PracticeConsultingCareers: Spin-offs – Play your part in the baby boom

Careers: Spin-offs - Play your part in the baby boom

The mushrooming of new business incubators in recent times was to some extent based on the B2C e-commerce IPO frenzy, and the market correction of spring 2000 means that consolidation is inevitable. But, according to IDC analyst John Ferrier, there is a sustainable role for progressive incubators developing startups in B2B, software and hardware development.

BT, for example, is collaborating with Scientific Generics on Brightstar, an incubator at its consulting and research arm BTexaCT, designed to capitalise on its vast intellectual capital. And, for management consultancies, concerned about losing staff to dotcoms and start-ups, incubators can help to retain their best and brightest employees – or at least share in the success of their ventures. PwC, for example, invested $500m in March 2000 in a Europe wide incubator network, citing demand from clients and staff.

Brain drain

Ferrier traces the trend back to the spring of 2000, before the IPO bubble burst. “A lot of new startups, whether straight e-commerce, B2C e-tailing or other types of technology companies were making initial offerings, seeing astronomical growth and investors were realising extraordinary gains. At the same time people in IT and straight management consultancies decided that with so much capital available, there couldn’t be a better time to be entrepreneurs. As a result a real brain drain took place in management consultancies.”

These firms saw that internal incubators might help to stem the flow. “Incubators would give employees an opportunity to participate in much more creative projects geared towards the new economy, satisfying their need to be part of that. At the same time, those employees who wanted to leave could leverage the consultancy’s expertise, resources and network to develop their idea, on a fee for equity basis.”

And the consultancies would develop expertise in cutting edge business models by working with entrepreneurs, says Ferrier. “This knowledge can be rolled back in to existing clients, creating a circular environment, broadening the consultancy’s network, sphere of influence and knowledge.”


Gerry Devlin, chief operating officer of PwC’s incubator, says its aim was to harness the capabilities of the firm’s network to the emerging dotcom/dotcore world. “We have a lot of creative and energetic staff and drawing on their expertise makes sense. It doesn’t make sense for them to leave and start a company elsewhere.” While the pressure in terms of the drain on staff has now somewhat disappeared due to the bloodbath in the dotcom marketplace, he says, the people aspect is still seen as an important part of the venture. “Good people will still leave and want to do new ventures somewhere so why shouldn’t they be part of our operation? We see it as a win-win.”

Working in the incubator itself, he says, is an exciting opportunity for staff. “We are recruiting into it on a rotational basis. It has a core team and we second people with specific skills to it for a period of time. They gain new skills which benefit both them and the organisation when they return to it.” While incubator staff do not share in the success of new ventures, says Devlin, the firm is looking at possibilities to provide more direct linkage or rewards. “And we are open to the notion that some of the people in the incubator may join the incubatee as it goes forward,” he adds.

Devlin says internal referrals are a very good source of ideas for the incubator. “23% of the ideas we get are referred by internal people and they are an order of magnitude better in terms of quality than those that come from outside, presumably because some sort of vetting goes on between colleagues.” An incentive scheme rewards people introducing the idea with a one-off payment upfront.

As far as the startups themselves are concerned, PwC employees who believe they have a winning Internet-based concept are given a three-month sabbatical to work on their proposal, following detailed evaluation. The would-be entrepreneurs can draw on the firm’s legal, tax, accounting and financial advisory services, as well as the strategic advice, performance improvement and technological expertise of its consulting arm.

Says Devlin: “The key advantage for these guys is security – we give them a safe environment in which to develop their idea and they are familiar with the company incubating them. If, at the end of their sabbatical, it is clear that the idea is not going to fly, they have a guaranteed route back into the mothership. We don’t see that as a failure, we see it as a career enhancing move – they will have learnt new skills which they can bring back into the business.”

If the venture does become fully-fledged however, PwC will take an equity stake in return for its services. And this can be a downside for an entrepreneur using an incubator, says Elena Christopher, an analyst with Gartner Group.

“Incubators offer a variety of benefits which improve the odds of being successful. But it comes down to whether the entrepreneur is willing to give up a substantial chunk of equity in return. Many firms give up 20%, others as much as 50%, and some people are more willing to try it on their own because of that.”

B> Flexibility

Adam Jacobs, a consultant with PwC for three years, was the first staff member to use the firm’s incubator service, launching in May last year with co-founder Greg Swimer, an IT manager with Unilever. The firm focuses on the development, management and distribution of quality electronic catalogues in the B2B arena.

Jacobs spent some time at the end of 1999 looking for the right kind of funding partners before selling the proposition to PwC that Cataloga as a company would add a lot of value to the firm’s e-procurement offering.

“The advantages for us were that PwC had a very well established network in the B2B and e-procurement community, and we were able to leverage some blue-chip accounts and establish our credibility through our relationship with the firm. Being associated with PwC gets us through the door with clients – that was particularly important. We also used its excellent technical resources in terms of IT architecture and design, which enabled us to get a very fast start. And using PwC people gave us the flexibility to defer the tricky business of recruiting production engineers.”

Jacobs cannot disclose PwC’s equity stake in the venture. “But,” he says, “we looked at it as a business transaction. We costed up the value of the services we were getting in the same way as we would have costed the value of cash from a venture capitalist. In that light we negotiated hard.”

The decision to leave a good job with a known brand and a huge support infrastructure to go it alone is never an easy one, says Jacobs. “A Big Five environment is quite a safe one to be in and some people feel comfortable in a big organisation. A small minority, however, feel it is healthy to move out and do it on their own.”

He viewed the venture as a great CV building exercise. “The kind of things I was doing as a startup – fundraising, building a management team and so on – were things that I wouldn’t have the opportunity to do in a large organisation.I took the view that if it didn’t work, I would have gained a hell of a lot from the experience.”

