Patrick Murphy
December 27, 2023

Why OpenAI Signals the Start of the Post Christensen Startup World

Tapestry VC partner Patrick Murphy explores how Big Tech's dominance challenges the theory of 'disruptive innovation', stifling competition and monopolizing AI development.

Microsoft hiring and un-hiring OpenAI’s Sam Altman last month was a bright red warning sign to entrepreneurs who hope one day to compete with Big Tech. As a venture capitalist looking to back future disruptors, this fills me with dread.

The eminent business theorist Clayton Christensen first defined ‘disruptive innovation’ in 1997. He said startup founders with great ideas could beat dominant players – not by directly challenging them, but by targeting bits of the market they’d overlooked, or by introducing simpler and more affordable solutions – before growing themselves and eventually elbowing out the incumbents to take a bigger slice of the pie.

This theory was the bedrock of the startup revolution we have enjoyed since, referenced in a million entrepreneur pitch decks to venture capital investors, whose risk taking and ‘risk capital’ working together drives the startup industry.

Good for capitalism

Christensen’s idea was also good for capitalism, and self-evidently supported the idea of free markets: innovation paid off for the brains behind inventions; consumers got better products or cheaper prices – or both; and monopolies were less likely to form, thus the state could stay out of the way.

But over the last twenty years Big Tech – Alphabet, Meta, Microsoft, Apple and Amazon – haven’t just turned this academic theory on its head. They’ve all but killed it. We now live in a firmly ‘post-Christensen’ world, with no better evidence than this week’s events at OpenAI.

Previous technology cycles gave rise to new players: desktop computers gave us Microsoft; the internet gave us Google; and smartphones gave us Apple, which rose like a phoenix from its own smouldering ash. These and most other companies in this epoch grew with VC-backing, or with a supportive independent public shareholder base, creating value for millions of citizens along the way.

It didn’t take long for incumbents to learn what to look out for and how to avoid disruption.  

The very opposite of a free market

Today, when a startup breaches the net, Big Tech buys it or tries to destroy it: Meta hoovered up Instagram and WhatsApp when it spotted opposition. Twitter cut off access to its platform to crush Meerkat, a video startup that competed with its own nascent Twitter Live service. Just last month Spotify’s CEO Daniel Ek said he would not have been able to launch today because of Apple’s dominance.

If that sounds bad, things look much worse when viewed through the lens of tech's latest paradigm shift, Artificial Intelligence and the race to a generalized artificial intelligence (AGI). In fact, it is becoming the very opposite of a free market.

That’s because, in a world of AI, the entrance ticket to the big league is through unlimited cash reserves and supercomputer power. By default, the number of people who can play the game is severely limited.

Even the world’s top venture investors, with tens of billions under management, can’t compete to keep these companies independent and create new winners that seek to challenge and replace incumbent Big Tech.

It’s no wonder: with vast reservoirs of data, colossal R&D budgets, huge networks of spin-off products on which to cross-sell, and unlimited remuneration for employees that ensures escalators of talent are ready to join when Big Tech rolls out the red carpet.

Lack of competition

When OpenAI needed investment and computing power to develop its epoch-defining technology, where could it turn? Few places but Microsoft could find $10 billion and enough computing infrastructure to power a small country. In return, Microsoft put a perpetual sole license in place on OpenAI’s technology – to keep future profits for itself and monopolize innovation for its own ends.

OpenAI’s peers have similarly been unable to go it alone: Google, Amazon and Microsoft have invested billions of dollars in Anthropic, Inflection AI, and more.

Altman, when cast adrift by OpenAI, could have gone it alone. Rumors abound that hundreds of millions of dollars were offered to him to start over. He certainly could have brought the talent. But it seems Microsoft was the only one in the negotiating room. VCs couldn’t compete with hundreds of billions for the next technology transition. To highlight the sea change: this might be one of the few moments when Softbank’s $100 billion ‘Vision Fund’ could have solved a real problem.

AI is not the first platform shift stymied by Big Tech either. In self-driving cars, Google and Tesla own the show, and the only independent player Cruise couldn’t afford to go it alone – becoming a subsidiary of General Motors before losing its founder and CEO too. In virtual reality, Meta and Apple have been the only ones spending tens of billions on what they believe is the replacement for smartphones.  

The solution

In a world of AI, where Christensen’s theory of ‘disruptive innovation’ is practically dead, where does that leave startups and the venture capitalists that invest in them? If monopolies can cherry pick the highest return ideas, where does this leave the investment in innovation that’s needed to tackle huge societal challenges, such as climate change, healthcare, and education?  

Does the venture world risk the same fate as public markets: increasingly irrelevant for new capital formation and so decreasingly the place where industries of the future take shape? If so, then a dynamic, sometimes chaotic, but fundamentally diverse ecosystem risks being replaced by a monolith of corporate power.

Government intervention through regulation can only ever be one part of the solution. It should be a last resort to fix market failure or protect against known harms. If it must be done, which I think it must be, it should be fair, balanced, and proportionate.

The European Union has passed laws to tackle Big Tech’s anti-competitive behaviour and look at protections around AI. The UK is following suit. Cases against Alphabet are with the FTC in the United States right now.

The second part of the solution is more risk capital for startups, just as the tide has turned in the opposite direction.

Now more than ever, pension funds, endowments, sovereign wealth funds and banks need to back more venture capital investments. Instead, the opposite is happening: these institutions are pulling back from VC. This is not because they think innovation is over, but simply because interest rates are higher, and their math says holding cash or bonds will be a better bet for the world.

In a world increasingly dominated by tech giants, the role of venture capital becomes not just relevant, but absolutely critical. These institutions should double down on the venture asset class, recognizing its potential not only for strong, long-term returns, but also for their role fostering and helping human creativity, innovations to improve society, and a thriving and dynamic market that benefits us all.

This article was first published on on December 27, 2023.