By Joe Rife
A Business Opportunity Opened Through Open Innovation Thinking
What is an Orphan Product?
Orphan products result when the business case to either continue selling an existing product or add a new product is not strong enough to meet strategic, financial and operational goals of the company.
Orphan Products are Inevitable
New product development projects take months and sometimes years. Initial enthusiasm generates momentum as technical issues are resolved and the marketing plan qualified with customer data. Even very promising product concepts may not launch because of practical business considerations:
Changing economic, market and business conditions
Contribution margin lacks financial impact
Not aligned with existing and planned company facilities and resources
Not aligned with current strategy or operations
Market and technology risk
These same factors weigh on the decision to continue support to existing products, especially those that address smaller, specialized markets.
Alternatives to Write-off and Abandonment
The “orphan” decision invites consideration of ways to find value. Conventional wisdom generally wins, supporting “cutting losses” and redirecting resources. Sometimes, not often, the company recognizes salvage value. Three ways for finding value in the future life of an orphan product follow:
Spin the product out as an independent entity within the current corporate structure: May solve structural issues while retaining ownership and establishing an exit strategy
License the product or create a joint venture with an industry partner: Makes it someone else’s problem and establishes claim on future earnings
Create a startup: Opens door to independent business strategy and outside investment
Investment Considerations
This article argues for serious consideration of the startup strategy. Startups offer several advantages:
Lean and highly motivated team
Ability to attract innovative, highly qualified technical staff
Cost advantages
Upside potential
Limited risk
The startup business needs to embrace the orphan product. Companies generally see startups at the prototype stage. This is too late! The company needs to think like a co-founder. A good terms sheet will recognize the startup partner is early stage, even when product concept and market seem well defined.
Prepare an offer package and invite proposals
Provide a grant to seed the venture with downstream financing contingent on team and business plan
Plan for additional rounds with possibility of participation with other investors
Consider both financial and in-kind investment options
Provide upside equity opportunity to the founding team and early employees
Be realistic about the practical limitations of both partners
Most important, locate the new venture in an “innovation community”