The Innovator Invests: Clayton Christensen's Stock Picks

Clayton Christensen is a giant in the world of technology innovation. The Harvard Business School professor (who stands 6 feet 8 inches tall) came up with the influential theory of disruptive technology and this year was crowned by Forbes magazine as “the world’s most influential business thinker.”

Less well known is that Christensen, 59, has staked his personal wealth, and that of his large family, on his academic ideas. The Boston hedge fund he owns, called Rose Park Advisors, operates a “Disruptive Innovation Fund” that has invested more than $100 million into companies fitting his theories about how technology disrupts markets.

The investment company is led by Christensen’s 34-year-old son, Matthew, himself a Harvard Business School graduate and former management consultant. Matt Christensen says the fund sticks closely to the ideas his father developed in books such as The Innovator’s Solution, which describe how new technology and management psychology lead to the rise and fall of great companies.

Father and son began investing together in 2002, Matt Christensen says, “and we did really well—so we thought we could take the show on the road.” In 2007 they launched Rose Park, named after the Salt Lake City neighborhood where the elder Christensen grew up.

The fund manages money from some 40 investors, including Scott Cook, the founder and chairman of Intuit, which makes TurboTax software. It also manages the bulk of the savings of the Christensen clan. “We’re investing nearly all the family money,” says Matt Christensen, who works closely with his father. “We talk almost every day and meet to talk about the portfolio every two weeks.”

Unlike hedge funds that use complex computer algorithms to trade stocks, he says, Rose Park mostly picks investments according to one simple criterion: “disruptive or not.”

While many people use the term “disruption” to refer to any kind of big breakthrough, for the Christensens the technologies that count are those likely to suddenly explode from niche applications into the mainstream. Their fund both invests in up-and-coming companies and places bets against older “incumbents,” in areas like media and manufacturing, that it thinks are poised for dramatic falls. “The cast-iron constraint is the academic framework we use to see the world. We are pretty strict the ways that we define disruptions,” says Matt Christensen. “We get three or four opportunities a week knocking on our door saying, ‘Hey, we are a disruptive innovation.’ And they are not.”

More recently, Rose Park has started to invest in private startup firms. It has taken stakes in BioLite, a company that designed a camping stove able to charge a cell phone, and also Coupang, a Korean outfit similar to Internet-deals phenomenon GroupOn. Christensen says the fund has performed reasonably well but admits that not every investment has panned out. The Christensens invested in eBay, seeing disruptive possibilities in its Skype and PayPal units. But their investment lost value as problems with eBay’s auction business ended up dragging down the company’s shares. Lesson learned. “Now we really stick to companies where we think it’s a clean case of disruption,” says Christensen.

Christensen shared with TR five public companies that Rose Park currently invests in:

Athenahealth

Athenahealth is a medical-software firm targeting doctors’ practices and small hospitals. The company got its start by automating tasks that no doctor wanted to do, such as billing insurance companies. From there, it has branched out into electronic medical records and doctors’ websites. Now it is growing rapidly, particularly as federal rules require more doctors to automate their practices. Christensen says Athenahealth is an example of how technology companies can succeed by “integrating around a job to be done,” or creating a one-stop service that is hard for competitors to challenge.

Cree

Cree manufactures light-emitting diodes (LEDs) from semiconductor materials. LEDs, used increasingly in indoor and outdoor lighting systems, last much longer than conventional light bulbs and use less energy. But they’re much more expensive, too. That’s set up a battle between Cree and huge companies like General Electric and Siemens, which sell LEDs but also own the factories that still churn out inexpensive glass bulbs. The big players may actually find themselves at a disadvantage, Christensen says: “It’s very hard to be good at two different businesses.” While those companies have to worry about sales of their incandescent bulbs, Cree is able to focus on the unique features of semiconductor-based lighting, where the big challenge is lowering costs. Christensen notes that Cree has bought companies specializing in lighting fixtures as a way to lower product prices. “Cree understands that there is more to the cost of LED lighting than making cheaper chips,” he says.

New Oriental Education & Technology Group

Call New Oriental the Kaplan of China. Specializing in test preparation, this for-profit cram academy for children and high-school students started out offering classes in English and other languages but has moved into general education and is now expanding rapidly, opening campuses in the second- and third-tier cities where much of China’s population lives—places like Xiangfan and Urumqi. New Oriental, in the Christensens’ view, is creating new markets where none existed before. Although it hasn’t opened a for-profit university in the socialist nation, that could be next in the business plan.

NxStage Medical

People with kidney failure visit dialysis centers to have their blood cleaned—a trip that can expose them to infections, which is especially dangerous if they are very ill. Why not bring the machine to the patient? NxStage created a portable dialysis machine that can fit behind a bed in an intensive-care unit or be used at home. While the device isn’t as good as state-of-the-art dialysis machines, it may have advantages beyond portability: a personal dialysis machine lets patients clean their blood more often, potentially helping them stay healthier. True, far larger competitors such as Fresenius have introduced their own portable dialysis units. But NxStage could have the advantage of focus. “In a classic innovator’s-dilemma fashion, it’s just very hard for any organization to sell to the high end and to the retail market,” says Christensen. “People say ‘The big guys could crush this company.’ But we’ve found that almost never happens.”


Salesforce.com

Salesforce pioneered the idea of supplying business software cheaply through a Web browser, an idea known today as cloud computing. Previously, enterprise software, such as tools for managing sales, had come on discs and was frequently installed and customized by consultants charging huge fees. As business quickly shift to cloud-based software, Salesforce’s stock price has skyrocketed. Is it too expensive already? The Christensens don’t think so. Research by Harvard Business School found that while shares of disruptive companies like Salesforce may look pricey, in fact the opposite is true—such companies tend to be chronically undervalued. “Salesforce has a lot of customers. But there are even more companies who don’t use it,” says Christensen, who believes that eventually all companies will make the transition to cloud-based business software. “The lesson is that it’s often a lot bigger than you think.”