The Next Disruptors
Here are the 10 game-changing startups most likely to upend existing industries - and spawn new entrepreneurial opportunities.
(Business 2.0) -- Disruption is easy to spot - in hindsight. The railroads were always going to be better than canals and wagon trains. The telephone was bound to edge out the telegraph. The transistor was clearly superior to vacuum tubes. In recent years, digital cameras have stolen the market for film, the iPod has started to replace the CD and Google seems to be disrupting just about everything else.
But many companies are still coming to terms with the flood of new technology. Even when it's right in front of your face, disruption can be hard to see.
So spotting the next disruptors is a difficult, but not impossible, task. In the following pages, we identify 10 businesses with the potential to rewrite the rules of existing industries or open up entirely new markets.
Bloom Energy wants to short-circuit electric utilities by building a power plant in every home. Zink is trying to create a market for mobile printing, without the ink. Blinkx thinks it can become the Google of video. Virgin Charter, the newest wing of Richard Branson's empire, is helping to launch the air-taxi industry.
A disruptive startup does not necessarily need to make a better mousetrap - just one that's cheaper or more convenient. Expensr is a webtop application for managing personal finances and has a lot fewer features than you can find in Intuit's Quicken. But Expensr is easier to use - and free. Zipcar thinks it can convince you that you no longer need to own an automobile. How? It sprinkles its rental cars throughout urban neighborhoods with the densest populations and lets people book online and by the hour.
This year's selection is the culmination of an extensive search for the most disruptive startups in the country, including a multi-city series of roundtable discussions last spring. At events in Boston, Los Angeles and Chapel Hill, N.C., we convened more than 100 entrepreneurs, some of whom are represented here. We also launched a weekly Web video series on CNNMoney.com called The New Disruptors (available as a podcast on iTunes). In it you'll find video profiles of companies featured here, plus many others. If you know where to look, disruption is everywhere.
THE DISRUPTOR: Blinkx
THE DISRUPTION: Web video search and ad insertion
THE DISRUPTED: Search engines and the TV ad business
The largest segment of Internet advertising, thanks to Google, is search. And the fastest-growing segment is video. San Francisco-based Blinkx believes that by putting them together, it can create a business that is greater than the sum of its parts. Blinkx is a video search engine that indexes more than 14 million hours of video available on the Web, everything from YouTube clips to old episodes of Seinfeld. Blinkx's special sauce - something even Google doesn't have - is software that can turn speech into text and count how many times a word pops up in a video. This is very useful to anyone selling targeted ads for, say, Junior Mints. Blinkx can also cluster videos together by topic.
In June, Blinkx announced a video advertising service called AdHoc, which CEO Suranga Chandratillake, borrowing a phrase from Google's business model, describes as "AdSense for video." The ads can take many forms: clickable "bugs" that crawl across the screen, banners that appear around the video, and, perhaps most innovative, a list at the end of the video of all the products mentioned in it. This fall Chandratillake will try out the ad system in his own peer-to-peer Internet video service, Blinkx Broadband TV.
Blinkx faces some formidable challengers: Google (Charts, Fortune 500) and Yahoo (Charts, Fortune 500) have not given up on video search. But video is a different beast than the rest of the Web, and Blinkx has shown that it knows how to hunt it. If Blinkx can stay ahead of its giant rivals, it could one day take on regular TV. "It is only a matter of time before cable and satellite providers let you forage beyond the set-top box," Chandratillake says. "When that happens, you will need a really good search engine."
THE DISRUPTOR: Raydiance
THE DISRUPTION: Lasers that cut without heating surrounding material
THE DISRUPTED: The entire laser industry - medicine, aerospace and beyond
There's not much connection between putting content on the Internet and building medical devices. But that's exactly the transition made by Barry Schuler, former CEO of AOL. His two-year-old startup, Raydiance, is taking aim at the $3 billion medical laser market with a technology called USP, or ultrashort pulse.
Why? Because USP lasers are phenomenally accurate. They are also of very high intensity, and when focused, they strip the electrons from atoms in a process that vaporizes the material with extraordinary precision. When properly tuned, Raydiance lasers can blast away at anything from a giant hunk of steel to a single cancer cell.
