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Clay Christensen on Steve Jobs & the trouble with venture capital

How much wisdom can one glean from a 20-minute chat with Professor Clay Christensen? I would say — if one keeps his mouth shut and asks the right questions — a lot. Here are notable highlights from my chat with the famous Harvard Business School professor, founder of the Innosight Institute and author of such best selling books as The Innovator’s Dilemma and Disrupting Class.

Jobs at hand

Steve Jobs and the company he co-founded just might be one of the few companies to look the innovator’s dilemma right in the eye and stare it into submission. Jobs’ Apple decided that it was better to cannibalize itself rather than have others do it. And so, the briskly selling iPod was replaced by the iPhone, and the iPad became the new low-end computer. When I asked Professor Christensen what made Jobs special, he said, “Jobs never said he understood the customer, but instead he tried to learn what they are trying to do, and that was his genius.”

Why? Because that helps focus on what matters the most: helping your customers get the job done. The professor pointed out that most people tend to focus on the wrong things, especially in the fast changing world of technology. Christensen argued that when companies make products that help make everyday stuff easier and get the job of life (or work) done, in the end customers don’t need any persuasion. That is precisely why a company like Apple can find buyers for its products so much more easily. Christensen pointed out the fundamental insight Steve Jobs had was that he focused on the “job.”

“Jobs are very stable in a sense and don’t change very much,” he said. For example, Julius Caesar used a chariot to get messages across from one city to another. Fed-Ex uses planes and trucks, he said. The job of delivering the packages hasn’t changed; just how it is done has changed.

Companies that realize this are fine, and will always find a way into the future. Apple understood that people would buy music, just not from a record store.  Amazon (s AMZN) is another company that has figured out that people love buying books, though it might not be from a bookstore, or even in a paper form. That is one of the reasons it introduced Kindle.

Innovation troubles

I asked the famous academic what he thought of the increasing rhetoric around a decreasing emphasis on fundamental innovation and long term thinking in our society. He said that the problem isn’t with a lack of teaching or learning; instead it is a problem with finance.

Financial institutions and educators have propagated a way of thinking that is poison for innovation, Christensen said. And that thinking is around internal rate of return or IRR. As a result, investors are looking to put money to work fast and take it out as quickly as possible. This behavior is not only prevalent inside companies but also inside the venture business, he said. Christensen said that typically it takes about seven years or so to get a company to the finish line and get a good return on investment. Now compare that with an incremental product (or improvement) that you can flip quickly – that gives a big boost to the IRR.

As a result, venture capitalists are focused on short-term innovations and that is just nuts, he added. “I keep saying, don’t be distracted by the siren song of synthetic message of IRR,” he said. “It is dollars and not IRR percentage that matters.”

Professor Christenen was critical of the migratory capital that sloshes from one sector to another or one country to another — moving in and out after locking in short-term gains. He thought the government should consider a new kind of tax structure that encourages longterm investments and stability. For instance, no capital gains taxes for investments that last as long as eight years. “Then you will find people like Steve Jobs and the vibrancy of innovation will return.”

18 Responses to “Clay Christensen on Steve Jobs & the trouble with venture capital”

  1. Too often we look to the business model, leadership and sales. In truth it is art and not a dry model, vision and not so much leadership, and lastly value added and not sales. These are what sustains a lasting business.

  2. arjun moorthy

    1920s economist John Maynard Keynes beat Christensen to the observation that IRR is not the gauge to use for investing. See New Yorker article here: Keynes on what drives the economy: entrepreneurship. “[Entrepreneurship is a] result of animal spirits and not outcome of [financial models]”

  3. Phil Hendrix

    Recommended book on Disruptive Innovation

    Om, Stephen Wunker of New Markets Advisors ( has written a great book that builds on Christensen’s perspectives (Wunker worked with Christensen at Innosight). Capturing New Markets – How Smart Companies Create Opportunities Others Don’t ( contains lots of advice as well as examples of companies (including Apple) successfully pursuing new markets with innovative new products.

    Of course, if it were easy there would be many more companies like Apple. We outline some of the challenges faced by companies developing “very new products” at and

    Dr. Phil Hendrix, immr and GigaOm Pro

  4. For a more in-depth view on investing for long term cash flows versus “synthetic irr”, consider Warren Buffet’s owner’s manual

    Charlie Munger and Buffet don’t believe in selling good companies to generate quick returns. Originally written in 1996 and updated in 2009, Owners Manual rings as true today as it did in 1996.

    Corporate America is sitting on piles of cash in USA banks and in banks around the world. Policy leadership should focus on tax structures that provide corporations incentive to repatriate funds and invest in innovation without fear of being hammered over one or two bad quarters.

    One benefit of venture backed and private equity backed companies is that they can take innovation risk without being concerned about quarterly shareholder, activist investors formerly known as corporate raiders, and machine trading hedge funds asking for CEO resignations when risks are taken

  5. Don’t think that Jobs ever focused on any customers. He just had Apple build devices that he himself would like to use. It’s not even the “dogfooding” concept of using what you sell – it’s selling what you use.

