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A Spinout’s Biggest Competitor May Be the Parent Company, Not Other Entrepreneurs  

By Sarah Steimer

In 2022, there were 5 million new business applications, a 42% increase from 2019, according to payroll software company Gusto. But new research published in Strategic Management Journal suggests that if these new ventures are in the same industry as the companies the entrepreneurs left, their parent company may have an upper hand. 

Prior research shows that spinouts — defined as new ventures established by employees who left a parent firm — tend to outperform other entrepreneurial firms. The advantage comes from the knowledge transfer from the parent company: The individuals spinning out a new firm have learned from the parent company how to run a business, what companies to target, and what suppliers to work with. 

But the new study finds that when parent firms implement ideas internally as new establishments, those grow bigger, faster, and survive longer than spinouts. This suggests that spinouts not only compete against other entrepreneurial firms but also against the parent’s new establishments. 

The reason, according to co-authors Natarajan Balasubramanian of Syracuse University and Mariko Sakakibara of UCLA, is because parent companies are able to identify and implement higher-quality ideas, placing more resources and time into setting up a new enterprise. 

Perhaps surprisingly, though, new enterprises created by parent firms were closed faster than spinouts. The researchers found that, for spinouts, the probability of survival to age three is about 64%; however, for new establishments of parent firms, that probability is only 59%. But that difference pretty much disappears by the time the ventures get to age seven. 

“You would think the large, parent firms that have more resources might be able to help with the survival of their own ventures more than a spinout,” Balasubramanian says. But the reality is that the parent companies have a higher opportunity cost, he says, in the sense that it may be more efficient to reallocate those resources elsewhere in the company, whereas a spinout is focused on that one venture. 

The authors emphasize that founders of new spinouts need to realize that their biggest competition may be their previous parent company, which has the benefit of seasoned management that can identify and implement the best ideas with more resources. 

“If you look at the prior literature, we are always comparing spinouts with other kinds of new firms and finding that spinouts do better,” Balasubramanian says. “But your previous parent firm itself could be your competitor.” 

So for the spinouts among those 5 million new businesses that started in 2022, you may want to keep eyes and ears to what you left behind: If that former parent company puts projects into motion that are similar to your own new venture, you may be recognizing your biggest barrier to success. 

Strategic Management Journal, published by the Strategic Management Society, is the world’s leading mass impact journal for the highest quality research on a diverse mix of topics relevant to strategic management. 

Based upon

Balasubramanian, N. & Sakakibara, M. (2023). Incidence and performance of spinouts and incumbent new establishments: Role of selection and redeployability within parent firms. Strategic Management Journal.