Episode 385: Spinout Ventures with Dr. André Laplume

Welcome to another episode of the Above the Business podcast. My name is Bradley Hemner, your host. On today's episode, we have Dr. André LaBloom. He's the co-author of Spin-Out Ventures and is a full professor of entrepreneurship and strategy at the Ted Rogers School of Management, which is part of the Toronto Metropolitan University. I really enjoy this conversation with Dr. LaBloom where we talk about this idea of what a spin-out venture is. If you don't know what this is, and even if you are a current business owner, I think there are some elements that we talk about in this conversation that can help you in your current business. Without further ado, here's my conversation with Dr. André Laplume. André, welcome to the Above the Business podcast.

Thank you, Bradley. So I'm happy to be here.

Excited to have you. Well, we start with background and origin story. Why don't you take, uh, our listeners back, André, about journey and a little bit about you and how you got to where you are.

Yeah, sure. I mean, I, I'm not sure how far back we want to go, but I, I have a background in computer science. That's where I started my professional career after dropping out of a very short military career. I was better off, I think, in the office working on analytical problem solving and things like that, helping companies often to replace people with technology, which was the, very much in vogue at that time. I did that for a few years pretty successfully. But then I had, I always had this yearning to go back and learn more because I always felt like I was just implementing the other people's plans and I always wanted to know more about the strategic side of things. So I did an MBA, which helped me a lot to get a better, a broader understanding of how the business world works. And I went back to actually some management consulting afterwards. But I still, I still didn't feel fulfilled from an college perspective, I guess, that's one of my curiosity led me to a PhD, and I did a PhD in management. And while I was studying management, it was very much about what I saw as the most interesting part of the discussion about business and management was this conflict or sometimes cooperation between the old companies, right, the incumbents and the startups or the new entrants. And I, I've always been fascinated in how some of the new entrants seem to be able to, you know, survive and even overcome despite the odds against them. And so a lot of my research has sort of moved in the direction of trying to answer those kinds of questions or to better understand that puzzle. Yeah. And, and so that's led me through an academic career. I'm a professor at the Ted Rogers School of Management, which is at the Toronto Metropolitan University. And we have a whole bunch of entrepreneurship students there and non-entrepreneurship students learning about entrepreneurship. So it's a great environment for teaching. And they also afford me some time to do some research. And so the things we'll talk about later about the book are really driven by research that I, that I've done over the years and the research of others that I've compiled into the book with my co-author.

You, you probably wouldn't have known this, but, um, this is actually great because I'm going to ask you a few questions around some, maybe some of the research that you, uh, specifically studied or maybe just came across. But we do twice a year, I get our members together and we do a retreat. And matter of fact, we've got one coming up in October, and we call that retreat The Beat the Odds Retreat.

Nice.

And it came from— I don't know what the prompt was, but roughly around 2017, 2018, I started to, uh, look up— and I say research because when I say research versus the level of research that you do is obviously very, very different. I think mine was like Google for 20 minutes or something. But it was interesting that I came across, and something that held with me, that 96%, at least in the US, somewhere between 91 and 96% of small businesses never see their 10th birthday. And I was like, oh my gosh, is that, is that real? That's unbelievable. Now, I ended up finding some more information later that after 1 year, 20% have failed, and after 5 years, 50%, and then so it just continues on. So it, it led me down this understanding that, look, Starting a business is hard. Okay. You know, it's, it's not easy to get a thing off the ground, but staying in business and let alone scaling and growing a business long-term is a lot harder. In some of the research that you've done, what are some of the things that you've came, you came across specifically around why business is just so hard?