  6. Bravo. 25 years ago, I heard Col. William Stackhouse (a government procurement officer) give a talk suggesting a tiered surtax on multiple short term flipping of stocks. This was before mass automated trading became the norm. He saw the specter of massaging stocks as a drain on the economy. Capital investment and fair return he was all for. But he recognized non-value added, and negative value added activities that siphoned money off of productive enterprises without adding any value back in. And so he proposed that if flipping a stock 4 times in 24 hours still looked profitable after a 5, then 10, 15, and 20% surtax was added, then go ahead and try it. He would put the surtax proceeds into paying off the national deficit. 25 years ago, there were people in government who saw things for what they are and saw ways clear.

    As for Jobs, it was a different time with much less short term thinking. Folks like Mike Markulla saw the potential and stuck it out for the professor’s 8 years.

  7. Michael Bonner

    Would it be possible to do a series of full interviews with Professor Christiansen? This is great, but only a hint of what’s needed.
    For instance – I imagine that if I were a VC, I would not have the luxury to take advantage of the capital gains idea. That kind of long term thinking seems like it would be more like philanthropy than what they do
    I have been trying to make sense of the VC’s business model for years. It seems to tout innovation but other than changing an expected 10X return to a 50X, it hasn’t changed its own model (with rare exceptions) in 20+ years.
    As an outsider, I don’t know how they can. They are competing for their investment funds with other VCs as well as countless other investment offerings. From what I read, the VC industry has had a decade of 0% returns or worse. Without the dream of the fast buck, how can they look attractive to the pension funds, etc.?
    They have to focus on dressing up their investments for the next possible investor – I think the term is making a stock ‘pretty.’ That means they have to assume the next guy isn’t looking for a lot of homework. Their VC investment should solve one question that can be elevator-pitched. Their options to promote innovation are limited to innovating around what people already know. Groupon is easy to understand instantly. I can’t imagine much of what Jobs did in the last decade as ever surviving the 3-minute and often less – reviews that make up a VC’s limited deal-flow time. In hindsight people can say they would invest in the iPad- but what they’d more likely say is “Tablets – been tried. DOA. Next.”
    Can Professor Christiansen reimagine the VC model in a way to benefit the VC, their investors, as well as a nation that needs to find and support the crazies with complex answers to complicated questions?
    Can he make it scalable?

  8. There was no need for a change in the tax structure for Steve Jobs to happen, so what empirical evidence does the professor have to support his assertion that “the vibrancy of innovation will return” with no tax on long-term capital gains? I’m all for lower taxes, but I don’t think we – including this “famous professor” – can predict what they will lead to.

    • Apple’s recent successes weren’t dependent on venture capital, so your argument about Jobs not needing a different tax system to succeed is irrelevant. In any case, Jobs and Apple are the exception, not the rule.

      Christiansen is absolutely right in calling for different treatment of long-held assets. I would like to see the tax rate on capital gains be inversely proportional to the length of time the asset was held – start out with 70% on assets held one year,and decrease it until it’s 10% for assets held 10 years or more. Not only will this reward long term investments, but will attenuate the expansion of bubbles, as profits made by flipping assets in an inflationary market will not be as easily re-invested. We can’t get rid of the positive feedback loops inherent in a market-based economy, but we can minimize their effects. This would be a great way to do that.

      • Robert, not that I have heard of. As Congress is very polarized, there are people whose religion is to tax as much as possible, and those who want no tax at all. Their allegiance to ‘isms don’t allow for a solution like this.

    • gp

      I think it was a different time and investment philosophy. What the professor is pointing out to the recent behavior changes in the investment community, especially in the VC community.

      That said, you are right — No one including the professor can predict what the lower taxes are going to lead to.

    • Hamranhansenhansen

      Tax breaks are the favorite whine of the loser business person. “I suck so bad I need a tax break.”

      What businesses should do instead is demand that the government actually act like a 21st century developed-world government, which would level the playing field so that American business could compete. The people should collectively provide their own health care, just as we collectively provide fire and police. Then businesses could jettison their entire private health care infrastructure which is all wasted effort, be rid of the uncertainty of rising health insurance costs that you can’t plan around, and their workers would be healthier, happier, more productive, and for the first time in their lives would have medical privacy. That does not require raising taxes because public health care systems are both cheaper than private and provide better outcomes than private. Same as public fire and police are cheaper and better than private.

      Another thing business should demand is free tuition at state universities, which is how it was in 1970’s in California when Apple was founded, and which created the talent base upon which Silicon Valley was built. Jobs and Woz did not build Apple alone, they needed to hire a lot of people, and they needed for them to already be educated. They were able to hire cheap because the labor market was flooded with educated workers.

      Business should demand that the government build out a 100% coverage 4G network across the whole country and rent time on it to the carriers, so that anyone in the country can use any standard 4G phone on any carrier. That will cause coverage to be universal and carrier fees will go through the floor because they will actually have to compete with each other. Right now we have 4 overlapping monopolies, the same phones can’t run on all 4 networks. Next time you cannot get a signal in the US, remember, you are standing in 3 networks you can’t access because the carriers want fiefdoms to pay for their investment in infrastructure that should have been paid by the government, who also has no problem getting the billions of dollars of credit that is needed to build out the network.

      Making government policy is 180 degrees different than running a private business. In private business, you are watering your own plant, but in government, you need to fertilize the whole garden, make everything grow much larger. Business people always come up with tiny little ideas like lower my taxes a few dollars, it is painfully stupid. Your real problem is sick, uneducated workers, private health insurance costs, and lack of public infrastructure, especially modern infrastructure like wireless networks.

      There needs to be a separation of business and state. Business school axioms are not just killing business anymore, they’re killing the country.