by the incumbent industry leaders, no matter what advantages the incumbents may have initially had.

The first, and actually easiest step, is to identify disruptive circumstances.  That is, industries that are undergoing disruption either because of a new technology or some other innovation is threatening the established value chain.   For example, the music industry has been experiencing disruption because of the digital revolution as has the local newspaper market.

After finding the industry, you need to think deeply about what the new value chain will be and to whom it will deliver profits.  This is not easy, and you need to be flexible and driven by the data, not preconceptions about what will change.  A key is to find the companies that are able to make money in ways that were previously impossible.  For example, no one believed that the hardware companies could make money in digital music until Steve Jobs showed them that he could through a whole new business model.

Finally, and most importantly, the management has to be committed to the Christensen model: drive the business to achieve profitability early and on lower gross margins than its competitors and serve areas of non-consumption.