Spin out

Entrepreneurs can't decamp alone

Berton Woodward

You’re fed up. As a high-performing senior figure in your workplace, you’d like to start a new enterprise in your field. Will your new venture succeed?

April Franco has some predictions for you. An economist in UTSC’s Department of Management, she studies entrepreneurship, knowledge transfer and “spin-outs”—start-up companies formed by people who leave from a firm in the same industry. According to a study she recently co-authored with three American researchers, there’s a checklist for success when you decamp.

First, it’s not all about you. Charismatic founders get a lot of attention when spin-outs soar.

In other studies, researchers have focused on the “founder effect” and on the value of the team as separate elements in a spin-out’s performance. But Franco says they go together. “The founder’s characteristics do matter,” she says, “but in terms of determining what the team looks like. The team’s characteristics then have an effect on the firm’s performance.”

So when you leave, she says, the bigger the group that follows you, the more likely you’ll be to succeed.

And you’ll need to convince the most experienced people to come—long tenure at the original firm will boost your spin-out’s ability to ramp up quickly and operate smoothly.

To reach these conclusions, Franco and her colleagues used U.S. census data on employers in the legal services industry in 10 states. This let them observe the pattern of new spin-outs in a field where there are no restrictions on top people upping and leaving (i.e., no non-compete rules). They were able to track what happened when a high-earning lawyer left to start a new partnership, with clear data on who came along, how long each individual had been with the old firm, and how the new firm performed in terms of revenue.

The results confirmed that new firms did best when a high-performing founder was able to attract a strong team of experienced former colleagues. It’s critical information, because, as Franco says, in many industries, “spin-outs drive change.”

But Franco warns that the firm you’re about to leave may also be updating its strategy. Many companies use every incentive in the book to hold on to a top performer they might be about to lose. But it may make more sense for them—as in, it may be cheaper and less devastating—to focus on the team around that performer, and hold on to them. Then you’ll really be on your own.