June 23, 2020
It’s no secret that things move more slowly and methodically in corporations than in startups. That’s the nature of the beast. It also means that great ideas can fall through the cracks as quickly as they surface. Considering how vital innovation is to lasting business success, this is unfortunate.
Instead of letting ideas languish and die, a spinout can be an effective way to give those novel ideas the space and structure they need to grow. As enterprise-sponsored startups, spinouts can prioritize development and experimentation that will benefit your entire corporation. Thanks to their smaller size, spinouts speed up the innovation process.
This sounds great, you might be thinking, but how can I run my current company and a spinout? Fortunately, you don’t have to. It might sound like a challenge, but there is significant value in allowing your best and brightest performers to move on from the corporation and run startups spun out from your original business.
Everyone wins when you hand the reins to your best performers. Not only will you give your spinouts the best opportunity for success, but you’ll also bolster talent retention and acquisition by giving your top performers room to grow. High performers usually shift around to different roles as they develop their skills, so giving them a shot at leadership and an opportunity to push themselves is a win for everyone.
If your best executive talent has been doing the same thing for some time and feels a bit disenchanted, they might become disengaged and leave your corporation for more challenging opportunities. Encouraging them to head up a spinout gives them a purpose, inspires them to nurture something new, and saves your organization from potentially having millions of dollars walk out the door if they leave. Only 45% of corporations engage with the startup space, which means you’ll have an instant competitive edge and a better chance of longevity as a company.
There is significant value in allowing your best and brightest performers to move on from the corporation and run startups spun out from your original business.
To get high performers on board with your spinout idea, you might need to have some tricky conversations regarding risk versus reward.
The risk/reward ratio is fundamentally different when shifting from working inside a large enterprise to founding a startup. For corporate executives, there’s usually a generous compensation package, vacation time, and maybe a 401(k) match or bonus — but the compensation is often capped at a certain point.
Some executives, though, thrive in high-risk, high-reward environments. Running a corporate spinout is riskier, but there’s also an outsized reward potential. Startup founders typically get 10% to 15% equity in a new venture, which could be worth a ton of money if they do well. Let’s say the spinout gets a $200 million valuation with a 10% equity; that’s $20 million for the executive if he or she secures funding or if the company gets bought out.
Ultimately, this approach creates value and better prospects for the firm, the spinout, and your customers. A great case study is the Australian auto insurance company Suncorp. Its crash repair vendors were overcharging it, so the company leaders decided to buy out body shop chain Capital S.M.A.R.T. The chain ultimately became the largest auto repair company in the country, and Suncorp sold it for nearly $300 million. Suncorp’s $50 million investment yielded a sizable profit and allowed the company to understand the crash repair business much better. As a result, the company was able to choose more effective partners in the future and could offer its customers reduced rates.
Think of corporate ventures as part of your high-potential executive development program. The executives you choose to head your spinout will gain an immense amount of experience and knowledge, and you’ll benefit from the significant value they’ll add to the new venture. Even if they fail, the involved executives can bring their experience back into the parent company.
Ask everyone in your company to share their best ideas for company growth. Maybe you start with 500 and narrow it down to the best eight for a “Shark Tank”-style competition.
Have executives judge the event. This will get them invested in the ideas and give you a good sense of who has the passion and risk tolerance to lead one of these new ventures.
Which venture ideas inspired which executives? Linking the right people to the right ventures will help set both the individual and the spinout up for success. If those leading the spinout are passionate about the idea, they are more likely to stick with it and propel everything forward.
No matter how great your executives might be, they still need the proper resources to succeed. Ask them what you can do to support them, whether it’s by providing training, talent, funding, or all of the above.
Strike the right balance between providing enough guidance along the way (e.g., mentors, funding, buy-in from high-level players) while still fostering freedom. Just like any other startup, your spinout will need space to experiment and grow.
A spinout might be just what you need to strengthen and progress your company’s innovation efforts. For it to truly flourish, though, you must be willing to have those tricky conversations with executives about the risk and reward they could see moving away from the corporation and into the world of startups. Give them the freedom to lead while ensuring they have the resources they need to be successful, and the innovation will flourish.
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