A spinout’s biggest competitor may be the parent company, not other entrepreneurs

Spinouts, which are new ventures initiated by employees who leave their parent company, often exhibit better performance than other types of startups. However, a recent study published in the Strategic Management Journal reveals that when parent companies internally identify and implement ideas, they outperform spinouts. For instance, if employees of Microsoft leave the company and start a competing spinout, the spinout would potentially need to face competition from a new business established by Microsoft in the same industry.

Former employees’ startups often have an advantage over competitors due to the knowledge transfer from their parent companies. This includes insights on running the business, identifying target companies, and collaborating with suppliers. However, parent companies can also identify and implement higher-quality ideas, benefiting from their additional resources and time to establish a new enterprise.

The study, conducted by Natarajan Balasubramanian from Syracuse University and Mariko Sakakibara from UCLA, utilized census data from 30 states to track employment, ownership, and other factors within an industry. This allowed them to identify cases where an individual worked at one company in one quarter and started their own firm in the same industry the following quarter.

In general, new establishments launched by parent companies tend to perform better: they are larger, grow at a faster rate, and have higher survival rates. Interestingly, Balasubramanian notes that parent companies also frequently shut down their new ventures. The authors suggest that this may be due to the parent companies’ opportunity cost of using resources that could be allocated elsewhere within the company. Additionally, spinouts, with their limited experience, may take longer to realize whether they should cease operations.

The study found that spinouts have a 64% probability of survival until they reach three years of age, whereas new establishments launched by parent companies have a slightly lower probability of 59%. However, this difference diminishes significantly by the time both types of ventures reach seven years of age.

According to Balasubramanian, the key implication of the study is for spinout founders to understand that they are not only competing with other entrepreneurs, but also with new establishments launched by their previous parent company.

“Previous research has typically compared spinouts with other types of startups and found that spinouts perform better,” says Balasubramanian. “However, your own parent company could be your competitor.”

The study also sheds light on the selection process within parent companies for managers responsible for deciding whether to internally implement new ideas. Due to the numerous projects and resource deployment opportunities available to parent companies, there is often significant selection pressure, particularly during the exit selection stage.

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