Everyone knows what spin-offs are in movies. The story is taken from the original work and turns into an independent film or series. For example, the series “Better Call Saul” is a classic spin-off: it tells the story of Sol Goodman, a lawyer from the very popular “Breaking Bad” series. Why do this? To earn money from fans of the original film and attract new fans.
There are also spin-offs in business. Moreover, a separated business may cost more than the parent company itself. So it was, for example, in the case of eBay and its PayPal spin-off. Over time, it happens that a new company can completely absorb the core.
Of course, creating a successful spin-off is a great success for the company. Only for this it is necessary to take into account many factors: which product to bring to a separate company, when to do it, who should manage a new project, how to track success. We’ll talk about this.
What product deserves to be a spin-off
There can be three situations when a product needs to be launched in a separate business or independent business.
- A new product is sold in the wrong way and in the wrong processes that are used in the main business. For example, the main product is aimed at the enterprise segment and the transaction cycle takes a year, and the company decided to make a product for medium-sized businesses, where the transaction cycle is two weeks. In fact, one business is very different from another. Yes, they can be built on the same platform, but, in fact, these are two different businesses.
- Sales go beyond the boundaries of the existing target audience. The sales cycle may be the same, but, for example, all current products are aimed at the financial industry, and a new one at retail. Here, other competencies are needed, another understanding of where and how decisions are made on the client side, how the market works. The SKB Kontur company has such an example. They made the Kontur.Wood service, which allows Russian manufacturers to sell lumber to China. At SKB Kontur itself, the majority of customers are from Russia, and here are Chinese, a completely different audience.
- The new product is the “killer” of the current product. For example, you study offline and decide to open online courses. In this case, you fall into the same segment, but the services will compete with each other. And if both products will be in the same department of the company, then they will always compete with each other: for staff, for marketing budgets and so on. In this case, you need to allocate a new product in a separate company or unit, so that there is no conflict.
Such a situation implies cannibalism: sooner or later the new project will absorb the old one. A good example to illustrate is Vkusvill. Initially, a network of dairy products “Izbenka” appeared, but experience has shown that outlets need to be opened where there are other products, and this has restrained growth. Then came “Vkusvill”, which swallowed the “Hut.” Cannibalism in this situation does not always occur. Sometimes an old product moves from an expansionary state to a survival zone. In fact, it turns into a “cash cow”, which has its own place in the market: it brings money, and there are segments where it does not compete with a new product. In this case, it is beneficial for the entrepreneur not to close the old project and leave it until the margin falls below a certain level.
How to separate a new project
There may be several options – from a new department to a separate legal entity. The last option is the simplest, because the spin-off and the main company have a completely different pace of life. Startup is quick decisions, experiments, risk. A large company is risk intolerance and marginality priority. Even people and processes are different. If the startup remains inside a large company, it will use the services of accountants, lawyers and IT services. But the same lawyers are used to working with a large company, they have contracts for hundreds of millions or billions of rubles, they have almost zero risk tolerance. They will not have enough time for a small company.
The new culture cannot rely on the internal resources of the company, because, unfortunately, this means its death. First, internal startups can be distinguished into a separate zone, the “sandbox”, where lightweight procedures for work will be created. And when one of the startups proves the right to exist, you can separate it into a separate structure.
When to start spin-offs
There are two important conditions here: to the parent company and to the employees. Any large company goes through several stages. First, the company checks the business model and looks for customers, then it is growing rapidly and at some point it reaches a plateau. Here her task is to keep her market. But the question always arises – what next? The market share is not growing, business brings money. Here, when the business has reached a plateau, and the best moment comes to launch spin-offs, which will give a new growth point. Although sometimes it turns out that you had to think about what to do next, even before you hit the plateau, that is, start creating new lines of business when the growth of the main line from 50% + per year fell to 10-20%.
The second important point concerns people: to create a spin-off, you need an entrepreneur who is completely immersed in a new company. A common story – the vice president of a large company comes up with the idea of spin-offs. He gathers a team and acts as such an entrepreneur. But the vice president does not have enough time, and the project is slowly dying. A full-time entrepreneur is needed, and while he is gone, launching spin-offs is almost pointless.
Where to get such an entrepreneur? There are two solutions: either to grow inside the company, as Yandex often does, or to hire a third-party person, as, for example, MTS does.
How to motivate the head of a spin-off
The spin-off team takes more risks than the employees of the main company, where all processes are debugged. It is likely that in a year the spin-offs simply cease to exist if the demand for its product is not confirmed. How to compensate for such a risk? Someone will be able to compensate for rapid career growth. A mid-level manager in a large company can grow to vice president in 15-20 years, if at all. And in the spin-off he has a chance to make an equal-sized business and in 3-5 years to rise to the level of vice president, and he will already be able to communicate directly with top managers right now.
Others may be interested in the financial component. For example, you can motivate options in the spin-off. Or phantom options that will act as deferred KPI: take the business to the rescue of 200 million rubles. a year at breakeven and receive a lump sum payment of 20 million rubles. Promising a percentage of profits is not a good idea. In some niches, it happens that the need for rapid growth leads to the fact that profits may not be 5-6 years – money is reinvested in marketing, new sellers, and so on.
