Back in 2014, the main problem for Fog Creek, the 15-year-old software business where I work, was Trello. It was a good problem, actually. Since launching in 2011, it had grown quickly. We wanted to raise venture capital to support further growth, but investing in Fog Creek wasn’t an option–it was too confusing a proposition for investors, and we didn’t want to give up ownership.
So after some consideration, we decided to spin off Trello as its own business. It wasn’t our first time taking this approach, having successfully done the same in 2010 with Stack Overflow, the Q&A site for developers that we co-created.
Here’s what both of those experiences have taught me.
Running any business, you’ll always come across new opportunities you’d never expected. Rather than pivoting to the one you think is most likely to succeed, you could instead use your current company’s resources to prove it out first. That’ll show potential investors that there’s demand for the product and that the team can deliver. And with more proof of the venture’s viability, you can often secure better terms.
The benefits aren’t just financial though. By spinning off a business, you can create a “pure-play” and rally staff around a single mission. That single mission is important for customers, too; as Matt Mickiewicz, founder of SitePoint has written, “people can only associate one thing with a name.” That’s one reason Mickiewicz says his decision to spin off Flippa from SitePoint was an easy one.
But just because it might make sense to spin something off doesn’t mean it’ll be easy. In my experience, these are four of the key considerations you’ll need to weigh.
You can expect to confront resource allocation issues as you build out the new product. For us, the resources to develop Trello were a trade-off on delivering quickly on the roadmap we’d laid out for FogBugz and Kiln, our existing, profitable products. We couldn’t let those starve or stagnate, so a delicate balancing act followed. And these issues don’t end immediately after splitting off, either. You’ll still need to backfill the positions of those who’ve moved on to the new venture.
However, these headaches are only temporary. How temporary depends on the business and how the new venture has been created. When SitePoint spun off 99designs, in just six weeks, it had an MVP ready to go and launched fully just six or seven months later. AdWerx, incubated inside of ReverbNation, on the other hand, worked on its own separation for over a year before finally launching.
Resource-sharing can be a benefit, though. Finding office space, for example, is often a big distraction. When co-creating Stack Overflow, some of our staff worked out of Fog Creek’s office for a while before they moved into their own space. And Trello actually continues to share the Fog Creek office, which has meant it can grow without having to worry about where all the people were going to go.
Spinning off a company can be an emotional thing, especially when friends and colleagues move around. Stack Overflow grew quickly, so at times going into the Fog Creek cafeteria to a sea of unfamiliar faces could be disconcerting. Also, people differ in their comfort of risk. The typically risk-tolerant founders need to consider the differing outlooks of those they employ. Getting into the startup game, however tangentially, wasn’t necessarily what they signed up for.
This was an important aspect at Fog Creek, an established company with profit-sharing. The resources invested into the spinoffs would otherwise have contributed to the end-of-year bonus pot. So it wasn’t just the company’s money at stake but, to many, a sense that they were investing, too. All Fog Creek employees got stock options in the spinoffs, of course.
But when employee compensation is potentially impacted in any way, it’s important to get the details–and the communication of them–just right.
To do that, managers should explain exactly what’s going on–in detail. The key is to prevent employees from having to make incorrect inferences. This is something we got better at each time. Ahead of the Trello split, our founder, Joel Spolsky, gave a presentation about the problems we were trying to solve, the solutions we researched, and the path forward we proposed. That mattered a lot. This approach, with lots of time for questions, helped to head off any potential misunderstandings.
The communication links need to continue after the spinoff, too, especially if you still share resources. Otherwise even little issues, like confusion over meeting room bookings, can go unresolved and affect inter-company rapport.
How and when you spin off can impact company culture, too. The Stack Overflow split happened early on, with just a few Creekers involved. Also, from the outset, co-creator Jeff Atwood had his own team working on it as well. So when the company was spun off, a different culture quickly developed than what had existed previously at Fog Creek. Whereas Trello grew with a large team of ex-Creekers, they stayed in the same office and carried on a culture much closer to the parent company’s.
Culture differences aren’t necessarily bad, but it shows how even logistical issues, like timing and office space, can have an impact on other, seemingly unrelated things.
Finally, you’ll want to think through how the companies will function after they’ve split. Between Fog Creek, Trello, and Stack Overflow, there’s what we call a shared operating system. This comes primarily from the founders, Joel Spolsky and Michael Pryor, who remain actively involved in all the companies.
The result is that while each company is customized to its own needs, they all share a philosophy and approach to business. They evolve on their own, but each of their experiences all feed back into the others’. So, for example, we’ve taken the successful approach to sales from Stack Overflow and applied it at both Trello and Fog Creek. The same goes for recent improvements in our paternity leave policy–it was a well-received change that has now been adopted across the companies.
That shared operating system extends to our hiring process. The benefit of that is employees often move between the companies, which is good for retention. When you’ve been doing the same thing for a couple of years, you can get the itch to move on. For us, that move can just be to a sister company, so we don’t lose a great employee altogether.
Ultimately, there are many logistical, resource-related, and cultural issues to work through. But as Stephen Chen, former director and senior counsel of M&A at VMWare, writes on Quora, “those can all be worked out if the fundamental business proposition is worthwhile.” So the next time you’re thinking of pivoting, consider whether a spin off may actually be the better way to go.