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HBS Star Prof In Court Over Investment

Clayton Christensen, author of The Innovator’s Dilemma and a Harvard Business School professor, is in a legal dispute with a former manager of his investment fund, Disruptive Innovation Fund. Wikipedia photo

He became famous by articulating the theory of disruptive innovation. Now one of Harvard Business School professor Clayton Christensen’s own investment funds is experiencing a different kind of disruption — in a court of law.

Christensen, whose 1997 book The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail explores why some companies fail to adapt to changing competition that threatens their business model, is being sued by a former employee. The employee, Shawn Cox, says he was promised a 6% ownership stake in Christensen’s Disruptive Innovations GP, LLC — and then, as the value of that stake climbed considerably, was first lowballed in a buyout offer before Christensen and his son, Matthew Christensen, began threatening legal action to avoid having to pay altogether.

Based on legal documents filed in Massachusetts and Utah, this is what transpired. Cox went to work as a principal for Rose Park Advisors in 2010, the Christensens’ investment management firm, managing its Disruptive Innovative fund. The curious case of Cox and the Christensens began in 2013 when Cox left the Massachusetts-based Rose Park to return to Utah. Two years later, the Christensens offered to buy Cox out — but, Cox says in his lawsuit, they refused to provide financial information that would enable an accurate estimate of fair market value.

The Christensens offered Cox a sum just north of $500,000. He says the value of the 60,000 Class B membership units he accrued while a principal for Rose Park is actually at least $14 million. And now he’s seeking more for damage to his reputation and his prospects, as well as coverage of his legal fees.

ONE OF THE MOST INFLUENTIAL THINKERS IN BIZ ED

Shawn Cox

Clayton Christensen, the Kim B. Clark professor of business administration at HBS, is the author of 11 books, the most famous of which, The Innovator’s Dilemma, has been named an essential guide to entrepreneurship and fluctuating modern markets. In it he describes the concept of disruptive technologies — re-coined disruptive innovation in a later work — which are those that create a new market that will disrupt an already existing one, or a new value network that will eliminate the market for an existing product. Think Netflix upending Blockbuster.

Christensen has been named one of the most influential business management thinkers in the world, including by Poets&Quants. He also walks the talk, having founded or co-founded four companies: CPS Technologies, a developer and manufacturer of products from high-technology materials; Innosight, a consulting firm that uses his theories of innovation to help companies create new growth businesses; Rose Park Advisors, which identifies and invests in disruptive companies; and the nonprofit Christensen Institute, a think tank that applies his theories to societal issues like healthcare and education.

Rose Park was launched in 2007, the same year Matthew Christensen earned his MBA from HBS, and its Disruptive Innovation Fund was created that year. Shawn Cox joined Rose Park in 2010 and was the first investment employee at the fund. In his lawsuit he says he did investment analysis, investor outreach, and management of the fund for three years, bringing in a total of $2 million in investment capital just from his personal network.

COUPANG: JEWEL OF DISRUPTIVE INNOVATION’S PORTFOLIO

Cox graduated from MIT Sloan in 2008. From his fund, Cox Capital Partners, he says, he brought $400,000 in investments to Disruptive Innovation; meanwhile he agreed to work for the Christensens at a below-market rate on the promise of an equity stake.

That stake began at 4% grew to 4.4%, and when another member left the fund, expanded to 6%. Of course, Cox says, he knew that 4% of nothing is just as good as 6% — but he was willing to take the risk because he believed in the company. His belief was well-founded: Disruptive Innovation was about to strike gold.

The jewel of the fund’s investment portfolio is Coupang. In 2010, Disruptive Innovation helped Coupang get off the ground; by 2013 the South Korea-based mobile e-commerce company had gone global, on its way to being named one of the “50 Smartest Companies in the World” by MIT Technology Review and one of “30 Global Game Changers” by Forbes. Coupang now has offices in Beijing, Los Angeles, Seattle, Seoul, Shanghai, and Silicon Valley, and is estimated to represent about 85% of Disruptive Innovation Fund’s value.