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| Home - Industry Article - Sep 04 Issue |
Corporate Technology Spinouts: Why and How
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Pre-negotiate a single deal form for every spinout. Negotiating the complete terms of a spinout -- IP transfer, employee transfer, physical asset transfer, venture structure, economics, transition services, incubation management, supply agreements, etc. -- with the corporation is time consuming. Do it once. Then use the template to crank out multiple deals over time.
Develop a disciplined venture development process. Unlike traditional venture capital, you don’t start with a fully formed company and management team. You must oversee their creation in a well-managed program. The result should be a qualified set of customers, a commercially ready technology, a good management team and a sensible business plan.
Syndicate quickly. It is very easy to get trapped in an endless development cycle. Figure out the minimum time and expense required to meet a set of targets that make the new venture attractive to mainstream, sophisticated venture investors. Then get it out and get it co-funded by other smart, deep-pocketed investors.
Get technologists from inside and management from outside. Nobody really knows the technology (and surprisingly often the market) like the inventors. You don’t want to throw the code over a transom to someone else. If the core R&D team isn’t interested in a venture, don’t do it. On the other hand, if they want to manage the venture themselves, don’t let them.
Be practical about intellectual property. Here’s your typical starting position: the guys in the corporate IP department want to license a narrow slice of the IP on a non-exclusive basis, limited to a minimal field of use, with the right to terminate the license if they feel like it. Outside counsel for the venture capitalists wants all related past and future IP to be assigned to the company with a global non-compete. The right answer, which both sides can live with, is always in the middle. A tough battle ensues that you mediate to a win-win conclusion. A week later no one cares anymore.
Leverage the parent corporation. This is a tremendous asset not available to traditional start-ups. The parent can very often be a customer, a channel, a marketing partner, a co-development partner, a service and support organization. It represents the kind of strategic partnership that gives instant credibility to the new venture that other start-ups typically take years to create.
Do the VC’s job as well. Almost all corporations who try manage spinouts themselves make the mistake of not taking care of their shareholder interest post spinout, nor having a ready pool of capital available for follow-on investment. Having done the hard work of identifying, incubating, spinning out, establishing and funding a new company you can’t rest on your laurels. The work continues, sitting on a board, driving the company to its ultimate exit. And you must have a deep reserve of capital to sustain the company and preserve a significant equity position through multiple rounds of financing.
Not all corporations should do spinouts. Some do an unusually fine job of focusing their R&D efforts only on projects they know they want to commercialize. Some have the wrong corporate culture to foster entrepreneurship. Certain companies, for example Microsoft, are doing just fine without it. For the rest of the world, tapping into this different route for innovation will prove exciting (“exciting” is a euphemism for “challenging”) and lucrative.
Andy Garman is a managing partner of New Venture Partners LLC, a $300 million venture capital firm focused on corporate spinouts, with offices in Murray Hill, NJ and Ipswich, England. He has been involved in creating or investing in more software and technology ventures than he can count from British Telecom, Philips, Lucent, Xerox, Bankers Trust, SRI International and Stanford University. Andy can be reached for article feedback at: agarman@nvpllc.com.
 
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