To successfully “spin-out” you need a big team with lots of experience

When it comes to splitting off a section of the company to start a separate business, whether you sink or swim could depend on how many good people you bring with you, according to new research by Rotman School of Management.

Lead author April Franco is of the belief that it’s a founder’s ability to attract a large and experienced team of colleagues that will determine the success of a spin-out company.

“A founder’s individual characteristics are important but what’s more important is that person’s ability to bring a bigger and more experienced team with them,” she explained. “And the bigger the team, the more likely the firm will succeed.”

Quite often it’s the charismatic founder who is given disproportionate attention when a company “spins-out,” Franco said. In fact, existing research looks at the “founder effect” and the value of a team as separate factors when considering spin-out performance. But the two, Franco suggested, are closely related.

Franco, along with colleagues Rajshree Agarwal from the University of Maryland, Ben Campbell from Ohio State University and Martin Ganco from the University of Wisconsin, used data on employers in the legal services industry to look at the pattern of spin-outs. The legal services industry, Franco claimed, provided an ideal example because there were no restrictions on non-compete rules; employees are free to pack up and leave whenever they want to start a competing company.

They were able to track high-earning lawyers who left to start a new firm, including data on who left with them and how long those individuals had been with the parent firm. Lastly, they were also able to track how well the new firm performed in terms of revenue.

The results showed that new firms performed best when high-performing founders were able to bring an experienced team of former colleagues. 

“If you have experienced employees who have worked together for a long time it will boost a spin-out’s ability to start quickly and operate smoothly,” Franco said. “They will be able to really hit the ground running.” 

Franco also noted that such information was important to know given that spin-outs are often drivers of innovation within an industry.

As an example, Franco used Fairchild Semiconductor. Several employees left to start their own tech companies and became known as “Fairchildren.” This phenomenon drove Andrew Grove, a former Fairchild employee who helped start Intel and eventually became CEO, to proactively prevent employees from starting up new firms.

“He was keenly aware of the value of human capital in their industry and didn’t want spin-outs to compete with Intel the same way they had with Fairchild,” Franco explained.

Franco said while many companies are now concentrating on retaining the talented team that surrounds top performers as well as offering incentives to their top performers who may one day leave to start their own firm, many are also looking at acquiring top teams through firm acquisitions. This helps to explain the acquisition of firms with little sales or revenue, but have talented teams of employees.

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Shané Schutte

Shané Schutte is a senior reporter at Real Business, with a particular specialism in employment and business law, human resources, information technology and sales/marketing.

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