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Spinning out a star.

Michael D Lord1, Stanley W Mandel, Jeffrey D Wager

  • 1Angell Center for Entrepreneurship, Wake Forest University, Winston-Salem, North Carolina, USA.

Harvard Business Review
|June 7, 2002
PubMed
Summary
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Most corporate spinouts fail due to common pitfalls. Successful ventures require independence and discipline, treating new companies as startups, not extensions of the parent business.

Area of Science:

  • Business Strategy
  • Corporate Venturing
  • Entrepreneurship

Background:

  • Corporate spinouts frequently fail to achieve success.
  • Common reasons for failure include ventures being too close to the parent business, financial burdens being transferred, lack of a solid business model or financial base, and insufficient parental divestment.

Purpose of the Study:

  • To identify common failure points in corporate spinouts.
  • To analyze a successful spinout case (Targacept by R.J. Reynolds) to understand best practices.
  • To provide insights for executives on how to improve spinout success rates.

Main Methods:

  • Case study analysis of R.J. Reynolds' spinout of Targacept.
  • Identification and categorization of common spinout failure traps.

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  • Comparative analysis of successful vs. unsuccessful spinout strategies.

    • Main Results:

    • Identified four primary traps: ventures too close to core business, debt/expense offloading, lack of critical business components, and retained parental control.
    • R.J. Reynolds successfully navigated these traps with Targacept by treating it as a startup.
    • Key success factors included an entrepreneurial leader, solid business plan, industry partnerships, and venture backing.

    Conclusions:

    • Spinouts need tough love and discipline, akin to successful startups, rather than parental over-protection or control.
    • Treating spinouts as independent entities from inception is crucial for their long-term viability.
    • Lessons learned from successful spinouts are often overlooked, particularly for ventures closely related to the parent company's core business.