Eight months on, however, is going from strength to strength.And, while Jacobs and Swimer obviously stand to gain financially as founders of the company, the most important thing, says Jacobs, is that they are building a successful company. “You gain a tremendous amount of satisfaction from making an idea work. Cataloga is now an established player with 40 staff, a very good customer base and an evolving brand.”

But while Cataloga is a success story, many dotcoms, particularly in the B2C arena, have famously fallen by the wayside. Says Gartner’s Christopher: “The investment community is very cynical right now. It is off e-business, retail focused dotcoms.”

Technological innovations Startups based on technological innovation have a much more solid pedigree, however. Truth, BT’s first true spin-off, is based on a network testing tool designed by David Skingsley while working in the company’s futures testbed laboratory. The spin-off of the firm, which offers network monitoring, testing, emulation and consulting services, put in place the processes now used by BT’s Brightstar incubator. Its CEO, Russell Cameron, came on board from venture capitalist 3i, to provide managerial expertise, while Skingsley became chief technology officer. BT and 3i both took 37.5% stakes in the venture with management holding the rest.

Launched in April 2000 with a headcount of two, the firm now has 16 staff and has just signed a major deal with Motorola for a network emulator.

Says Skingsley: “I always had an ambition to run my own company and wanted to see my product exploited rather than dying a death. I really enjoy my new job – the hours are very long but it is very rewarding. It is good to talk to customers and see the fruits of your labours very quickly.”

Avril Woods, HR business partner for Brightstar, sees the business focus required in a spin-off as a valuable addition to the skills of the technical people who tend to bring ideas to the incubator. “They benefit from being involved in something they have direct control over and being much closer to the bottom line. Exceptionally strong technical people develop new, commercial skills and become more rounded business people.”

But, she says, people used to a large company for a number of years can find a spin-off something of a culture shock. “In addition to skills assessment programmes to work on team dynamics and manage expectations, we are wrapping around training and development to make sure people joining spin-offs are completely happy.”

Recruitment benefits

In firms like Scientific Generics, spin-offs are an integral part of the business model. Says group HR director John Sparks: “Every year we spin out two or three companies and at any one time there are 30-40 small scale proof of principles or market study projects going on.”

A reward scheme pays the innovator of any new technology a percentage of any profit the company makes in licensing it or a percentage of any company that results from it. “It is not necessary to go with the spin-off to get share options – someone involved in innovations resulting in several spin-offs will have a portfolio of shares. Those that do go with the new company can benefit further, however, by investing as founding directors in real equity.”

Sparks sees a net benefit on recruitment. “We lose a certain number of very able people but we have a net inflow. A small category of people join with the primary intention of staying for a while and then getting involved in a spin-out. But a larger number would rather work in an environment where spin-outs are possible, where they are encouraged to innovate and try different things. They join because they find the environment very attractive.”

For the people who leave the company with a spin-off the major motivation is to see an idea dreamt up come to fruition, says Sparks. “Financially they get a stake in the commercial success of their idea, and it does their career no harm either. Having been the technical director of a company based on your idea and taken it to success is a big stamp on your CV.”

People who stay with the company, however, continue to work on a vast range of different projects worldwide, alongside high-calibre people, and benefit from the development of their own ideas as well. “Working for a spin-off requires a commitment to a very focused existence for a considerable time, with a single goal and a single technology,” says Sparks, “something which does not appeal to everyone.”

Attracting staff with startup culture

From a headcount of one 18 months ago, Jac Peeris’ Skillvest has grown into a pan-European business with just over 100 people, building and implementing people management tools on corporate intranets and extranets.

The experience has exceeded all her expectations. “If you have an urge to do something like this, you should jump off the bridge. There is a huge benefit in learning about yourself, about creating value and working with people. I have realised an entrepreneural piece of my personality by chasing and trying it rather than dreaming about it.”

Her enthusiasm is infectious: she has attracted senior and line talent from consultancies, banks and Fortune 500 companies.

Startups like hers, and, ironically, the products of consultancies’ incubators like Jacobs’, will continue to attract the very staff the big firms are trying to keep. While the incubators provide an exciting environment for the staff working in them, young, vibrant companies offer something more. Says Peeris: “People are attracted by the potential of the business and culture we have. Keeping the excitement and vibe alive is a crucial part of our recruitment strategy. What we offer is the opportunity to really contribute rather than being a cog in a wheel. This is a huge personal risk but an opportunity to make a real difference.”

Jacobs agrees. “People have applied to us speculatively,” he says. “People who feel they have always been in a Big Five environment want to be out at the leading edge. It is very hard to do that in a big company.” Building the company has been a very enriching experience, for him, and, he says, feedback from his staff suggests they gain significant satisfaction from seeing the value they are creating.

Peeris lists the attractions of a startup such as hers as: a sense of fulfilment which comes from knowing it’s up to you; a flat management structure and team environment which fosters a tremendous “can do” attitude where everyone is equally responsible for contributing to the growth of the business; and the ability to be who you are, not hiding behind a person or profession.”

“Everyone took a pay cut when they joined us,” she says, “but once they have proved themselves, they get shares in the company.”

Guiseppe Guida joined Skillvest from Gemini Consulting and is now MD for France, Italy and Spain. Anyone leaving a well-established position in a management consultancy, he says, must think long and hard about it.

“You have to believe very strongly in the solution and in the people, and know that you can make it happen.”

After the variety of his consultancy role, he says, it was also important to him that the Skillvest solution had a strong intellectual content.

Interestingly, at that time, Gemini itself was thinking about an e-business/incubator initiative, he says. “I would have considered working in it,” says Guida. “But creating a new business is very exciting and the culture is very vibrant, enthusiastic and intense.”

Mary Huntington is a freelance journalist?:

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