Project Management:

Venture Strategies

Implementing Projects through Spinouts

A New Way of Financing and Managing an Innovative Project

 

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Founder, Ten3 Business e-Coach Inspiration and Innovation Unlimited!

"90 per cent of success is turning up." ~ Woody Allen 

 

Benefits of Implementing Projects as Spinouts

  • Funding and implementing projects without increasing corporate liabilities that may undercut the organization's financial standing.

  • Possibility to syndicate finance from a consortium of financial institutions

  • Reducing the investor's risk by isolating a profitable project and its return on investment from low performing divisions of the parent company

  • Possibility to share the financial risk with other equity investors

Types of Projects that Can Be Implemented as Spinouts

  • Large profitable construction or infrastructural projects

  • Development of new product or service as a joint venture with other financial and non-financial partners

Why Implement Projects as External Ventures?

More and more companies are turning to project financing through spinouts. In this arrangement, loan repayments are based on profits realized from the project.

The main reasons for financing and implementing projects as external ventures are:

  • insufficient collateral to secure a bank loan for implementing a large project internally

  • the need to loose controls and organizational burden and empower management of the project dealing with development of an innovative product or service.

For some large projects, if they were financed in the conventional way, based on the creditworthiness of a company, its liabilities would increase and undercut its financial standing, possibly leading to a lower credit rating for the company. Project financing skirts there drawbacks by linking creditworthiness to a project's long term profitability.

Why Spinout Projects May Look More Attractive to Financing Institutions?

If a project was financed in a conventional way, the performance of the company's various divisions would have an impact on its ability to make repayments. Project financing - which limits lending and risk only to profitable businesses offers an attractive source of earnings. What's more, banks can share risk raise the necessary funds by putting together contracts involving a consortium of financial institutions.

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External Projects as a Part of the Corporate Venture Strategy

In external ventures, large and midsized companies can discover a source of growth. New product or service development projects established as independent ventures can more readily fulfill their potential. These spinouts would enjoy a higher flexibility, provide independence and space for action and allow management to enhance market capitalization. They can also be established as joint ventures to share risks and rewards with partners that have complementary resources.

References:

  1. "Project Funding Gaining Ground", Jun Nojima, The Asahi Shimbun

  2. "Venture Catalyst", Donald L. Laurie

  3. "Project Manager's MBA", Cohen E. Graham