Definition of a Spin-Out

Question from a reader: What is a spin-out?  I've heard the term, but I'm not sure what it really is. 

Centri In physical terms, a spin-out occurs when centrifugal force overpowers whatever is connecting a rotating object to some central hub.  The power acting to make the object independent is stronger than the power constraining it within the existing system.  Objects would fly off the earth, for instance, if the earth were spinning fast enough to cancel the power of gravity.

In business, a spin-out is a new corporate entity formed to exploit some opportunity that is not directly aligned with the core business of the parent organization out from which it is spinning.  (Pretty good, huh?  Only an English major could construct a sentence like that.) 

Not all spin-outs become free-standing enterprises.  The new entity might be set up as a “division” of the parent, rather than a totally  independent company; but it is managed independently as a consequence of its differences from the parent.  Typically, the defining difference is a new marketplace or target demographic, for which the parent provides no economies of scale or special knowledge.

New market.  New buyer group.  New business model.   Spin-out. 

Notice I didn't include "new manufacturing technology."  A new manufacturing technology that improves profitability will not typically trigger a spin-out.

I also did not include "new ways to address the needs of the customer."  Once you have customers, you should always be working on new ways to address their needs.  Otherwise, you will surrender them to competitors who manage to do just that.

Spin-outs are appropriate when there is a truly fresh market opportunity, a chance to serve a different batch of end users, with its own particular compelling needs.

Sometimes the spin-outs continue to take advantage of some "commodity" parenting services, such as accounting, payroll, or central computing power.  Typically, however, they do not share marketing and sales staff because of the clear market differences that caused the spin-out in the first place.


This post is from What is a spin-out, anyway? by Jim Flowers, Executive Director of business acceleration center VT KnowledgeWorks, and author of the blog for entrepreneurs, So you want to launch a business…

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