Yeah, I mean, why, why is entrepreneurship so hard? Why are startups so hard? I think it's a, it's a, it's a good question. And I think that's really kind of the, the fundamental question in, in the field really of the, the kind of research that I do is we're trying to answer the question, you know, why do some companies perform better than others, right? Or some, why do some startups succeed and others don't succeed, right? That's kind of like the holy grail question of the field. And, you know, the early part of the research was mostly focused on the individual psychology of the entrepreneurs themselves, right? And there's a lot of work that was done and still continues to be done in that pathway to try to identify these psychological traits that are, you know, somehow you know, embedded in, in most entrepreneurs. And so you'll hear, you'll hear people talk about things like tolerance for ambiguity, or you'll hear people talk about being able to bear uncertainty and all these kinds of traits that we see across entrepreneurs. And so there's, there's that psychological level that, that's been studied quite a bit. But a lot of people, you know, criticize that, that approach because they say, well, you know, a lot of the, the people that we have as entrepreneurs, for example, tends to be somewhat of a male-dominated thing. In North America. And if we were saying, well, the average traits of the people who are entrepreneurs are this, and then we try to, to say, okay, well, does this extrapolate to, to other groups? Does it extrapolate to, to women, for example? And it's not so clear, right? So there's all kinds of issues with that. And if you add also things like different ethnic groups and things like that, it gets even more complex. So people have started to sort of move toward looking at more structural reasons the conditions in the environment, you know, that prevent people from becoming entrepreneurs or enable them to become entrepreneurs. And so that's why I think what we see in, you know, a lot of cities that are trying to harbor entrepreneurship is, you know, they invest in a strong entrepreneurial ecosystem, which usually includes things like universities and research labs and incubators and accelerators and venture capital firms and angel groups and all of the different components, you know, that are, that are needed to be constructed around a good context or environment. And then, and then once you have that in place, then, you know, there's this belief that, well, you know, each place is endowed with its, its, you know, its population of entrepreneurs. It's how those entrepreneurs are using their energies. Well, that's going to be different depending on the, the, you know, what they're facing. And so if you have this, this proper entrepreneurial ecosystem, then you can help to channel that entrepreneurial energy toward things like startups, things like potential high-growth startups or technology startups or even social ventures and other things that can do good for our economies and for our societies, right?

Yeah. So I'm even curious on what's been the definition of success even to begin with. So to your point of, hey, we're going to study these businesses were not successful. Okay. That's fairly easy. They're not in business anymore. Okay, well, we can try to go through and figure out what are the things that led to their demise versus what about the ones that are still in business? How do you— how, how do we even quantify that they're, quote, successful? What, what has been your, uh, research? What has your research shown?

Yeah, well, I mean, the, the metrics that are often used, um, when you, when you mentioned the, you know, the number of years or the survival rate, right? So calculate how long they survive compared to their peers. That helps us to understand if a startup is more successful. But then there are other measures such as how much, how quickly they grow or how much money they raise or other types of metrics that can be used, but they're all sort of imperfect metrics that are out there. But there are lots of different ways to measure that performance.

Yeah. Um, yeah, I mean, you could even just look at, you know, for one person, the entrepreneur themselves, they get a business to $1 million in top-line revenue, profit of $300,000. They pay themselves a salary. That is success beyond maybe their wildest dreams, potentially individually, but by some metrics and some research, You know, especially a business that's raising capital, $1 million, they just like, they throw that around like it's nothing, right? As an example, you know, if you're not doing $25 million, $50 million, we're not even interested in talking to you. So it's just interesting, the definitions of success. It's not like soccer, you know, American football, basketball, where it's very clear, here's the winners. Here's the losers. Business is just not— is not like that. I think that kind of speaks to Simon Sinek's finite games and infinite games.

Yeah, because I think, you know, capitalism is more like all of the games of the Olympics times 10 instead of just one sport, right? And so we do have people filling every one of these little niches, and every one of those sports looks very different and attracts different types of actors and whatnot.

So yeah, yeah, good point. So tell me about the book Spinout Ventures. Tell me about kind of how the book came to be and a little bit about what it's about.

