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Venture Strategies:

Spinouts

Success Stories Best Business Practices Thermo Electron Corp.

Managing Radical Innovation through Spin-Outs

By Vadim Kotelnikov. Main source of information: Venture Catalyst, Donald L. Laurie.

"Thermo Electron pioneered the spinout concept for the New Economy." ~ Donald L. Laurie

Corporate Venture Strategies Spin-outs Case in Point: Thermo Electron Corporation Ten3 Business e-Coach: why, what, and how 1000ventures.com

Some Results of the Thermo Electron's Spinout Strategy

(achieved over a period of 12 years)

  • 23 new venture companies created

  • 85% survival rate for new ventures

  • 20-times increase in company's revenues

  • 40 executives and spinout managers are multimillionaires

  • Spinout multiplier effect: second-generation companies started spinning out third-generation grand-children

  • Diversified production lines: Thermo Electron that started with manufacturing heat-treating furnaces now develops, manufactures and markets environmental monitoring and analysis instruments; biomedical products; paper-recycling and paper-making equipment; alternative-energy systems; industrial-process equipment; and many other specialized products.  >>>

2 Business Growth Strategies

 

 

Spinouts Remain Closely Tied to the Parent Company

  • Financial ties: interlocking stock ownership; financial oversight by the parent company

  • Operational ties: shared professional and administrative services; marketing and leadership support

Support Provided by the Parent Company to Spinouts

  • Coaching of new CEOs through formal training; on-job training; and motivating them through creating a steady stream of CEO positions

  • Financial support raising initial equity; providing investment guarantee to external investors; taking new ventures to IPO; financial oversight; interlocking stock ownership

  • Marketing and sales through acquiring and restructuring the companies with developed matching marketing operations and sales/distribution channels

  • Legal counsel

  • Accounting

  • Human resources management

  • Other professional and administrative services

 

 

Coaching Potential CEOs for Venture Companies

To groom potential CEOs for the future spinouts, Thermo introduced a special formal program for training new CEOs and preparing them to deal with Wall Street and media. The two major features of the training are:

  1. Contracting Harvard Business Scholl professors as trainers

  2. Placing a major emphasis on case studies written for and about Thermo and the experience of its subsidiaries' and spinouts' executives

Thermo is also known for its executive "bench". The company hires bright young MBA graduates and engineers and assigns them to a series of projects as assistants to senior executives. Thus, when a new business emerges new managers are available to step up and lead it. The steady stream of new executive positions makes these prospects very attractive to young talents.

10 Commandments of Innovation

10 Rules for Building a Great Business

Selection of New Ventures to be Spun Out

To be spun out, each venture is required to pass tests. It should:

  1. demonstrate a unique and proprietary product or service

  2. project time-to-market of less than three years

  3. aim at a large and growing market; and

  4. promise 20% annual growth

Building Management Teams for Venture Companies

A special management team at Thermo is assigned the task to match managers and technologists who share the same level of passion for the same project. In order to encourage the inventors to spin out new businesses rapidly, Thermo distributes stock options to the subsidiary that spawned the new business, as well as to the new business itself. Usually, members of each new management team share from 5 to 7% of the equity in the new enterprise.

Raising Private Equity Funds for Spinouts

The two major steps in raising private equity funds by Thermo for its spinouts are:

  1. Raising $5million to $10 million for start-up operations

  2. Setting up an IPO shortly thereafter and sell 25% of the spinout's stock for, say, $50 million

Thermo Electron invented an innovative spinout financing technique in order to bypass the costly route of more traditional venture capital financing.

Venture Financing Funnel

Venture Financing: Key Documents

A unique aspect of Thermo Electron's financing is the company's guarantee that for the next five years it would repurchase the stock at the original price. This no-loss promise encourages private equity investors to buy stocks of the spinout and hold them. For Thermo Electron, this strategy presents a low-risk solution as well as it banks the principal and uses the interest as operating capital for individual ventures.

Fast-Track to Establishing Marketing and Selling Operations

Thermo accelerates implementation of the new product by acquiring an existing business with established market, distribution channels, related know-how, and experience, and merging the new venture with it. While the new venture continues to develop the new business, Thermo begins looking for it termed a "wounded eagle" to buy ‒ a business that had fallen on hard times but could still provide a worthwhile structure into which the entrepreneurial business could move. Having purchased a "wounded eagle", Thermo initiates a disciplined and well-conceived turnaround plan that is executed by a small team looking at every aspect of the business. This team:

  1. works towards eliminating overheads, reducing costs, and seeking ways to improve efficiency, and

  2. looks for ways to focus the marketing and distribution know-how on the new product.

Eventually, they inject the new technology into the business, thus providing the new technology platform with the operating capability to serve the market.

Back To Consolidation and New Focus

In January 2000, Thermo Electron, a once-massive holding company worth more than US$4 billion, announced a major reorganization that sought to sell off US$1.5 billion worth of businesses and narrow its focus from 24 publicly traded firms that spanned four diverse industries to a single business focused on one just analytical instruments.

In 2006, Thermo Electron merged with Fisher Scientific to form a new company Thermo Fisher Scientific.