Spinning out a startup from a successful business: Go or no go?
I’ve seen this time and time again.
A business is doing well with a good customer base. Then management starts thinking:
“Why don’t we spin out a startup using this customer base?
We’ll borrow the name of the main business to minimize marketing expense, and we’ll pull over some existing employees to the new business.”
Fast forward:
Their employees leave one by one because they don’t want to work for a startup. (This is the worst problem of all.)
Only a minority of their existing customer base wants the new product or service.
The majority of their customer base are now confused because they’re getting marketing messages about something they don’t want.
The startup siphons more cash than expected from the successful business for new hires and rising operational complexities.
Profits decrease in the main business.
Every time I see a business like this, I facepalm internally. A business like that would have made more returns by investing its spare cash. A business like that would have made more money by staying in its lane, penetrating their market deeper with their existing offer and happier employees.
Why ruin a working business?
But, if it still makes sense to try it anyway…
My recommendations:
Test-promote competitors of the planned startup to your customer base. This is to test the receptivity of your customer base to the solution that your startup would offer. See if they bite.
Think about this: What if partnerships with these businesses are more profitable than building out an entire startup from the ground up?
Don’t be lazy and don’t overestimate your startup idea. You might think you’re being smart by using an existing customer base to shortcut the customer acquisition process of a new business. You might be right, or you might just be lazy (and don’t even realize it because your judgment is clouded by laziness that masquerades as brilliance).
Leave your existing employees alone and don’t pull them over to the startup.
Consider starting a completely separate startup with a different name, and cross-market it sparingly to customers of the main business. If the startup idea is really that good, your existing customers will try it out. If not, you’re not risking your main business on a bet that could leave a huge dent to your employee morale, brand, and operations.
You can still lend legitimacy to the separate startup by noting its affiliation with your main business on your websites and marketing materials, even though the business names are different, to optimize marketing costs.
Hire new employees for the startup and make sure they are the types who are motivated to work for a startup. Again, not every employee wants to work for a startup, especially if there is no equity up for grabs.