Why do employees leave to start their own firms, and how do they build their founding teams? Recent research by Shah, Agarwal, and Echambadi, titled “Jewels in the Crown: Exploring the Motivations and Team Building Processes of Employee Entrepreneurs,” aims to answer this question. The authors held in-depth interviews with founders and cofounders of unique spinout companies in the disk-drive industry founded over a 20 year period.
The findings challenge the conventional idea that teams working on innovation projects leave together to start a new company. Instead, most spinouts have a “ringleader,” an employee who ventures out and actively chooses the best potential cofounders from their network, usually coworkers in the same company. The main findings and implications of this process are discussed in more detail below.
Ringleaders are motivated primarily by the opportunity to create, especially when their parent company restricts them from doing so.
The primary motivator for ringleaders is to create something new in an environment where people share their same values.
This motivation is especially reinforced when bureaucracy or other frictions in the parent company prevent ringleaders from pursuing their ideas, or when there is a fertile startup environment that attracts them. About a third of ringleaders each mentioned bureaucracy and strategic disagreements with their managers as motivations for starting their own companies. Nearly all ringleaders and cofounders also mentioned the exciting opportunities presented by the industry’s high growth phase at the time.
Motivations that were absent were also revealing. Ringleaders rarely mentioned a lack of promotion opportunities or monetary incentives as motivation for starting their companies.
Ringleaders select cofounders with different skills but similar values.
Once they decide to start their own company, most ringleaders select a team of cofounders. Cofounders, in turn, are more motivated by the benefits of starting a new company rather than negative factors at the parent firm. Unlike the ringleaders, one third of cofounders also mentioned the possibility of returning to paid employment as a potential safety net.
The majority of ringleaders choose cofounders who share complementary skills and knowledge, but hold the same values for how the new company should operate.
Equity was one of the most common values mentioned, both in terms of stock ownership and fairness in rewarding contributions. Nearly all ringleaders and half the cofounders mentioned it as a reason to spin out and as a fundamental value of the new firm.
Ringleaders are very careful not to exploit technology or ideas from their original employers, even if they are willing to poach talent.
Interestingly, ringleaders are careful not to use intellectual property or technology from their host firms without prior consent, largely to avoid legal battles, even though they often poach talent. Many ringleaders in the study either made sure to create a completely different product or sought explicit permission from their employers to pursue a specific idea. Ironically, many founders reported that their employers were significantly more concerned about the loss of talent than the use of their intellectual property.
Founding teams with complementary skills and shared values were much more likely to succeed.
The study found that 88 percent of firms with above average technological capabilities who survived past 5 years engaged in all aspects of the team building processes, where the cofounding team shared the same values but held strong, complementary skill sets. In contrast, only 17 percent of the firms with below average technological capabilities who did not survive beyond 5 years had founding teams with these characteristics.
The original study can be accessed here.
Contributed by Maha AbdelAzim