Spin Off Or Incubate? A Framework
A very common scenario — your team comes up with a great idea.
A very common dilemma — you wonder whether to continue developing it internally as a project or spin it out as a separate company.
Should we look at overall trends or find a comparable example to justify a decision? The rise of open innovation has also led to the rise of intrapreneuership ie developing a novel idea within the safety of a larger company. But creating a startup is today easier than it has ever been before, with things like open-source software, off-the-shelf hardware, AWS, angels investors, just to name a few, paving a smoother path ahead.
Numbers alone are not enough to make sense, the framework below with three major dimensions might hopefully inform your decision.
1) Talent aka Human Capital
Echo was developed within Amazon when that company had failed to get hardware right over and over. Echo needed a lot of data, a lot of patience and especially a lot of smart people to succeed. Being able to recruit within Amazon itself was arguably key, along with a relentless drive to commercialize otherwise you run into the danger of becoming a research project as opposed to a product.
Consider if your project’s time horizon is years requiring specialized manpower, or months with manpower geared towards execution. Consider then if your parent company will provide a safe environment better than taking your chances as an independent startup. A common compromise is to create a subsidiary, but then you must be very careful in balancing the benefits and expectations of your corporate.
2) Fundraising aka Financial Capital
If spinning out was universally better for the original company then Odeo, which spun out Twitter, would still be standing today. But then you could also look a bit further north and see Expedia was spun out of Microsoft and each is quite successful. In both cases the resulting startup showed enough momentum to raise money quickly. It’s far cleaner for an investor for sure, who doesn’t have to contend with a messy cap table.
Consider if your project has a realistic potential to grow 10x and can make money by itself. And the revenues should be coming from many other clients rather than just your current employer, if not in the short term then definitely in the long term. If you can honestly answer both questions as yes then chances are spinning out will be better for you, and perhaps even for the parent.
3) Branding aka Marketing Capital
The question here is devilishly simple and maddeningly complex — if you keep the idea as an internal project, how will you end up affecting the parent’s brand and vice versa? The parent will see both advantages and disadvantages in the brand equity you generate, say the perception of being more innovative versus the perception of failure.
Consider that Orkut, Google’s first attempt at social networking, was launched almost the same time as Facebook in 2004 and for quite some time the leading platform in many countries. The team and the budget were fully Google’s but it was always kept as a separate brand, just a small tagline of “Orkut, by Google”. In this case initially the parent company felt that Orkut did not have the performance on par with Google’s as it was written in a different codebase and didn’t have enough servers. Both were eventually fixed but Orkut, always in the limelight, deteriorated its brand and eventually shut down in 2014. Which is perhaps wise of Google to have minimized its own brand exposure as much as possible.
This case study, while certainly not exhaustive, highlights many factors regarding branding capital — it is easier for a private company to incubate projects than a public one since it is subject to less scrutiny. Same thing for enterprise-focused versus consumer-focused, especially so in networked businesses where people’s perceptions dictate overwhelmingly how they perceive and promote you.