By André Laplume and Sepideh Yeganegi

In the dynamic landscape of entrepreneurship, individual visionaries often hog the spotlight. Yet, beneath this glare lies a startling fact: the heroic garage or independent entrepreneur is mostly a myth. Research conducted over the last decade reveals that the most successful entrepreneurial businesses were actually spinout ventures, incubated in parent companies.

Knowledge and Networks

Strong networks—former colleagues, mentors, and industry contacts—act as turbochargers for the spinout ventures, propelling growth.

Spinout ventures are created when employees leave established organizations to form new businesses. What makes them successful? Spinout founders’ familiarity with the inner workings, industry nuances, and organizational intricacies of their parent companies provide them with a head start in navigating the entrepreneurial landscape, akin to having a secret map to uncharted territories.

In addition, within the halls of their former workplace, spinout founders are able to develop strong networks – former colleagues, mentors, and industry contacts become lifelines, offering support, introductions, and collaborative opportunities. These connections act as turbochargers for the spinout ventures, propelling growth.

For example, Zoom’s triumph owes much to the 40 engineers who migrated from Cisco, and Intel’s ascent emerged from a “brain drain” out of Fairchild. Ideas also fuel spinouts; consider Kik, originally a co-op project at Research in Motion (now Blackberry), which harnessed messaging innovations.

Expertise gained during their tenure becomes the spinout’s competitive edge. Whether it’s technical prowess, market insights, or operational wizardry, they carry specialized skills that set them apart in the entrepreneurial arena.

A Delicate Balance

Innovation seeds often sprout within established organizations. Spinout entrepreneurs recognize these latent concepts, nurturing them into full-fledged ventures. Yet, there’s a delicate balance. Spinouts can bask in the halo of their parent’s reputation, attracting customers, investors, and partners. But they also risk drawing negative attention—friction, legal skirmishes, or strained relationships—when they compete head-on or disrupt the status quo.

Nurturing Innovation Beyond Corporate Walls

Many business ideas remain untapped in parent companies due to resource constraints, strategic focus, or other limitations. These dormant ideas often find their escape route through spinout ventures when employees leave taking an idea, technology, or concept and transform it into a new venture. This mechanism allows rejected or underutilized ideas to flourish outside the corporate confines.

While spinouts are a natural consequence of organizational creativity, they sometimes raise ethical eyebrows. Critics argue that departing employees should leave their intellectual baggage behind. However, reality paints a different picture. Most venture capital-backed startups draw inspiration from their founders’ experiences within former employers. It’s a pragmatic dance between loyalty and ambition.

The Genesis of Spinout Ventures

Spinout ventures find their origins in diverse soil. Recent research reveals a series of nuanced factors that propel them beyond the corporate walls.

Strategic Disagreements

Some spinouts germinate from disagreements within the parent organization. When divergent visions clash—whether about which initiatives to pursue or the strategic direction—the entrepreneurial spirit seeks refuge elsewhere. These dissenting founders embark on their spinout journey, driven by a belief that their vision deserves independent cultivation.

Managerial Frictions

The soil of frustration nurtures many spinouts. When employees feel stifled by bureaucratic hurdles, rigid hierarchies, or uninspiring management, they seek greener pastures.

Interpersonal Conflicts

Sometimes, it’s not just strategy or management—it’s people. Interpersonal conflicts, simmering tensions, or clashes of personalities can push talented individuals toward the exit. The startup becomes an attractive escape, where they can forge their own path without the weight of office politics.

Ethical Triggers

Spinout founders often carry ethical compasses. They question the practices of their parent organizations. Consider the oil driller who turns geothermal well driller, seeking a more sustainable energy future. Or the social media leavers who build safer, more democratic alternatives.

Liquidity Events

Start-ups need fuel, and capital is their lifeblood. Liquidity events—such as IPOs or acquisitions—act as catalysts for spinouts. When eBay acquired PayPal, the corporate culture shift triggered a talent exodus.

Three Trends Boosting Spinout Ventures

Spinout ventures are gaining momentum due to several key trends:

The relaxation of restrictive covenants, especially non-compete agreements has significantly facilitated the process for departing employees to create their own startups. With reduced fear of potential legal repercussions, leavers can now pursue entrepreneurial endeavors more freely.

Spinout founders often carry ethical compasses, questioning the practices of their parent organizations.

The practice of open innovation has revolutionized the sharing of innovative components. Organizations are increasingly collaborating and exchanging ideas, technologies, and intellectual property. This openness accelerates the development of spinout ventures by leveraging collective knowledge.

Companies like Palantir exemplify the trend of fostering spinout ventures. The Palantir Pack, composed of former employees who have either launched their own ventures or invested in them, demonstrates how friendly parent organizations can encourage entrepreneurial initiatives and gain a reputation for incubating innovations.

Myth of The Independent Entrepreneurship

Generations of prospective entrepreneurs have indulged in the myth of the heroic garage or independent entrepreneur. Setting the record straight is important. Studies show that employee spinouts are more successful than other types of start-ups. Employee entrepreneurs should be heartened by this information. Parent companies, too, can benefit from understanding the true nature of spinouts. Once they embrace the concept of spinouts, incumbent organizations can differentiate themselves as workplaces that nourish innovation and support employee entrepreneurship. This creates a win-win situation for all.

About the Authors

Dr. André Laplume, co-author of SPINOUT VENTURES, is a Full Professor in Entrepreneurship and Strategy at the Ted Rogers School of Management, which is part of Toronto Metropolitan University. Laplume researches the intersections where new entrants and incumbent firms meet with the aim of breaking down the barriers facing entrepreneurs, while helping managers deal with entrepreneurial ambitions in their organizations. His research has appeared in top journals like Human Relations, Journal of International Business Studies, and Journal of Business Research, among others. He received his PhD in Management from the University of Manitoba in Winnipeg, and spent seven years at Michigan Tech, teaching in its MBA program. Earlier, Laplume was a business and information technology consultant, helping clients integrate businesses and automate units. He is a frequent judge at entrepreneurship pitch competitions and an experienced entrepreneur, having launched a startup while in Michigan.

Dr. Sepideh Yeganegi, co-author of SPINOUT VENTURES, is an Associate Professor in Strategic Management at the Lazaridis School of Business and Economics in Waterloo, Canada. She received her PhD in Management from the University of Manitoba in 2018. Yeganegi’s research centers on the intersection of strategy and entrepreneurship, especially employee entrepreneurship and spinouts. She has been studying spinout ventures, the focus of her PhD dissertation, for over a decade, investigating how enablers, like venture capital availability and work experiences, can propel employee entrepreneurs. Her projects also explore the barriers that employee entrepreneurs face (e.g., non-compete agreements). Yeganegi has interviewed dozens of spinout founders and reviewed the growing literature on private sector employee spinouts. Her research has been published in journals such as Research Policy and Journal of Small Business Management.