And because the pulse of energy is so brief, lasting only a trillionth of a second, no heat is transferred. "Existing lasers that are used in medicine are no different from blowtorches," Schuler says, exaggerating somewhat. "You're really burning that tissue out, and there's a lot of collateral damage."
USP devices have been in the hands of researchers since 1989, but they've also been unmanageably large and notoriously difficult to operate. Schuler's company, funded to the tune of $35 million, has already shrunk its device to the size of a microwave oven. Raydiance is now working on pairing up its lasers with companies that can help automate them to work on specific substances, from diamonds to human tissue.
There are plenty of short-term medical applications, such as cancer and optical surgery, that could benefit from greater precision. But Schuler has his eyes on a grander prize. He wants Raydiance lasers to replace standard cutting tools in every industry, from lumberyards to aerospace factories.
THE DISRUPTOR: Expensr
THE DISRUPTION: Simple, straightforward financial planning
THE DISRUPTED: Today, makers of personal finance software; tomorrow, the credit industry
Credit card debt in the United States has reached a total of $895 billion. And as anyone with plastic in his wallet knows, it's all too easy to help that figure grow - as it has annually for the past 20 years.
Intuit's Quicken ($29 to $89) and Microsoft Money ($19 to $59) can help budget-conscious consumers get a handle on their expenses. Now Expensr, a San Francisco startup run by programmers Shawn Gupta and Reman Child, has taken aim not only at those software giants but at the demon of debt itself. "It's like a taboo subject," Child says. "We want to break down that barrier."
Expensr is a Web-based application that's both free and easy to use. With Quicken, Gupta says dismissively, you can often "get into the page and not know what the hell you're doing." Expensr strips it down to the basics, telling you in large, friendly numbers what you really want to know: how much you're spending and how many days it will take, at the rate you're going, to become a pauper or a millionaire.
Of course, Expensr wouldn't be a Web 2.0 company if it didn't have a social component. By adding tags and categories, such as location, occupation and income level, you can compare yourself with your peers. "You might see that you spend 30 percent of your income on food, but you have no idea if that's good or not," Gupta says. "That's the idea behind the social network, to help you do better by making you aware of what other people like you are doing."
The credit industry is fueled to some extent by our ignorance of our spending habits - and of their true cost. If we really knew how much interest we were paying on our debt, we'd be less inclined to incur it. With apps like Expensr, we might even learn how to save.
THE DISRUPTOR: Zipcar
THE DISRUPTION: Self-serve hourly car rental in urban neighborhoods
THE DISRUPTED: Car dealers and traditional rental agencies
If you live in a large city, you've probably seen people driving in Zipcars. These are not your typical rentals. Zipcar operates a fleet of 3,000 cars in 23 cities, but you won't find one at any airport. They are more likely to be Volkswagen Jettas or Mini Coopers than the bland sedans you get from Avis and Hertz. And there are no customer service clerks to deal with, no lines, no paper contracts to sign.
Instead, you book a car on the Web, where a map shows the vehicles currently available in your neighborhood. You swipe your wireless ID card to unlock the door, and the keys are inside. By the end of September, you'll be able to reserve a car via an app on your cell phone. Insurance and gas are included in the fee. The cost: a $50 annual membership fee plus $8 to $15 per hour.
CEO Scott Griffith doesn't think he's disrupting the car rental business as much as car ownership. "You don't need to have a car at all," he says. "You can use one anytime you want and save a lot of money while you're at it." Griffith estimates that 40 percent of Zipcar's members (100,000 and growing quickly) either sell their cars or don't have any, and that they save thousands of dollars a year compared with the costs of parking and operating their own vehicles.
Founded in 1999, Zipcar is already profitable in the major cities where it has been in business for more than two years (Boston, New York, San Francisco and Washington). Lately the company has been on a growth spurt, adding 11 cities to its network, including London and Vancouver, British Columbia. It's on track to bring in more than $60 million in revenue this year, staying well ahead of competitors like Flexcar and City CarShare.
