An innovator's dilemma: Is there a critical mass of talent and innovation in the southeast?

In the Innovator's Dilemma, Harvard professor investigates why CEOs of major companies can be blindsided by discontinuous innovations - how did Sears get blindsided by Wal-Mart, IBM by Microsoft, or US Steel by Nucor.

His answer is that these new companies created markets of new customers that did not previously exist. At Harvard, MBA students are taught to do market research to understand the needs and wants of customers, and then to develop products to meet these customers needs. This is a proven way of commercializing sustaining innovations that enhance a company's most profitable products delivered to its best customers. But how does one do research on new markets that do not currently exist?

His answer is that highly successful new companies don't. What they do is a series of incremental experiments to discover what the new market is and how to serve it. By the time the new market is obvious to everyone, the new company has such a depth of knowledge, expertise and relationships that it is a very potent competitor with the potential to overthrow not only the previous market leader, but the entire value chain of which the leader is a part.

I recently was brought face to face with the dilemma Dr. Christensen describes. An associate and I are assessing the opportunity for a company that depends on a deal flow of high-quality investment opportunities in emerging companies in the southeast. My colleague sought the advice of an expert in corporate finance, who asked a series of questions we all would like the answers to:

Is there ample southeastern deal flow?

How many closed seed/startup capital raises have there been in the southeast?

What was average size of capital raised?

One thing is certain, the southeast as a region is underserved in terms of the amount of venture capital invested. The MoneyTree Survey of US venture investments indicates that states they define as the "southeast" have 16 percent of the US population but only 6 percent of US venture capital investments in 2005 Q1, and half of that was in only 7 companies.

While the market research ought to be done, I am also fairly certain that there will not be enough closed investments in the southeast to convince our finance expert a market currently exists for the company we are envisioning.

But then Sears didn't understand how important rural communities like Bentonville, AR were, IBM did not understand the individuals and small businesses that were the initial market for PCs, or US Steel did not understand how reprocessers of scrap steel who made low quality re-bar could be important.

I am certain we can create a market of wealth creating, emerging companies in the southeast. But, for the most part, this market does not yet exist. We can document what is not happening in the southeast, but is very difficult to document companies that can be created that to not exist today.

This is precisely the innovators dilemma that Clayton Christensen describes.