Corporate castoffs bring new life to VC

As an Intel subsidiary, the PC management software maker enjoyed moderate sales for about 12 years. But in 2002, the chip giant decided to spin it off as a separate company. And in 2006, Landesk Software was acquired by Avocent for $416 million.

"It was sort of 'Let my people go,'" explained Bart Schachter, an Intel era Landesk employee. Schacter is now a partner at Blueprint Ventures, a venture capital firm that is trying to build a franchise by creating start-ups out of corporate castoffs.

Large companies regularly spin out divisions: Agilent Technologies out of Hewlett-Packard, Spansion out of partners Fujitsu and Advanced Micro Devices. Private-equity firms in recent years have made a cottage industry out of buying large divisions and restructuring them. By contrast, Blueprint seeks to refurbish small groups, typically made up of about 10 to 20 employees, likely slated for oblivion or irrelevance inside their corporate host.

Over the last 10 years, Blueprint has completed 13 deals and, so far, not one of the spin-offs has gone out of business, a low rate of mortality in the venture capital world.

This week, the firm participated in the spin-off of IntelliPath, a division of Brocade Communications that makes cable management hardware.

One of Blueprint's more novel deals revolved around SpectraSensors, which sells a laser-based sensor. The basic technology was devised at NASA's Jet Propulsion Laboratory in Pasadena, Calif. The Mars rover incorporated some of the sensors to help it detect water on the planet.

SpectraSensors now sells the sensors to oil and gas companies to detect leaks on pipelines.

Corporate spin-offs differ from private-equity buyouts in scale. Instead of hundreds of employees, these divisions involve only a few people, and they may not have established or significant lines of business. Still, the size doesn't mean that these deals are easy. Another venture capitalist said his firm, like several others, avoids spin-offs because of the work involved in unwinding these deals.

Schachter, though, asserts that the growth in spin-offs is almost a foregone conclusion. When new, promising markets emerge, organizations rush in to build or buy a new division. As a result of these binges, large companies invariably amass sprawling technology portfolios. Unfortunately, they manage only a few product lines adequately.

"Things that aren't core to their multibillion-dollar businesses just aren't interesting to them," he said. "Five years from now, Google is going to be a great hunting ground for spin-offs."

From a financial perspective, a huge part of spin-off appeal is the fact that a huge part of the work required to get a company off the ground has already been accomplished. The parent company has likely conducted extensive research, product testing and marketing. A team of engineers already exists. At the same time, the prior history means that the new investors have to put less money into the company to get it running. The typical investment hovers around $5 million to $10 million.

"There is a lot more comfort for all parties," he said. "A year ago, we saw about a quarter of the number of inquires that we saw a year ago. A year from now, you are going to see it double again."

A few quirks of the legal system also make it an attractive way to go. If a corporation owns 20 percent or more of a company, it remains a subsidiary and stays on their books. Thus, in a spin-off situation, parent companies want to keep just 19.9 percent of the company.

"It's the opposite of most situations, where the entrepreneurs want to keep 90 percent of it," he explained.

Additionally, if the division to be spun off was acquired in an acquisition, the parent company can write off the cost.