Okay, the book came to be because we had published some research about spinouts in academic journals, but we felt strongly that, you know, the audience that we wanted to reach was not reading that stuff. And so we wanted to reach out to a more practitioner type audience. Particularly people who are potential entrepreneurs, people who are employees who are thinking about starting their own venture, but also managers who are working inside of organizations who have to deal with the reality of entrepreneurial employees, right? Who may want to leave to do spinouts. So we're trying to look at it from both sides and be able to tell the story of spinouts to those two audiences. And so, you know, just as a quick definition, right? With spinout venture, is a startup or a new business. You could think about a new business or a new company, but what makes it distinct is that the founders of the company, the founders of the business are coming usually straight out of a large incumbent company or a high-growth startup that's doing well and they jump out of there and they start their own venture. And often what they're taking, they're often using an idea that they found in previous employment, or sometimes they're taking knowledge or individuals or employees or resources or sometimes even customers with them from the parent organization into the spinout. And so that gives them sort of an advantage, right? Because imagine you're a de novo founder, right? Starting a spinout, but you don't really have much experience in anything related and you're really starting from scratch and you don't know your business model and you're trying to identify your customers and figure out your product market fit. Meanwhile, you're competing with spinouts that have, you know, sometimes 1 or 2 or more individuals, like the example that's often given is the Zoom example with 40 engineers that came from Cisco to Zoom, right? Along with the founder who left there. So, you know, they have a scale advantage in being able to grow the venture a lot faster. And so the studies that look at the longevity of startups and the longevity and the amount that they, how fast they grow and how successful they become, have shown that these spin-out ventures tend to be the ones that outperform. And I think that's an important thing to know. And when we look out there, you know, if you can do your search yourself on the web or whatever, you can even ask one of the AIs or whatever, you ask them the question, what is a spin-out? The answer is confused right now. The world thinks, half the internet thinks that it's the same thing as a corporate spin-off. Which is not the same thing, right? Because in a corporate spin-off, usually you have a company that says, oh, we have this unit and we want to, we're going to take this whole unit and we're going to take it outside and make it a separate company, right? That's a managerial decision. It's a corporate decision. It's not the same thing as a spin-out where it's the employees who are independently deciding to do this, you know, regardless of whether they have the approval of the management or not. Although sometimes they want to negotiate a deal and so they want to have that approval. So you know, but, but most spinouts are actually totally independent.

So, you know, in my— again, I say this very tongue-in-cheek, but, but very light compared to what you do. When I was doing some research after looking at the failure rates of businesses in general in the US, there was a subsegment of that that had a very substantially, statistically very different failure rate, much lower, and that was franchises. I mean, I think it was around 15%. And so that was very interesting to me as to what— why is that? My, my reason I'm giving that example is for a lot of our listeners, they may have left their corporate job, or they may themselves have said, I'm, I'm going to go ahead and start my business. So they may have— in fact, a lot of our listeners already do have their business. But my question is, what are the elements that make, in addition to kind of what you've already shared, elements that make these spinouts successful that then we can apply the principles back to our business?

Yeah, it's actually, it's interesting that you mentioned the franchises, you know, because, you know, when you think about the franchise model from a corporate perspective, right, the franchisor is often using the franchises to grow quickly, right? Because they could do it and they could do it organically, right? And just own all of their own expansions, right? They could do it that way. But usually that takes a lot of capital to do it. And it can be cheaper often and easier to have franchisees who actually bring some of their capital to it as well. And so from a corporate perspective, it's a way to grow the business. And it also has built into it a kind of sharing of the earnings of the business between the franchisee and the franchisor, right? So it has this sort of cooperative nature to it, right? So we think about it often as a kind of strategic alliance or more than that. So it's, it's a highly related concept when you think about spinouts, because spinouts are using, you know, actually one thing you mentioned, you know, the, about franchises, or I guess one thing that jumps to my mind right away is that often what you're getting in a franchise as a franchisee is you're getting a validated business model. Right? That's what you're getting because you normally, as an entrepreneur, you don't have a validated business model. You have to validate it and you've got, you know, you've got to go and do your customer discovery and then do your product market fit and make sure that it works. But with a franchise, what you're betting on as a franchisee is that you have a validated business model that you're implementing, right? And so you're taking that part of the entrepreneurial process out of the equation, right? Maybe you've done some of that in searching for the best franchise for you. Okay. But Essentially, you've taken that, some of that risk and uncertainty out of the equation. And the same thing with spinouts. If you think about spinouts, a lot of them, what they're doing is they're taking ideas that their previous employer doesn't want to pursue, right? They don't want to pursue it for whatever reason, you know, oh, well, that's not our market, or that's not big enough for us, or that's not profitable enough for us, or that's not the right technology for us, or that's going to hurt our culture. There's a thousand different reasons. That organizations have for not pursuing different ideas or different innovations that they have often themselves helped to incubate, right? And so what a lot of these spin-out founders are doing, or they're basically employees who look at these opportunities and they're saying, well, these are getting shut down in this company and I'd like to take it and bring it out and make a startup with it. And I have better odds now because, you know, it's been prevalidated. We've already looked into it, you know, as I was, as a company, and there's already often evidence that the innovation has early customers or other types of validation, right? And so that's what gives these spin-out founders an advantage, I think, over other startups, right? Is that experience.

