A Different Spin On Startups
Finding Hidden Opportunities In Corporate Technology
Out For A Spin With Randy Parker
invested in more than a few spinouts, Randy Parker
sees five common characteristics of the most
“Vulture” capital. One
thing that makes spinouts attractive to VCs is that
they leverage the investment others already have
made in product development. You gotta
find a way to take advantage of that.
Successful spinouts maintain the core technology
team from original development, especially where the
people feel passion for the product.
way that spinouts can have a leg up is where there
are existing customers with third party knowledge of
Contracts and revenue. Even
better than just any customer is one that’s making
profits for you already.
Protected IP. Parent
companies protect their intellectual property both
legally and by retaining the people who created and
VA) -- June 26, 2002 -- Despite the dotcom bubble
and the tech wreck, technology entrepreneurship is still
alive and kicking, and often in the last place you’d
think to look—big corporations.
“We have 145,000 employees, and
they all have my phone number,” says Hal Kennedy, Vice
President for Technology Commercialization at Lockheed
Martin. “My phone rings at least once or twice a
week from someone I don't know inside the corporation who
says, ‘Let me introduce myself. I have a real great idea
for commercialization.’ We take them all seriously and
review every one.”
was part of a panel of speakers at this morning’s
Netpreneur Coffee & DoughNets meeting who assembled to
discuss opportunities in spinning out technology ventures
from inside corporations and other large organizations. He
has had some success at that. Since 1997 Lockheed has spun out 13
companies, 12 of which are still doing business.
Joining him were panelists who could boast
similar feats, including Tom
Gilbert, co-founder of Blue
Ridge Networks which spun out from StorageTek;
Jesko VonWindheim of CRONOS/JDS Uniphase who has been
involved in several successful spinouts; and Randy
Parker, Managing Partner of SpaceVest,
a venture capital firm with some 30% of their portfolio companies
that were spinouts from large government contracting
what is a spinout? According to David
Sylvester of law firm Hale &
Dorr who moderated the discussion, it’s when
corporations and venture capitalists take technology or
ideas or people from existing large organizations and
commercialize them in the marketplace. These are
entrepreneurial ventures, not to be confused with a spin-off,
which occurs when a public corporation provides a
distribution to its shareholders to give them value in its
that’s a definition, in practice, “You
have to look at it as a deal,” said VonWindheim, “And
the deal is interesting because it's a three body
three bodies are the entrepreneur, the parent company, and
one or more VCs, and they all have different motivations.
That’s why the biggest challenge for the
entrepreneur—in addition to the vision, the business
plan, the contracts, and more—is that he or she has to
act as the facilitator between the other two bodies to get
the deal done.
be an iterative process, said Gilbert, and there’s a lot
to learn along the way. For example, Blue Ridge Networks
got off to a slower start than they might have because
they waited too long to bring the VCs into the picture.
Once you have an idea, start by talking to the parent
company to keep everything above board, but the panel
agreed that you should bring in the investors as soon as
appropriate so that everyone’s issues get addressed
play an important role in spinouts, not just for their
money, but especially for their industry knowledge,
contacts, channel connections, and other assets that help
the spinout find commercial viability. The contract
conditions they are looking for can sometimes conflict
with those of the parent, which, for example, may want
clauses such as “claw backs” which return certain
rights to the parent under given conditions. Get these
motivations on the table early.
we most often think of spinouts as coming from inside an
organization, some of the most successful ideas come from
outside, according to Kennedy, such as when a customer or
potential customer comes with a critical need they have to
fill. If the same need is felt by enough others, there’s
of any other conditions, the first, most critical question
a spinout entrepreneur has to ask is: Why is the company
willing to let the spinout happen? After all, if it was a
guaranteed money maker, wouldn’t they want to keep it?
There are a lot of answers to the question, some good,
others that should sound warning bells, but if you don’t
understand the reasoning, you can’t close the deal in a
way that will make value and sense for all the parties.
face all the same challenges as other entrepreneurs, such
as raising funds and validating the product in the market,
but they can have certain advantages, such as access to
the research and other facilities of billion dollar parent
companies. And there are unique challenges, as well.
According to Kennedy, one of the most important things for
a startup to do is to get managerial autonomy. It is
essential, he said, because otherwise, “The
parent company will pull the plant up every six months to
see how the roots are doing.” The panel’s complete
comments and suggestions can be found in the edited
transcript and video from the event.
another rule that’s just as true for spinouts as it is
for all other startups—the people are what really
Parker put it, “Technology-in-a-box ages very, very
rapidly. Without the human beings surrounding it who are up on it and
interested in it, it has a half-life of microseconds. It's
not all about intellectual property, it's much more about
2002, Morino Institute. All rights reserved.