I am a founder and Managing Partner at Atelier, an early-stage VC firm.
[Thanks to Cliff Maxwell, Clayton Christensen’s former Chief of Staff, for his help on this post!]
In last week’s newsletter, I explored the intersection of Clayton Christensen’s disruption theory and the Passion Economy.
The theory of disruption explains how smaller companies with fewer
resources can topple established, well-run businesses: disruptors target segments of the market that incumbents rationally ignore in favor of
more profitable customers. Aided by new technologies and business
models, upstarts create offerings that are “good enough” for low-end consumers and previous non-consumers, before gradually moving upmarket and unseating incumbents over time.
The Passion Economy has massive disruptive potential, as it connects non-producers with non-consumers. Empowered by new digital platforms, creators in the Passion Economy are introducing new products and services aimed at those who previously couldn’t afford or were over-served by existing offerings.
These new creator-led products and services expand the market and tap into latent demand. This is classic disruption theory, and the Passion Economy thus threatens numerous incumbents.
If you haven’t read that post, I recommend starting there, as it lays the groundwork for this one.
Christensen’s insights from examining disruption across numerous industries lead to 4 major implications when considering the Passion Economy through this lens. Let’s delve into each one:
Any industry that is a talent-based industry is at risk of disruption by Passion Economy businesses. Beyond what is traditionally regarded as a talent-based industry (e.g. entertainment), the Passion Economy’s scope extends into any industry where the customer doesn’t view the product/service as a commodity, but cares deeply about the specific individual involved in its creation.
This broader lens of talent implies that the Passion Economy encompasses education, media, fitness, sales, and many other lines of work.
Talented individuals can eschew traditional employment and leverage new platforms to monetize and grow. This process enables new producers to enter the market as well as as new products/services to flourish.
Here are some examples of how Passion Economy models can disrupt incumbents in various industries:
MBAs, career-focused education, online certifications, etc.
Modular, creator-led learning options designed with an eye towards ROI can be far more valuable than an expensive, long-term education that few can afford.
While online course creators’ offerings don’t yet possess the brand prestige of a top-tier institution’s credential, they can be more aligned to the specific interests that students have, adapt curricula more responsively to external events or feedback, and offer greater convenience at lower prices than traditional solutions.
For instance, Pat Flynn is a blogger, podcaster, and course creator, best known for his blog Smart Passive Income. He offers a number of online courses about building an online business, ranging from validating an idea to starting a podcast, with prices ranging from free to $1,000.
These are courses that entrepreneurial learners over-served by traditional 2-year MBA programs might find appealing as an alternate, modern business education.
Another example is NYU Professor Scott Galloway, whose 2-week online course “Strategy Sprint” teaches the basics of brand strategy for $500.
Companies offering education targeted at K-12 students, like Prenda or Outschool, are creating robust networks of community-based education providers that have disruptive potential for independent and private schools. Enabled by managed marketplaces that facilitate trust, ensure compliance with regulations, and vet and support teachers, these networks help customers find and select a teacher/school that fits their preferences
and desired learning environment.
By turning non-producers into producers (i.e. enabling people from the community to become Prenda Guides or Outschool teachers) and creating highly customized education solutions that are far more affordable and accessible, these creator-led education offerings have found a disruptive foothold.
Pre-internet, it was immensely challenging for individual writers and other content creators to get distribution. For journalists, the primary path to
making an income consisted of joining an established news organization
with an advertising department, production capabilities, and delivery
Now, a new entrepreneurship stack has emerged for online content creators: scaled social networks democratize distribution, and new platforms make it easier than ever to create and monetize content. On the consumer side, people’s information appetites are shifting from bundled media content to curated podcasts, blogs, newsletters, and video content.
Individual media creators can increasingly go into business for themselves: talented writers can create their own publications (Substack, Ghost, Mailchimp + Memberful + Stripe), audio content creators can distribute via RSS feeds and monetize their listeners directly (Supercast, Glow.fm), and visual content creators can earn an income through user donations and
subscriptions (Twitch, Patreon), merchandise (Pietra), or advertising.
Fitness / personal training
While new online creator-led fitness content may not be as immersive as going to an in-person trainer, they enable consumers to follow routines from creators they love, often at lower prices with greater convenience. The disruptive potential of the creator-led online fitness market is in
relation to gyms, boutique fitness classes, and personal trainers that provide community and accountability, but are expensive and inconvenient for many consumers. By leveraging digital platforms like Fitplan or Playbook, or even just enabling payments or donations on Zoom/other
video conferencing solutions, creators are offering scalable, cheaper, and more convenient fitness instruction.
These are just a few of the industries that are under siege by businesses in the Passion Economy. I expect others to emerge in the coming years that we can’t even yet predict.
The question of market size was one of the top questions I received from readers of my blog post “The Passion Economy and the Future of Work.” Many people were optimistic about this trend, but were unsure of how
large the market could be: how many individuals can actually make a living this way? And how many consumers want to consume and pay for creator-led products/services?
