Strong spin-outs and weak parents don't mix!

Creating spin-outs from a weak parent can be fatal – no matter how good the new venture. I suggest you sit comfortably and don’t read on if you are of a nervous disposition.

A company I know went through a great public offering and reached near a half-billion dollar valuation based on a series of spin-outs and a pipeline of IP. I know them pretty well so this was a pretty thin story but the market bought it (literally).

In the middle of all this excitement was an attractive little spin out with a novel approach to optical transmission. I would explain but that’s as much as I can remember or dare to try to explain at the moment.

So anyway – they had gone through some early rounds when over a few months, the parent hit trouble with the markets. The shares fell faster than a pigeon with a rocket plummeting to its doom. In the end, the company was valued at around $10 million – even though they had near $50 million of ‘value’ in spun out subsidiaries and investments and $30 million in the bank. I’m no Gordon Gekko but even I saw a possibility here but sadly the situation meant you would not have been able to convince enough shareholders to sell.

Back to our heroic start-up which is now trying to raise a $7 million round. Look at the maths. People could pay several million for a small part of the spin out or seemingly a large chunk of the parent (and hence a bigger stake in the start up). Things did not go well and the start up is no more I am afraid. The logic of investing was clouded by its ownership structure and it died.

The identity of these companies has been disguised to protect the guilty. The value of your investment can go down as well as up. No animals were hurt in the making of this story.

© Copyright Richard A D Jones 2005