Spinning out a star.
Spinouts rarely take off; most, in fact, fall into one or more of four traps that doom them from the start. Some companies spin out ventures that are too close to the core of their businesses, in effect selling off their crown jewels. Sometimes, a parent company uses the spinout primarily to pawn off debt or expenses or to quickly raise external capital for itself. Other times, a company may try to spin out an area of its business that lacks one or more of the critical legs of a successful company--a coherent business model, say, or a solid financial base. And in many cases, parent companies can't bring themselves to sever their ownership ties and give up control of their spinouts. R.J. Reynolds, the tobacco giant, managed to avoid these traps when it successfully spun out a most unlikely venture, the pharmaceutical company Targacept. As the story illustrates, the problem with spinouts is similar to the problem of rich children. Their parents have the wherewithal to spoil them or shelter them or cling to them, but what they need is tough love and discipline--much the same discipline that characterizes successful start-ups. R.J. Reynolds recognized that it didn't know that much about the pharmaceutical business and couldn't merely try to spin out a small clone of itself. It had to treat the venture as if it were essentially starting from scratch, with a passionate entrepreneurial leader, a solid business plan, help from outside partners in the industry, and ultimately substantial venture backing. That these lessons are less obvious to executives contemplating spinning out ventures closer to their core businesses may be why so many spinouts fail.
Lord
Michael D
MD
Angell Center for Entrepreneurship, Wake Forest University, Winston-Salem, North Carolina, USA.
Mandel
Stanley W
SW
Wager
Jeffrey D
JD
D002202:Capital Financing; D004345:Drug Industry / Q000458:organization & administration*; D017598:Efficiency, Organizational; D016520:Entrepreneurship; D007857:Leadership; D009935:Organizational Affiliation; D009936:Organizational Innovation; D019460:Tobacco Industry / Q000458:organization & administration*; D014481:United States