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Three Reasons Why Business Leaders Should Support Employees’ Start-Up Ventures.
Despite the romanticised image of the successful entrepreneur as having launched their business in some dusty garage, the majority of founders come from within established organizations. It’s at these “parent companies” where future entrepreneurs develop the knowledge, skills, and connections that help make their new ventures, or “spinouts,” possible.
There are many reasons why an employee may want to leave their parent company to start a spinout – including strategic disagreements, managerial frictions, liquidity events, and more. But no matter what causes employees to exit, parent companies do not need to view their departure as a problem or a threat. In fact, a spinout may have a positive impact at some point in the future. It’s known that spinout ventures often situate themselves near their parent organizations contributing to cluster formation. Silicon Valley’s semiconductor spinouts are credited with the development of the agglomeration of firms in California, for example.
From a parent firm perspective, it may not seem obvious at first that a spinout venture from their own organization is a good thing. Managers may be concerned that spinouts will take valuable human resources with them that are hard to replace. In a well-known example, Zoom’s founder attracted 40 employees from Cisco after he left their Webex division to found the spinout.
Based on ten years of research as outlined in our book SPINOUT VENTURES, we have found that there are three common scenarios when managers should consider supporting spinouts:
Firstly, when it is clear that the spinout is going to happen no matter what the management wants. Many spinouts are in some sense inevitable, especially if they are triggered by strategic disagreements and interpersonal conflicts. They can’t always be predicted and are often more autonomous than deliberate. Organizations can try to suppress spinouts, but these attempts often fail and degenerate into negative public relations and legal costs—potentially tarnishing the company’s reputation as a friendly incubator of innovations. For example, Palantir, whose founders came from Paypay encourages spinouts of non-core innovations and boasts a vibrant “Palantir Pack” of alums who have gone on to form a ton of new ventures.
Instead of fighting them, management can think strategically about how to smooth the path for spinouts and maintain a positive relationship with them. They have the opportunity to create links with spinouts for future reciprocal exchanges of knowledge, human resources, and opportunities. Future relationships may include licenses, transactions, and employee mobility between the parent and its spinouts.
Secondly, organizations that generate more good ideas than they can actually exploit are ripe for spinouts because the alternative may be to squash innovations and create disagreements with the people championing it. One of the key goals of corporate strategists is to device an organization that has enough focus to dominate a market. An organization that enters too many loosely related business lines will find itself overextended and confused. For example, AstraZeneca’s story shows how an organization may actively seek to trigger spinouts by assigning a spinout coordinator that seeks external funding and partners for spinouts of internal R&D discoveries. Spinouts can bring corporate coherence by allowing ideas that the organization will not exploit internally over to the market for startups. At the same time, buy allowing innovations to survive through spinouts, AstraZeneca sets itself up as licensee and minor equity partner in the short term, and as a potential acquirer in the future should the innovation pan out. It turns out spinouts are easier for parent firms to integrate because of their shared experiences, process, routines and technologies, which is good for spinout founders looking for a future exit pathways.
Intel’s strategy of encouraging spinouts of process technologies because it wanted to focus all of its development resources on design technologies is another example. These vertical spinouts become suppliers of Intel, but become sustainable by also providing process technologies to other firms. Intel gets to keep its eye on design and still gets to benefit from the spinouts’ process innovations as a customer.
Thirdly, Nokia’s unique story shows how spinouts can be used as a way to help employees from downsized divisions to get a head start in entrepreneurial careers. By providing business and entrepreneurship training, bridge financing, and allowing IP to be released to leavers as part of their severance package. Thus, spinouts may at times be used not only as post-employment support vehicles, but also as a way to preserve ideas and knowledge that might otherwise get lost in the downsizing. Those startups can become future Nokia partners, but the strategy also earned the firm the title of a socially responsible company as the spinouts created new jobs and economic development in the incumbent’s headquarter city.
In conclusion, more and more organizations are realizing the strategic potential of spinout ventures to boost their reputations, improve corporate coherence, and stimulate knowledge spillback, but also as a way to become better corporate citizens.
Written by Dr. Sepideh Yeganegi.
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