Management & Strategy

Why not start a spin-out

Commonly deriving from university projects or larger organisations, so-called ‘spin-out’ businesses can be an attractive option for many entrepreneurs. But can the relative safety of this kind of start-up compensate for a lack of entrepreneurial control?

The vast majority of new businesses are launched with very little funding and are dreamed up by entrepreneurs working from a spare bedroom or other equally low-key HQ. Such fledgling tycoons must rely on their own abilities to make their businesses grow, but should they succeed the rewards are the entrepreneur’s alone. But such one- or two-man bands are not the only form of start-up. Many opt for the comfort, support and the increased chance of survival provided by starting a franchise within a bigger business. These entrepreneurs forsake the freedom of decision-making for the security of an established partner.

A happy medium between these two kinds of start-up is the spin-out. Spin-outs usually derive from universities, larger businesses or public sector organisations, and they exist for several reasons. They may be a student project that attracts commercial demand or a niche product that has scope but which doesn’t fit within a business’s core objectives. Entrepreneurs who run spin-outs generally have more freedom over their brand (marketing materials, product design, etc.) than franchise-owners, but often enjoy more security than ‘pure start-ups’ because they have already gone through the initial start-up phase and been nurtured by parent organisations.

A successful example

Perhaps the most famous example of a university spin-out company is the search engine Lycos, which began life in 1994 as a research project at Carnegie Mellon University and broke out a year later. In 1996, the business became the fastest to go from inception to IPO on the Nasdaq market, and by 1997 it was one of the most profitable businesses in the world. It was eventually sold to a Spanish company in 2000 for $12.5 billion.

“Many universities have resources dedicated to helping spin-outs as part of their Higher Education Innovation Funding,” says Karen Brooks, Projects Director at the SETsquared Partnership, a university research collective comprising Bath, Bristol, Exeter, Southampton and Surrey. “We operate incubators for high-tech, high-growth companies,” says Karen. “These attract high-quality mentors, which gives them a great head start.”

There are plenty of benefits to this kind of set-up, as well as for companies spinning out of public sector organisations and corporate entities, according to Executive Coach Martin Palethorpe, founder of performance consultancy the Pragma Group. “Spin-outs often benefit from having financial resources,” he says. “They may also receive the wisdom and experience from leaders in an established firm and its backing may add credibility to the venture.”

Lack of freedom

But spin-outs can come with a down-side, which are often related to the relationship between the spin-out and the parent organisation. Such negatives could be based on finances, decision-making or entrepreneurial concerns. “This may mean the freedoms you would have as a start-up may limit your entrepreneurial flair,” says Martin. “Will you own enough of the business to incentivise you in the same way? And/or will you have to spend time and energy justifying your actions and progress?”

Martin believes this can get spin-out businesses off to a less-than-perfect start. “You may end up feeling less inspired than the true start-up entrepreneur,” he says. “And your decision-making may have to be more bureaucratic to appease the mothership. The other danger is that aspects of the larger organisation's culture are adopted, which can also limit speed of progress.”

Spin-outs aren’t for all entrepreneurs, not least because you have to be part of a large organisation to start one in the first place. However, this ‘safe start’ model can allow an idea to become a going concern in a closed environment; an attractive option for many entrepreneurs.

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John Carroll - Helping businesses achieve International success. Head of Product Management & International Business, Santander UK