Built from the ground up as a self-serve operation (using the Web and wireless technologies that monitor the health of the cars), Zipcar manages its entire fleet of 3,000 cars with just 110 employees. That means Zipcar can handle 27 cars per employee, compared with Avis's 15, and its cars are available 24 hours a day, so they can be used more often. "We don't have all those people that you interact with," Griffith says, "so as we scale, we'll have twice the margins."
THE DISRUPTOR: MFG.com
THE DISRUPTION: An online exchange for the manufacturing industry
THE DISRUPTED: Manufacturers' reps, parts brokers, and trading houses
MFG.com is rapidly becoming the eBay of manufacturing. In the past 12 months, $2 billion worth of gears, molds and machined parts were sourced and traded on the site in an innovative system in which sellers pay an annual fee - $6,000 on average - and buyers pay nothing. Buyers describe precisely which machined part, molding, metal stamp or fabrication they want, along with computer-aided design drawings of the product, and then industrial suppliers go online to bid for the business. (See "An eBay for Manufacturers.")
It's a system that makes the site particularly attractive to purchasing managers and engineers, and it has drawn clients as diverse as Apple (Charts, Fortune 500), Ford (Charts, Fortune 500), Newell Rubbermaid, Northrop Grumman and 3M (Charts, Fortune 500). MFG's largest outside investor is Amazon.com founder Jeff Bezos, who learned of the site a few years ago from an engineer at his spaceship company, Blue Origin. He met with CEO Mitch Free, a former airline operations manager, and was impressed by his entrepreneurial zeal. "He's awesome," Bezos says. "He knows all the ways that the industry can be made more efficient."
MFG's revenue nearly doubled to $15 million last year. The site is on track to pull in $25 million - and make its first profit - this year. Free got a foothold in Europe last year by buying Sourcing-Parts, a purchasing-management Web site based in Geneva, and in October he launched MFG.com in China, the world's third-largest manufacturing economy.
But what excites Free more than anything is a patent the company filed earlier this year for predicting the prices of manufactured parts. More than 150,000 CAD diagrams have been uploaded to MFG.com, giving it what could well be the largest database of 3-D diagrams for such parts. Free's idea is that a design engineer at Apple, say, could predict what the manufacturing cost of a new product would be by comparing the design with similar parts in MFG's database. "3-D search is looking for a killer app," Free says. "I think we have it."
THE DISRUPTOR: Virgin Charter
THE DISRUPTION: Online reservations for the budding air-taxi business
THE DISRUPTED: Commercial airlines
Air taxis - tiny, short-hop planes that are so affordable that business fliers can charter them whenever they want - are taking off. So much so that Richard Branson was thinking of starting his own air-taxi service. But then the Virgin boss came across a startup called Smart Charter with an even better idea: to become the Expedia of airplane chartering. Branson became the majority investor and swiftly renamed it Virgin Charter. Now the venture is creating a travel portal for the 2,500 air charter services in the United States - and all the air-taxi services to come.
Most charter operators are mom-and-pop shops that still take reservations by phone or fax. They are notoriously inefficient: Last year an estimated 40 percent of charter flights flew empty. If a CEO books a flight to St. Croix, for example, there might not be anyone who wants to charter the return trip to the plane's base. So customers often end up being charged for the empty flight back.
The industry is more than ready for a better scheduling system. Says Virgin Charter CEO Scott Duffy, "We will reduce or eliminate the concept of an empty leg." By bringing in more revenue and reducing the cost of operating air charter services, Duffy hopes to spur more competition and waste less jet fuel.
To build a reservation system that can coordinate among thousands of operators, Duffy hired two top engineers who once worked at NASA's Jet Propulsion Laboratory. (One was also the lead programmer for Google's AdWords system.) The site is scheduled to launch in a private beta test in September and publicly early next year. Air charter operators will be able to list their flights and monitor reservation requests online, many of them using the Web to do so for the first time.
"The problem is not that there aren't enough jets," Duffy says. "The problem is that it's too hard to buy and sell what is already out there." A popular online reservation system may be just what the air-taxi industry needs to get off the ground.
