In late April 2024, the Federal Trade Commission (FTC) made a historic decision to pass a rule banning non-compete clauses for all workers in U.S. industry, with a few exceptions for senior management. I’ve made a decision. Far from hurting businesses, this new ban opens the door to innovation, higher wages, and market growth, making everyone a winner: employees and businesses alike. According to research in our new book, SPINOUT VENTURES, the biggest winners may be spinout entrepreneurs.
spin-out venture
A spinout venture is a start-up business founded by an entrepreneur who is a former employee of an existing organization. They outperform other types of startups due to the knowledge, networks, and capabilities inherited from their parent companies. Non-competition often has a stifling effect on spin-outs and employee mobility.
The myth of non-competition and entrepreneurship
Despite the famous legend that many successful entrepreneurs drop out of college and start their businesses from spare parts in their home garages, most entrepreneurs have previously worked for other companies and in the process built their businesses. You’re absorbing important lessons and skills about how to do things.
Unlike intrapreneurs, who are content to work on their venture within their current employer, spinout founders launch new startups independently from their employers. Also, unlike corporate spinoffs, where an existing business unit is converted into an independent company due to management misconduct, spinouts tend to be initiated by small teams or retired individuals. For example, Zoom attracted his 40-plus employees from Cisco in its early days, but after the founder stepped down due to strategic disagreements with Cisco executives over funding priorities, they They didn’t retire all at once, but one by one.
Unlike the mythical garage-and-dorm-room entrepreneurship, where self-made individuals build something from scratch, spinouts create a rich learning environment that founders and early employees experienced in their previous jobs. benefit from. Because of their shifting work routines and networks, spinouts tend to scale faster and last longer than other types of startups.
The research legacy of the late Professor Stephen Klepper explains how spinout mechanisms led to the success of clusters like Silicon Valley. Recognizing that founders of spinouts typically want to remain close to their parent companies so they can leverage their network of stakeholders and do not want to be separated from their friends and family, California requires non-compete was the first to ban it. These preferences result in agglomeration of firms in a particular geographic region and create synergies between firms with similar origins. For example, Intel and AMD spun out of Fairchild, and Fairchild itself spun out of Shockley, all of which were founded in the Valley.
Benefits not only for spin-out entrepreneurs but also for the parent organization.
What has received considerable critical attention in the media regarding the FTC’s ban is the potential downside for employers, who have suggested that this could weaken their competitiveness or hurt their company’s stock price. ing. However, this narrow thinking overlooks the potential benefits for the other side of the equation: employees who have ambitions to leave and start a new company.
Spinouts are not only good for the economy because they encourage clusters, but they can also benefit the parent company. Single organizations tend to have limited resources to take advantage of all the innovations they generate internally. As a result, many of the innovations and ideas that permeate a particular company end up being exploited by someone else.
Encouraging employees to pursue peripheral opportunities outside of their existing company and establishing a separate company can improve company coherence and strategic alignment, allowing them to focus on their core business. Spin-outs often become licensees, new customers, or suppliers of the parent company. And some spin-outs generate new knowledge that can spill over to parents. Spinouts are easier to integrate because routines and knowledge are transferred and can be ideal targets for later acquisition.
Companies can choose to develop a reputation for innovation and attract more talented employees, some of whom may be spun out but most of whom may remain as valuable core assets of the business. is high. Or do they want a corporate culture imbued with the chilling effect of a litigious employer pursuing former employees?
Examples such as Nokia, AstraZeneca and Palantir, which are the parent organizations of many spin-out ventures, suggest that being seen as a leading incubator of innovation and new business development is a good business strategy.
As studies of jurisdictions exacerbated by bans have shown, we can expect a boom period for spin-out ventures that compete with their original parent organizations. However, eliminating anti-competitive conduct is not a panacea. This is because other restrictions such as non-solicitation (no poaching) and non-disclosure agreements remain in effect. These restrictive covenants provide parent companies with legal tools to prevent valuable resources (customers, employees, confidential information, etc.) from being exposed to external parties.
Written by Dr. Andre Laplume.
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