5 Reasons VCs Love Tech Spin-offsPresentation by Larry Scheinfeld

What is a ‘Spinoff’?

A spinoff is the creation of an independent company through the sale or distribution of new shares of an existing business or division of a parent company.

Source: http://www.investopedia.com/terms/s/spinoff.asp#ixzz47Vm7aIa6

For example,

✤ A company might spin off one of its mature business units that is experiencing little or no growth so it can focus on a product or service with higher growth prospects. The spun-off companies are expected to be worth more as independent entities than as parts of a larger business.

Source: http://www.investopedia.com/terms/s/spinoff.asp#ixzz47Vm7aIa6

Spin-off Startups and Venture Capital

✤ A tech spin-off investment is a no-brainer for VCs because of their access to the resources, reputation, and management of its established startup parent company. Piggy-backing on the strengths of a proven Silicon Valley winner makes for a less risky investment.

VCs love a tech spin-off, and here are 5 basic reasons why:

Resources Matter

✤ Investors want to know the product or service they are putting their money into has a sufficient market to ensure maximum success.

✤ A spin-off is able to determine where and when there are available opportunities due to being able to use the resources of its parent company.

✤ Investors can rest assured that the new business has done the proper research with the assistance of industry leaders before launching.

Proven Reputation

✤ The reputation of the tech spin-off’s parent company affects how promising investors think the spin-off will be.

✤ If the established business has a viable product that has been tested, improved, and marketed successfully, then its spin-off has higher chances of experiencing the same kind of accomplishment in the marketplace.

✤ The combination of low risk and potential high returns make VCs flock to these enterprises, especially to make up for any losses from investments in unprofitable start-ups.

Skilled Management

✤ This is just as important as the product or service is the team behind it.

✤ VCs often judge the management behind the spin-off before making a decision on whether or not to invest.

✤ How well the business operates, especially at the top level, may be a better indicator than the product or service of how successful the spin-off will be.

An Uncommon Enterprise is Ripe With Possibilities

✤ Although spin-offs have higher chances of success, they are not as common as other types of start-ups. This may be due to entrepreneurs putting more focus in a single, unique idea than in branching off of existing ones.

✤ Spin-offs tend to be found in the academic and technological industries.

Benefits for Tech Spin-offs

✤ The increased likelihood of investment brings benefits to a tech spin-off as well.

✤ This start-up has more options from which to choose, and therefore more control over the terms of the financial agreement.

✤ It may also be able to go longer before needing to obtain venture capital because it can rely at first on the resources of its parent company.

✤ During that time, it may be able to gain some traction and become even more attractive to potential VCs.

For more Venture Capital News, please visit: LarryScheinfeldvc.com

✤ Larry Scheinfeld is one of the co-founders and partners at Zelkova Ventures. Larry concentrates most of his time in working with the current portfolio companies in deciding strategic funding and customer acquisition plans. Currently, he is on the Board of Directors for Starlight Foundation, a nonprofit that provides quality of life programs for seriously and terminally ill children.