#lean spinoff

For the better part of 4 years I led a team to find, fund and launch new web businesses on behalf of a mid-market company.  My client was generating cash hand over fist, but they knew their business model and market were likely short-lived (highly regulated, faltering demand).  

We set out to quickly and cheaply develop new web-based products & services in their vertical. We identified a few promising opportunities, but we were struggling to find a workable and repeatable process for launching these spinoffs.  That is until I happened upon the book, "A Stake in the Outcome" by Jack Stack and Bo Burlingham (of "Great Game of Business" fame).  It's a good read if you're interested in open-book management, but the key gems for our project were buried deep.  

/ Jack Stack "A Stake in the Outcome"

Back story:  Jack Stack and his management team took over a failing engine re-manufacturing company and over time turned it into a growing, profitable employee-owned company.  But a number of years into the turn-around they faced a tough challenge - generating enough cash to payout employee-shareholders who retired, left the company, or simply wanted to sell their shares.  Big liability headache.

After trials and tribulations, Stack and his management team found a solution. Build equity in spin-off companies and use the equity they built to fund the Mothership's ESOP liabilities.  Their method:

 Find a leader to build the spinoff, who:

understands the startup process

knows how to make the most of limited resources

has skin in the game (equity, pay for performance)

aligns their interests (goal: equity growth)

Determine a single project to develop that:

solves a problem for the Mothership

meets demand of Mothership's customers (non-core)

Fund the new entity with a small loan. 

See here: for eye-opening math

Build overhead absorber

overhead starts from day one

generate cash

Build for cash

build the company around cash cycles

large % payments up front

recurring revenue/long-term partnerships

Never-never-never risk the Mothership

external offices

external operations

external people

separate financials

Scale for equity

build scalable sales engine

build scalable product

build scalable systems

According to the book, in 5 years they built enough equity in spinoffs to fund projected ESOP liabilities (this is a few biz cycles back, so I'd love to see an update). 

Bottom line: Every business owner I've ever known has a surplus of opportunities.  They see the inefficiencies in their own business, are plagued by expensive component parts, wish for better suppliers, see the needs in their market and have tried over and again to get their employees to tackle these opportunities. 

These same entrepreneurs would be exploiting these inefficiencies and building more companies if they had the time/energy.  But there are only so many hours in the day.

We found Jack Stack's model and a bit of Steven Blank's "Epiphany" book to be the best model available.  In future posts I'll talk a bit more about lessons learned.