THE DISRUPTOR: PatientsLikeMe
THE DISRUPTION: An online community where patients can discuss and track medical conditions
THE DISRUPTED: The health-care industry, medical research
When Stephen Heywood developed Lou Gehrig's disease, his brothers Ben and James turned to the Internet to learn as much as they could. There was plenty of basic data about amyotrophic lateral sclerosis (ALS), as the condition is formally known, at sites like WebMD. But firsthand accounts about what the disease was like from the patient's point of view were fragmented and scattered all over the Web.
So Ben and James, both mechanical engineers, teamed up in 2004 with classmate Jeff Cole to found a Web site to consolidate those accounts and help patients track their progress. They called it PatientsLikeMe, and it immediately developed what many other social networks struggle to achieve: a deep and engaged community, driven by members with a personal investment in the site. It started with ALS patients eager to share stories of what did and didn't work for them but quickly grew to embrace users suffering from multiple sclerosis, Parkinson's disease and HIV/AIDS.
"If there's one patient in the world with a particular treatment, they're there," Ben Heywood says. "You see everything that everyone is trying." The site has only a few thousand members, but it is capturing 10 percent of newly diagnosed ALS patients every month.
For researchers, access to such an engaged community of patients is a fast bypass around restrictive privacy rules that tie scientists in red tape. "The existing setup is very slow," says Paul Wicks, an ALS researcher in London who got involved in the site in 2005. "For an old research project of mine, it took me about two years to get the questionnaire together and send it out. With this site, I can do the same thing in 30 minutes."
THE DISRUPTOR: Bloom Energy
THE DISRUPTION: Energy generators in homes and businesses
THE DISRUPTED: Electric utilities
Making electricity in central power plants is so 20th century. K.R. Sridhar has a better idea: Create energy on the spot, right where it's consumed. His startup, Bloom Energy (formerly known as Ion America), is developing a fuel cell that could kick-start the distributed-energy industry.
The problem with today's centralized approach is its vast inefficiency. In coal-and gas-fired power plants, almost two-thirds of the energy produced by converting fuel into kilowatts escapes as heat. Another 8 percent, on average, dissipates as the electricity travels over transmission lines to get to your home.
Sridhar, a former aerospace engineering professor who developed a device for NASA to turn carbon dioxide into oxygen on Mars, is undaunted by big challenges. His plan for generating energy locally is to use solid-oxide fuel cells - a concept that has been kicking around since the 19th century but is now becoming practical with advances in the ceramics needed to build the things.
Bloom's cells, still in development, are constructed around a ceramic core that acts as an electrode. At high temperatures, fuel on one side attracts oxygen ions on the other. As these ions are pulled through the solid core, the resulting electrochemical reaction creates electricity.
Such a fuel cell can run happily on almost any hydrocarbon fuel - ethanol, biodiesel, methane, natural gas. Though it consumes hydrocarbons, Bloom Energy's fuel cell does not require combustion and therefore produces half the greenhouse gas emissions of more conventional energy sources. One of its by-products, in fact, is hydrogen that could be used in a different type of fuel cell, the hydrogen-powered version imagined for propelling cars.
Bloom Energy's biggest hurdle is cost. The company needs to get the price of the machines below $10,000 apiece. At that level, they could pay for themselves in five years. (Solar panels take twice as long to recoup their capital expense.) "For it to reach mass-scale adoption, that has to be the goal," Sridhar says. "Otherwise, you are playing in a niche market."
Ultimately, Sridhar sees his fuel cells as a leapfrog technology that could find a market in developing countries that haven't yet built an electrical grid. He imagines local entrepreneurs, armed with one or two of his machines, renting out electricity to a whole village. Lighting up the world one village at a time - there's nothing niche about that ambition.
THE DISRUPTOR: Vanu
THE DISRUPTION: Software that allows mobile networks to accommodate devices with different standards
THE DISRUPTED: Wireless network providers and equipment makers
Wireless carriers operate in a sea of acronyms: GSM, CDMA, iDen, Edge. These systems are hard-wired into the equipment, and they don't interoperate. Your AT&T iPhone won't work on Verizon's (faster) network, and it would need to add different chips for future communication modes like Wi-Max.