A big salary for the head of a spin-off is also not very good. On the one hand, it should be quite marketable. People should not have a desire to work somewhere else to provide the level of compensation they need. But on the other hand, it should be less comfortable than people in the parent company. Otherwise, you do not need to quickly overcome the first steps. A startup is a death zone. You seemed to be in the desert, you need to get out of it as quickly as possible. And if you are thrown water and food into the desert, then the motivation to move faster does not increase.
Do I need to attract an external investor for the spin-off
Much depends on the state of the main business. It’s more profitable to finance yourself. At a minimum, testing hypotheses that someone needs this project and that the unit economy is converging is usually done with their own money. And when you understand that you are in a niche and you need to invest 100 million rubles, otherwise the moment will be missed and the market will not succeed, but there is only 10 million rubles. Then you should look for an investor. The second point: spin-offs can develop in a niche where the main company lacks competencies. In this case, it also makes sense to look for an investor who additionally verifies the business model and helps with its competencies.
Why does it not make sense to take an investor at an early stage? An investor is usually not prepared to value an asset in such a state. For example, IIDF standardly evaluates a project with a monthly revenue of about 200 thousand rubles. 30 million rubles. For 7%, the project may receive 2.5 million rubles. But a company, in order to bring its spin-off to such revenue, sometimes invests 10-20 million rubles in a product. Therefore, such investments will not play a big role. But at the next stage, when the investor is ready to invest from 25 million rubles, it makes sense to talk with him. But it is more profitable for a mature business to bring spin-offs to their own money to the point of confirming hypotheses.
How to finance spin-offs
Large companies often have this problem. One investment committee may consider completely different issues: for example, “let’s build 100 new base stations” or “try to make a product in a new segment” – and both options require costs that differ by two orders of magnitude. The first option is to expand a proven business, the second is not a fact that will work out, but the money will be spent. The choice of the second option is not at all obvious. Accustomed to proven risk-free business models, the investment committee will not be ready to approve even small, but very risky investments. It is for such procedures that hundreds of pages of business plans arise that make no sense, since all the numbers in these business plans are hypotheses that have no confirmation.
It is more efficient to break the work into several stages. When the idea of a spin-off comes up, you need an “easy” investment committee that will evaluate three aspects: whether the idea matches the company’s strategy, whether it is theoretically possible to earn a tangible amount of money for the company, and whether such a business is possible at all. At this stage, not even money is allocated, but the employee’s right to spend a couple of months testing hypotheses. In fact, this investment is not direct money, but time – that is, the money of the wage fund.
The next step is when you need to spend money on creating an MVP (minimally working product). In software companies, this is 5-20 million rubles. and up to 12 months work. There is also enough “easy” investment committee. Unfortunately, at this stage it is impossible to confirm that there will definitely be profit, or to draw up a detailed development plan for 10 years in advance. These are high-risk investments, but the amounts for such projects are not the largest. Usually the budget is agreed upon for 12 months, but once every 3-4 months. check the results. If there are no results, the project can be rolled out ahead of time and saved.
The third stage – the project has confirmed all the hypotheses, there is a market, you need to invest money and grow rapidly. Here we already need a real investment committee that compares the confirmed revenue and volume of investments with other large expenses like a new office or the construction of base stations. And such a phased design allows you not to put on one shelf proven business solutions and startups with great uncertainty.
How to help the head of the spin-off
The executive director of the company or members of the board of directors cannot follow the spin-offs more often than once a quarter (there is simply not enough time for them). If a company has several spin-offs, and members of the board of directors watch them once a month, then all of their meetings will be devoted only to this. How to control an entrepreneur and help him build a new company? Here, a lot depends on who manages your spin-offs – internal or external entrepreneur.
If you choose an internal entrepreneur, that is, there is a risk that he does not have enough entrepreneurial experience, he is not used to working in conditions of uncertainty, making quick decisions, going across company procedures, and so on. If the entrepreneur is external, then he may have the necessary experience, but he may not align with the culture of the parent company and will not build communications.
A good option is to send the spin-off team to the accelerator or bring in a separate tracker for them. How will this help the spin-off? A tracker can just lead a team from the state “we came up with an idea” to the state “we found customers, the product suits them, we know the sales channels and how to sell so that it all grows”. A tracker is a person who knows the methodology of conducting a company from a “zero” state to a state of confirmed market value. Some companies have already grown their own trackers, but usually these are external people. They have specific knowledge in a particular area, and the profession is just emerging, but in Russia there are already several hundred of such specialists.
In the West, spin-offs have become a very common practice. In Russia, this market is only emerging. Many domestic companies have now reached a plateau in their field. Now is the best time for them for spin-offs. And those who launched spin-offs several years ago have not yet managed to achieve great success. To bring the company from zero to 1 billion rubles. Revenues need about five years. But there are still examples of successful spin-offs. Yandex has a lot of them (for example, taxi service or car sharing), Tinkoff Bank (Tinkoff Insurance), several MTS launched spin-offs. With a competent approach to business, the emergence of a successful spin-off for the company, although a laborious, but very real process.