Why OpenAI signals the start of the post-Christensen startup world – Tech.eu

Microsoft hiring and un-hiring OpenAIs 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 theyd 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 drive the startup industry.

Christensens 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 hasnt just turned this academic theory on its head, theyve all but killed it. We now live in a firmly post-Christensen world, with no better evidence than this the 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 didnt take long for incumbents to learn what to look out for and how to avoid disruption.

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 Spotifys CEO Daniel Ek said he would not have been able to launch today because of Apples 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 generalised artificial intelligence (AGI). In fact, it is becoming the very opposite of a free market.

Thats 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 worlds top venture investors, with tens of billions under management, cant compete to keep these companies independent and create new winners that seek to challenge and replace incumbent Big Tech.

Its 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.

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 OpenAIs technology to keep future profits for itself and monopolize innovation for its own ends.

OpenAIs 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 couldnt compete with hundreds of billions for the next technology transition. To highlight the sea change: this might be one of the few moments when Softbanks $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 couldnt afford to go it alone becoming a subsidiary of General Motors before eventually 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.

In a world of AI, where Christensens 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 thats 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 Techs 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, recognising its potential not only for strong, long-term returns, but also for its role in fostering and helping human creativity, innovations to improve society, and a thriving and dynamic market that benefits us all.

Patrick Murphy is a founding partner atTapestry VC, an early-stage venture capital firm that focuses on backing technical and repeat founders.

Lead image: Racool_studio

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Why OpenAI signals the start of the post-Christensen startup world - Tech.eu