Spinouts by former employees of established firms are a common form of innovation. Research from Bayes Business School highlights the costs and benefits of doing this for the spinouts themselves. The research analyzed 117 spinouts from over 100 firms, and found that the degree of overlap in terms of the market targeted by the spinout and the parent company mattered to the success of the venture.

While there are benefits to staying close to the parent company in terms of benefiting from the resources and know-how of the founders, this is also likely to trigger more hostile actions from the parent to disrupt the new competition. This ultimately harms the chances of the spinout’s survival.

“Our study suggests that by minimizing the degree of market commonality, spinouts can obscure their visibility and mitigate their competitive threat in the eyes of the parent firms,” the researchers explain. “This could play a big role in reducing the parents’ motivation to undertake aggressive actions.”

Surviving the break

What’s more, the study also suggests that the previous ran of the founders is also important, as spinouts created by high-ranked employees tend to have not only a higher level of knowledge but also access to more resources from the parent company.

These high-ranked employees are also likely to possess greater bargaining power, which the researchers believe helps to ensure that they get better exit conditions when they depart the firm. The flipside of this is that spinouts might also run the risk of falling into so-called “competency traps”, which means they fail to move beyond old logic and develop the new habits and routines they need to thrive.

“From the parent companies’ perspective, employees’ transition to entrepreneurship can be cause for serious concern,” the researchers conclude. “This is because, in addition to the loss of important human capital, spinouts may pose a serious competitive threat. To protect their competitive position in the market, parent companies are likely to retaliate and adopt a hostile attitude toward employee start-ups that attack their vital markets.