April 3, 2019
Some of the most innovative emerging businesses today aren’t coming from startup incubators or college dorm rooms. They are getting their starts inside established companies. In Plymouth, Ind., ITAMCO (Indiana Technology and Manufacturing Companies) is leading the charge with a second spin-off company, SIMBA Chain.
Company spin-offs or “spin-outs” involve a corporate realignment in which part of the established business is separated to create a new, independent corporation.
Company spin-offs or “spin-outs” involve a corporate realignment in which part of the established business is separated to create a new, independent corporation. The parent company in these situations is often trying to create space for potential value to be realized.
Among the many brands that have spun off other companies are eBay (creating PayPal Holdings), Biogen (building biopharmaceutical company Bioverativ), SINA (spinning out the Chinese Twitter-like Weibo platform) and Fog Creek (cutting loose project management software company Trello).
Gavin Ferlic, Elevate Ventures’ Entrepreneur-in-Residence for North Central Indiana, says that working on solutions that aren’t part of a company’s core business can be a challenge. Larger organizations focus on competencies that drive the vast majority of revenue, but they likely have other valuable underutilized skills.
“As a result, new technologies and initiatives within an organization often don’t receive the attention they need to flourish. Sometimes those corporate spin-offs can have a great chance of developing a viable solution, opposed to developing it in house,” Ferlic says.
SIMBA Chain on its own
Such was the case at ITAMCO, a third-generation manufacturer of precision-machined components. Founded in 1955, the company has made the pursuit of manufacturing innovation elemental to its evolution. Spinning out companies has become part of its growth strategy.
Since 2012, ITAMCO has partnered with the Center for Research Computing at the University of Notre Dame to develop and commercialize technologies. Atlas 3D spun off from ITAMCO through the university partnership in 2016. That company offers software that makes the design of 3D printed parts easy and predictable. Elevate Ventures supported it with a pre-seed High Potential Startup Grant in 2017.
Hot on its heels, SIMBA Chain was formed in 2017 from an SBIR grant awarded by the Defense Advanced Research Projects Agency (DARPA) to ITAMCO and the Center for Research Computing to develop a secure, unhackable messaging and transaction platform for the United States military.
When, why to spin off
For a spin-off company to make sense, innovation that is not core to the current business is the first necessary element.
For a spin-off company to make sense, innovation that is not core to the current business is the first necessary element. This can be in the form of intellectual property, a novel solution developed by the company or a problem that the company has encountered that people within the organization think they can solve. And while in North Central Indiana the manufacturing sector is seeing spin-off success, the strategy is not industry specific.
SIMBA Chain CEO Joel Neidig says the blockchain offering could have been a software product offered by ITAMCO, but it would have distracted the parent company from its core business and prevented the technology from making a broader impact.
“We want the region to grow and the people and community around us to participate and grow the company,” he says.
Neidig says that as a spin-off, SIMBA Chain was able to avoid gaps in critical funding. Its ability to make strategic hires and cover administrative costs, for example, was less complicated, allowing fundraising dollars to go directly to ramping up development of the product and getting it to market.
“We are more risk averse than a traditional startup, but we are focused on bootstrapping the company ahead of time with large contracts with customers, including ITAMCO, so we had revenue coming in sooner than many startups are able to,” Neidig says.
What’s in it for me?
Parent companies like ITAMCO mitigate some of the risks of pursuing a commercialization opportunity by relying on outside investors to fund parts of the new business. Neidig says they have also learned the value of hiring a seasoned CEO who understands the technology, such as CEO Chad Barden of Atlas 3D.
How ITAMCO functions sets up its spin-offs to be successful as well. Inside the company, agile development teams carry out initial research and development, and then they partner with Notre Dame to incubate technologies. If an organization doesn’t have an innovation mindset and structure, spinning out a technology or business can be a challenge.
For startup leaders, making professional connections to grow their business requires a lot of time and energy. Being associated with a parent company allows leaders like Neidig to benefit from networks already tied to the parent company and its reputation. The spin-off can make progress faster using those connections.
From an investor’s standpoint, analyzing a spin-off deal versus a traditional startup deal is relatively the same, Ferlic says. If the terms are right, and there is value in the solution, it is worth consideration. One competitive advantage to the corporate spin-off in terms of valuation is often having a built-in customer: the parent.