One of Christensen’s findings when studying disruption is that forecasting the market size for disruptive technologies is tremendously challenging to the point of impossibility:
“Markets that do not exist cannot be analyzed [...] Not only are the market applications for disruptive technologies unknown at the time of their development, they are unknowable.”
The same analytical techniques for forecasting the market size of sustaining technologies fail when applied to markets that don’t yet exist:
“It is simply impossible to predict with any useful degree of precision how disruptive products will be used or how large their markets will be.”
A notable example of how wrong forecasts for disruptive innovations can be is Uber: its original pitch deck forecasted a best-case scenario of $1Bn annual revenue; in reality, Uber’s 2019 full-year gross bookings were $65 billion.
As a general rule, the potential market for non-consumers vastly exceeds what is already being consumed.
A couple of useful ways to begin thinking about the potential market size of the Passion Economy is to approach it in terms of supply and demand.
On the supply side, according to a Dartmouth study on latent entrepreneurship, 71% of Americans (110M) would prefer to be self-employed. This huge contingent of aspiring entrepreneurs suggests that many individuals will embark down the “enterprization of consumer”
journey, initially exploring side hustles and earning supplemental
income, with some eventually forgoing traditional employment altogether.
On the demand side, massive pockets of consumer spend are up for grabs,
should Passion Economy workers create lower-cost, more convenient
offerings. Each of the industries below are categories where creator-driven content is already pulling consumers away from incumbent offerings:
While Passion Economy platforms are rooted in a value proposition that deeply appeals to workers—they lower the barriers to earning income in a way that is aligned to individuals’ sense of purpose, meaning, and passion — companies still need to be evaluated just like any other consumer business. What are the needs of consumers that the new offerings are addressing, how widespread is that need, and how are new offerings better than what already exists?
Christensen in 2015 wrote:
Success is not built into the definition of disruption: Not every disruptive path leads to a triumph, and not every triumphant newcomer follows a disruptive path.
For example, any number of internet-based retailers pursued disruptive paths in the late 1990s, but only a small number prospered. The failures are not evidence of the deficiencies of
disruption theory; they are simply boundary markers for the theory’s application. The theory says very little about how to win in the foothold market, other than to play the odds and avoid head-on competition with better-resourced incumbents.
Many disruptive innovations take a generation for their full effect to be
realized, as new behaviors enter the mainstream. A disruptive innovation’s beachhead is among low-end customers or previous non-consumers, but successful companies must move upmarket and improve their offerings to appeal to mainstream customers.
For instance, Netflix started with mail-order DVDs (disruptive to video rental companies), but is now taking on the entirety of the television and film industries.
Overall, creator products and services find their greatest success when workers intimately understand and serve the needs of their customers. As
outlined in my blog post “1,000 True Fans? Try 100,” creators who want to earn a living without amassing a massive audience should tap into consumers’ desire for tangible results and transformation; provide premium content, community, and accountability; and appeal to users’ desire for status, recognition, and access.
4. Incumbents aren’t going to build for the Passion Economy; startups will
Large companies commonly respond to disruptive technology by waiting until the market is large enough to be interesting. Christensen writes that
“it is a seductive logic that can backfire, because the firms creating new markets often forge capabilities that are closely attuned to the requirements of those markets and that later entrants find difficult to
Rational managers of well-run companies often focus on business lines that offer higher margins and serve existing, large markets. This can explain why large social platforms in the US have not thrown their weight behind new products that would make it easier for content creators to monetize beyond advertising.
According to the Re:Create Coalition’s study on America’s New Creative Economy, in 2017, 5.6M creators on Instagram earned revenue through sponsored posts. Contrast that with Patreon’s entire base of 150,000 creators who earn revenue through membership subscriptions— representing just 2.7% of Instagram’s income-earning creator base.
Because the market size of total creators who can potentially monetize through non-ad-based means is uncertain and appears small, and because direct user payments represent a lower-margin business than advertising (Patreon’s take rate starts at 5%, whereas ad-based platforms often keep 100% of ad revenue), incumbents are not incentivized to iterate on the business model and offer creators more valuable paths to monetize until it’s too late.
Last fall, I wrote: “We envision a future in which the value of unique
skills and knowledge can be unlocked, augmented, and surfaced to
consumers.” New technologies and business models in the Passion Economy enable more people to unlock economic value from their creative skills and passions.
Beyond the clear benefits that the Passion Economy offers to workers in the form of more accessible paths to earning income, there is real value to consumers, too. The downstream impact of lowering the barriers to entrepreneurship is that consumers who previously couldn’t access or afford certain products/services, or were over-served by incumbents, can now have a wider variety of choices. I can’t wait to see this entire ecosystem evolve and grow.
If you’re building something here, I’d love to hear from you!
Acknowledgements: Thank you to Nathan Baschez for creating the image for this post.
Originally published as “Four implications of disruption theory for the Passion Economy (Part 2)"
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