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Grow Your Business Your Team

Teamwork: How to Build a Successful 'Spin-Out' Startup

Credit: RawPixel/Shutterstock

If you plan to leave your current employer to start a rival company, you better bring a strong team with you, new research suggests.

The success of a "spin-out" company — a business created by employees who leave one company to form another in the same industry — depends on the founder's ability to attract a large and experienced team of colleagues, according to a study scheduled for publication in the upcoming edition of the Academy of Management Journal.

"A founder's individual characteristics are important, but what's more important is that person's ability to bring a bigger and more experienced team with them," April Franco, one of the study's authors and a management professor at the University of Toronto's Rotman School of Management, said in a statement. "And the bigger that team, the more likely the firm will succeed."

Often, it's the founder who is given disproportionate attention when a company "spins out." Past research has looked at the "founder effect" and the value of a team as two separate factors when considering a spin-out company's success. However, Franco said the two factors are closely related.

For the study, researchers used U.S. Census data on employers in the legal services industry, because there are no noncompete rules. They were able to track lawyers who left to start a new firm, and included data on who left with them and how long they had been with the original firm. Additionally, they were able to examine the new firms' revenue. [Bright Ideas: 6 Bold Startups Reinventing Their Industries ]

The results revealed that new companies performed best when the founder brought in an experienced team of former colleagues.

"If you have experienced employees who have worked together for a long time, it will boost a spin-out's ability to start quickly and operate smoothly," Franco said. "They will be able to really hit the ground running."

Understanding the correlation is critical because spin-out companies are often drivers of innovation within an industry, Franco said.

As part of the study, the researchers specifically pointed to the Fairchild Semiconductor company during the 1950s and 1960s. At that time, several employees left to start their own tech companies and became known as "Fairchildren."

This exodus drove Andrew Grove, a former Fairchild employee who helped found Intel, to proactively prevent employees from starting up new firms.

"He was keenly aware of the value of human capital in their industry and didn't want spin-outs to compete with Intel the same way they had with Fairchild," Franco said.

The study's results help to explain why many companies are now not only concentrating on retaining the talented team that surrounds top performers but also looking to acquire top teams through firm acquisitions, even when those businesses have little sales or revenue, Franco said.

The study was co-authored by Rajshree Agarwal, a professor at the University of Maryland; Ben Campbell, an associate professor at Ohio State University; and Martin Ganco, an associate professor at the University of Wisconsin.

Chad Brooks
