10 game-changing startups

The Next Disruptors

Here are the 10 game-changing startups most likely to upend existing industries – and spawn new entrepreneurial opportunities.

By Erick Schonfeld and Chris Morrison, Business 2.0 Magazine



(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.

blinkx.03.jpg
Chandratillake wants Blinkx to become the Google of Web video by placing contextual ads inside clips.

patientslikeme.03.jpg
Ben Heywood helps patients help themselves by connecting them to each other.
lasers_old_vs_new.03.jpg

zink.03.jpg
Caswell is taking the ink out of color printing, making mobile prints a snap for cameras and cell phones.
ebay_manufacturers.03.gif

zipcar.03.jpg
Zipcar’s Griffith is turning self-serve auto rental into a viable alternative to car ownership.
get_off_grid.03.jpg

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.

DISRUPTOR: Cree

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.

Erick Schonfeld (eschonfeld@business2.com) is an
editor-at-large at Business 2.0. Chris Morrison
(cmorrison@business2.com) is an editorial intern.

>BackTrack

Leave a Reply

RSS Daily Search Trends