Bridging the Valley of Venture Death

One of the biggest challenges we see is bridging the gap between testing and validating new ideas and getting those with proven customer, product and market traction launched.

There are a few reasons why this is so tough:

1. Incentives: Corporate incentive structures almost always prioritise short-term results over long-term growth, especially in publicly traded companies. Managers are rewarded for hitting quarterly targets, not for placing bets on the future. This makes allocating human and financial resources to new ventures almost impossible.
2. Processes: Corporate processes are designed for repeatability, predictability and control, not for the speed and flexibility that new ventures need. From budgeting to procurement to HR, corporate systems are designed to slow down, not speed up progress - this is a feature, not a bug.
3. Politics: New ventures challenge the status quo and threaten existing power structures and this leads to all kinds of internal resistance and sabotage as people seek to protect their turf and maintain control.

The result is that the vast majority of well-validated new ideas don’t make it to market, not because they’re unproven, but because they don’t have the resources and support they need to succeed.

At Future Foundry, we've seen this challenge play out time and time again, so we've been experimenting with a solution.

Over the past few years, we've been selectively spinning out some of our most promising ventures and incorporating them as separate entities alongside our clients. We've encouraged corporates to maintain minority stakes in them and helped to recruit experienced founders to lead the spinouts so they have the freedom and focus they need to grow and scale.

By giving these ventures the required resources, leadership and autonomy and by balancing that with clear governance, reporting, and re-acquisition terms, we’ve seen them achieve rapid growth and impact.

Spinning out a venture isn’t for everyone, and it’s not for every venture. So, I thought it’d be helpful for me to share our framework for when to do it, how to do it and what comes next. 

When to Spin Out

Not every validated venture should be spun out. To decide if it's the right move, we evaluate them against three key criteria:

Scalability: Can the venture scale quickly with the right resources and team?

1. The venture has attractive unit economics that improve with scale.
2. The venture can achieve significant economies of scale as it grows.
3. The venture can attract and retain the talent needed to drive rapid growth.

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Alignment: Is the venture strategically aligned with your company's long-term goals?

1. The venture aligns with your overall strategy and vision for the future.
2. There are potential synergies between the venture and your core business.
3. There is a risk of the venture conflicting with or cannibalising your core business.

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Independence: Would the venture benefit from operating independently?

1. The venture requires a different culture and operating model than your core business.
2. The venture would be able to move faster and more nimbly as an independent entity.
3. The venture would benefit from having dedicated resources and a singular focus on its mission.

The Spinout Process

If the answer to all three is a clear "yes," a spinout is likely the right path. Here's how we do it:

Incorporation: Set up a new legal entity for the venture.

1. Determine the appropriate legal structure based on factors like tax treatment, liability protection, and potential for outside investment.
2. Choose the right jurisdiction for incorporation based on business needs and regulatory considerations.
3. Establish the initial governance structure, including the board of directors.

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‍Capitalisation: Determine the initial cap table, including your company's minority stake and any outside investment.

1. Figure out the right valuation for the venture based on traction, market potential, and comparable companies (the discounted cash flow method is our favoured way of running valuations).
2. Decide on the initial equity split between your company, founders, team, and any outside investors.
3. Secure the balance sheet funding to support the venture's initial operations and growth.

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Recruit: Bring in experienced founders and early team members to lead the venture.

1. Identify and recruit experienced founders with the right mix of domain expertise, entrepreneurial experience, and problem-space understanding - we usually look for founders who have raised to at least Series A.
2. Build out the initial team with talent across key functions like product, engineering, marketing, and sales.
3. Establish the venture's culture and values, and ensure alignment with the founding team.

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Governance: Establish a board and governance structure for the new entity.

1. Determine the right mix of board seats to allocate and mix from your company, founders, and outside experts/investors.
2. Set up clear governance processes and decision-making frameworks.
3. Establish regular reporting and communication channels between the venture and the corporate.

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Operations: Give the venture the resources and autonomy to operate independently and grow.

1. Provide the venture with the resources it needs  (e.g., capital, technology, facilities) to support its operations and growth.
2. Give the team the freedom to make their own decisions and operate independently, within the agreed-upon governance framework.
3. Provide ongoing support and guidance as needed, but avoid micromanaging or interfering with day-to-day operations.

Future Acquisition

One key benefit of a spinout is the potential for our clients to re-acquire the venture later at a discount. Here's what a term sheet for that might look like based on some that we’ve put together:

Option to Acquire: Retain the right to buy back the venture at a pre-set valuation.

Trigger events: Specify the events that would trigger our right to acquire (e.g., hitting certain milestones, reaching a certain valuation).

Acquisition process: Outline the process for exercising the acquisition option, including due diligence, approvals, and timing.

Valuation formula: Specify the exact formula for determining the acquisition price and discount rate based on the venture's financial performance.

Exercise Period: The option can be exercised within a set time frame, usually 3-5 years.

Extension provisions: Include provisions for extending the exercise period if certain conditions are met.

Vesting schedules: Establish vesting schedules for founder and employee equity to make sure they’re committed and aligned for the long term.

Earn-out terms: Include earn-out provisions tied to specific performance milestones to incentivise key team members.

Setting the terms upfront is the best way for both the corporate and the venture to get clarity and alignment on the long-term plan.

What next?

Spinning out validated ventures has become a key part of how we work with clients. By using a clear decision framework, following a structured process, and planning for the future, we've been able to bridge the gap between exploration and exploitation and give their ventures ideas a shot at success.

It's not always easy, and it requires a willingness to let go of control and embrace a different way of working. But the results speak for themselves.

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Ready to speak to the team on how you can get started? Grab a discovery call here.