Just what is a spin-out?

The vast majority of new businesses are dreamt up by loan entrepreneurs and launched with little funding from a spare bedroom or other equally low-key headquarters. These fledgling tycoons must rely on their own abilities to make the business grow, but know that if they do the rewards are theirs alone.

But one or two man-bands are not the only form of start-up. Many opt for the comfort, support and, bluntly, the increased chance of survival offered by starting a franchise within a bigger business. They forsake the freedom of decision-making for the security of an established partner from the get-go.

A happy medium between the two, perhaps, is the example of a spin-out. Spin-outs usually come from universities, larger businesses or public sector organisations and they exist for a number of reasons; for example a niche product that has scope but doesn’t fit in with a business’ core objectives, or a student project that opens up commercial demand.

"Spin-outs benefit from financial resources. They may receive wisdom and experience from leaders in an established firm and backing may add credibility"

Entrepreneurs who run spin-outs generally have more freedom over their brand – marketing materials, product design and the like – than franchise owners, but often enjoy more security than ‘pure start-ups’ because they are spun-out having gone through the initial start-up phase nurtured by parent organisations.

Perhaps the most famous example of a university spin-out company is search engine Lycos, which began life in 1994 as a research project at Carnegie Mellon University and span out of the university a year later.

In 1996 the business became the fastest business to go from inception to IPO on the Nasdaq market and by 1997 it was one of the most profitable businesses in the world. It was eventually sold to a Spanish company in 2000 for $12.5bn.

Karen Brooks, projects director, SETsquared explains the case for university spin-outs: “Many universities have resources dedicated to helping spin-outs as part of their Higher Education Innovation Funding.

"In the case of SETsquared universities - Bath, Bristol, Exeter, Southampton and Surrey, they have thriving business network around each of the universities as we operate incubators for high tech, high growth companies. These attract high quality mentors which gives them a great head start.”

There are plenty of benefits to this set-up, as well as for companies spinning out of public sector organisations and corporate entities, according to executive coach Martin Palethorpe, founder of The Pragma Group.

He says: “Spin-outs often benefit from having financial resources. They may also receive the wisdom and experience from leaders in an established firm and its backing may add credibility to the venture.”

Spin-outs often benefit from forms of financial support, brand and mentoring that other firms do not

But are down-sides too. Depending on the nature of the relationship between the spin-out and the ‘parent’ organisation, these could be based on financial, decision making and entrepreneurial concerns.

According to Palethorpe: "The downside of a spin-out, is that this may mean the freedoms you would have as a start-up may limit your entrepreneurial flair. Will you own enough of the business to incentivise you in the same way? And/or will you have to spend time and energy justifying your actions and progress?

"You may end up feeling less inspired than the true start-up entrepreneur, and your decision making may have to be more bureaucratic to appease the 'mother ship'. The other danger is that aspects of the larger organisation's culture are adopted, which can also limit speed of progress."

Spin-outs aren’t for all entrepreneurs, not least because you have to be part of a large organisation to start one in the first place, but this ‘safe start’ model which allows an idea to become a going concern in a closed environment is extremely compelling for many.