But with the right technology, all these standards could work on a single network. It's called software-defined radio, and it's being sold by Vanu Bose. "Wireless today isn't like the Internet," Bose says. "You can't plug in any device." To change that, he's created a Boston-based company called Vanu. (The name Bose was taken by his father's audio equipment firm.)
Vanu's system is already able to support GSM, iDen and CDMA. Unlike network equipment that uses a specialized chip for each protocol, Vanu replicates different standards in software on servers running Linux. By connecting to these servers, devices built using different protocols could connect anywhere, anytime, regardless of the provider's network.
That opportunity could come sooner than you'd think. In early 2008 the U.S. government will auction off the 700-MHz spectrum previously used by TV broadcasters. eBay, Google and Yahoo successfully pushed for the auction rules to mandate that any networks built on the new spectrum allow so-called open device access - which plays right into Vanu's hands. (A startup called Frontline Wireless, chaired by former FCC chairman Reed Hundt and including Vanu among its investors, also wants the chance to build an open-access network on part of this spectrum, although its prospects are uncertain.)
So far, Vanu has the leading software for this open-standards world, and its founder is watching the auction closely. "Ultimately," he says, "we want to work with whoever wins."
THE DISRUPTOR: Zink
THE DISRUPTION: Inkless printing
THE DISRUPTED: Desktop printers, ink cartridge resellers, and photo services
Picture a world where you don't have to deal with interminable "toner low" messages from your printer or make trips to Staples to buy pricey replacement cartridges. In this brave new world, you may not even need a printer - because there's one built into your cell phone or your digital camera. All you need is special paper on which your words or images appear like a Polaroid picture, but without the shaking or the waiting.
Welcome to the future as envisioned by Zink (which stands for "zero ink"). The Polaroid comparison is not entirely coincidental: Zink is a spinoff of Polaroid and still housed in that company's old R&D facilities in Waltham, Mass. Its patented process uses special paper embedded with three layers of dye crystals - yellow, magenta and cyan - designed to melt at different temperatures. Without the bulky cartridges and printheads, Zink can make its printers small enough to fit in your pocket. "We are tackling applications where no printer has been able to go before," says CEO Wendy Caswell.
This holiday season, Zink's manufacturing partners will begin selling the mobile printers. (One will be embedded in a digital camera.) Eventually they could be built into cell phones, laptops, TVs or digital picture frames. Zink will sell the paper; in July it bought a Konica Minolta paper plant in North Carolina to ramp up production. Each 2-by 3-inch print will cost the consumer roughly 20 cents and come with a peel-off sticky back like a Post-It. No uploading is required.
The next disruptors: Bonus round
Want more? We've discovered that there's no shortage of startups out there with industry-shaking potential. Here are five more ventures that could prove just as disruptive.
DISRUPTOR: A123 Systems
The leading battery technology - lithium-ion - has not changed in a decade. A123 holds patents for smaller, lighter lithium-ions with significantly longer lives. A123 batteries are installed in hybrid buses worldwide and will enter consumer hybrids in 2010.
DISRUPTOR: Renewable Energy Group
Biodiesel delivers around 50 percent more miles per gallon than ethanol. REG, an offshoot of an Iowa farm co-op, makes biodiesel from soybeans. It has 40 percent of the market and a distribution deal with Safeway.
DISRUPTOR: Desktop Factory
The cost of rapid prototyping machines is already plummeting. (See "3-D Printing for the Rest of Us," page 46.) Now San Francisco startup Desktop Factory is set to bring out a $5,000 3-D printer, undercutting competitors by 75 percent.
Sure, compact fluorescent lightbulbs are energy savers, but they also contain mercury. Cree is the leading maker of light-emitting diodes, which are less hazardous and even more energy-efficient. Toronto and Raleigh, N.C., are already installing Cree LEDs in streetlamps and parking garages.
DISRUPTOR: One laptop per child
It isn't just Third World kids who will benefit now that Nicholas Negroponte's venture is producing its $176 laptops. The machine's innovations, such as Wi-Fi mesh networks and a power system that consumes 90 percent less electricity than standard laptops, could affect the rest of the industry.click here.