Are there any disadvantages that they face compared to a traditional startup?

Yeah, I mean, sometimes there can be hostility between the spinout and the parent firm that a de novo startup would never experience because they don't have a parent. But that's also often depends on the way that it's done. What we're seeing in the research now is a lot of cases where there's a positive relationship between the parent and the spinout because they find ways to help each other. Sometimes, you know, the spinout becomes a customer or a supplier of the parent organization. There's all kinds of transactions that can happen to make things more positive as well. But sometimes what happens is the leavers are not careful. They take things with them that are sort of restricted by restrictive covenants in their employment contracts. So maybe they signed a very strict nondisclosure and one of the ideas that they want to take is covered under the trade secrets of the parent organization. Right. That can happen. So, you know, it behooves the leaver to be careful and make sure that they know what they've signed when they make their decision to do a spin-out. And it also sometimes that, you know, that process of looking at what the risks are helps them to understand whether they should be negotiating an exit with the parent company or not. Sometimes a license is appropriate. There's all kinds of different possibilities, right?

You know, um, I had an experience. There's one in particular, I won't share the name, but they, they, they left and started their own business, and they were kind of, I would say, fairly vocal about things that needed to be done, um, in, in, in the business while they were an employee. And, uh, they went off and started their own business. And it was a couple years later that they came back and they said, you know, it's a lot different when you're, when you're sitting in that chair than when you're not sitting in that, in that chair. What are some of the things that, you know, in this, in this case, that, um, they have some advantages, but also I'm sure you've seen examples to where people— this, I I don't mean this as— it's not an example of grass is greener on the other side. I don't mean it that way. I just mean like, it's so easy in theory until you actually go do the thing and then it can be like, oh wow, okay, actually this is a lot harder than what I thought it was going to be.

Yeah, I mean, I think you make a good point. Uh, um, sometimes people leaving to do a spin-out are only taking part of what they need and, and they have to cobble together the rest and that could be very difficult or sometimes almost impossible. Maybe they, you know, they've been inside of the organization and they've been part of different processes, but they haven't been exposed to all of the different functions of the organization, right? So they're missing some of that core business knowledge about complementary assets and how to put together an organization. And they have to figure that out as they go. And sometimes it's even worse, you know, depending on what you're, where the spinout's coming from, there's often an imprint from the parent firm that isn't always a positive one. There's a big difference between a large firm and a startup company. And when the spin-out founders are taking with them routines that work well for a big company, but don't work well, say for a startup, then there could be some process of unlearning that's needed in order to be effective as a spin-out, because spin-out ultimately is a startup typically that needs to have a different cultural approach than the parent firm did, right? So there are those kinds of kinds of issues at play. But I mean, comparing spin-out founders to, to de novo startup founders, often they have even less exposure to the real business aspects. And so I don't think that spin-out founders are immune to these kinds of issues, but they have an advantage inherently over the ones that have no experience or, you know, coming out of a student perspective or an unemployed perspective or all these different other possibilities, right?

This may not be something that's covered in, in your book, but I'm curious if you have some insight here. Is what about, um, if I'm a business owner and I want to— I see an employee or two that has some entrepreneurial traits within them and I want to, I want to cultivate that and I want to cultivate that within my organization before they go spin out to do one, right? I want to keep that innovation, that enthusiasm, that forward-looking inside my organization. What are some ways for me to do that well?

