A tech spin-off investment is a no-brainer for VCs because of their access to the resources, reputation, and management of its established startup parent company. Piggy-backing on the strengths of a proven Silicon Valley winner makes for a less risky investment. VCs love a tech spin-off, and there are 5 basic reasons why.
Investors want to know the product or service they are putting their money into has a sufficient market to ensure maximum success. A spin-off is able to determine where and when there are available opportunities due to being able to use the resources of its parent company. Investors can rest assured that the new business has done the proper research with the assistance of industry leaders before launching.
The reputation of the tech spin-off’s parent company affects how promising investors think the spin-off will be. If the established business has a viable product that has been tested, improved, and marketed successfully, then its spin-off has higher chances of experiencing the same kind of accomplishment in the marketplace. The combination of low risk and potential high returns make VCs flock to these enterprises, especially to make up for any losses from investments in unprofitable start-ups.
This is just as important as the product or service is the team behind it. VCs often judge the management behind the spin-off before making a decision on whether or not to invest. How well the business operates, especially at the top level, may be a better indicator than the product or service of how successful the spin-off will be.
An Uncommon Enterprise is Ripe With Possibilities
Although spin-offs have higher chances of success, they are not as common as other types of start-ups. This may be due to entrepreneurs putting more focus in a single, unique idea than in branching off of existing ones. Spin-offs tend to be found in the academic and technological industries.
Benefits for Tech Spin-offs
The increased likelihood of investment brings benefits to a tech spin-off as well. This start-up has more options from which to choose, and therefore more control over the terms of the financial agreement. It may also be able to go longer before needing to obtain venture capital because it can rely at first on the resources of its parent company. During that time, it may be able to gain some traction and become even more attractive to potential VCs.