Yeah, I mean, sometimes that's the toughest challenge because if you have, you know, entrepreneurial employees, they can do great things internally, but they could also just turn around and go and do it on their own. And so I think that's a pretty common challenge is to try to figure out, well, how do we keep them working for us? And lots of different approaches have been used, such as compensation for one, and tying it to shares in the company, and providing stock options, and these kinds of approaches, and saying, well, you're kind of tied here now. You want your shares to vest, don't you? But, you know, the research shows that that's kind of like a double-edged sword, because, you know, once they do vest, then they have that liquidity and pot of money that they can use, for their venture. So other than like compensation type approaches, we've talked about the restrictive covenant type approaches, the legal means, but those tend to sort of stifle people and kind of make them feel like they're not in a really entrepreneurial kind of situation. And so, you know, there are other approaches that can be used as well. And sometimes we call it strategic intent. And so the idea is to try to channel the energy of those entrepreneurial employees toward projects that are more related to the core, what the top management team perceives to be the core business activities of the organization. And so it's more likely that those things will stay internally and maybe have some, in that strategic intent, some resistance to the pursuit of internal corporate ventures that might be too far off and going into more diversified markets or diversified product lines or things that might be more suitably disconnected from the parent organization later, right? As we know, you know, we know from a lot of research about big corporations that when they focus, they tend to do a lot better than when they try to be in 10 different businesses at the same time that they don't really know much about, right? Anymore. So, yeah, that's good.

Andre, where would people— you point people to pick up the book and also to be able to connect with you?

I mean, yeah, of course we want— we'd love people to pick up the book. This is what it looks like. It's available on Amazon and just about everywhere else. That you can buy books these days. And I'm happy to connect with people on LinkedIn, you know, just Google my name and I mean LinkedIn search my name and I'm sure I'll be the first one to pop up with Henri Laffont. So, yeah.

Last question. What do you think, what do you think being or working at times above the business? What does that mean? How does that resonate with you?

Yeah, you know, it's interesting because I was thinking about that because you kind of mentioned it earlier that you're going to ask me this question and it resonates well actually with this concept of spinouts and really what you think about what an organization is and what a business is. And I think sometimes as an employee, you know, I remember a time when as an employee of a company, I'm thinking to myself, oh, I'm a member of this organization, I'm a part of this, I identify with it. It's like its success is are my successes and its failures are my failures. But I think sometimes we get a little bit too, I guess, connected or too close to the concept of a unit or an organization when really when you're thinking about business, when you're thinking about entrepreneurship, often there's a disconnect between organizations and businesses, right? Sometimes businesses don't belong in certain organizations. right? Or they need new organizations. And I think when we start to think about them that way as this kind of disconnect between businesses and organizations, then we can think more fluidly about our careers too in terms of being, you know, internal to one company or whether we need to change companies or start a new company, right? And, and so I think when I think about above the business, that's, that, that's what it makes me think about.

I love that. That's great. Well, you know, a couple of my takeaways really from today It's a good reminder of just really what, what is my definition, my own definition of success. That has really, just as we've been talking, has been my own, the back of my mind of exactly what is my own definition. Not anybody else's, not academic, just really my own definition of success in business. And it made me think about the psychological traits that you mentioned and the structural traits. And then I even was going back and thinking through when I was in Corporate America. Uh, I was previously— this, I mean, this is years ago now. I, I was that entrepreneur that had some ideas of things that could be done, and I, I would have been— I really feel like that there were some traits, and I did not have the word entrepreneur in me. That wasn't part of my vernacular at the time, but there were these elements of some committees that I was on, um, etc., that made me realize like I would have been a prime candidate for some sort of a spin-out at point, I would have said, hey, you know what, we're just not— they're not going to do— they're moving too slow, they're not taking our ideas seriously, sayonara, you guys come with me. Like, that would have been totally me to do that. So, Dr. André Leplume, thank you so much for coming on the podcast.

Thank you, Bradley, for having me. It was a good time.

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