Separate company for an unrelated product

The same problem is being faced at my day-job company (mobile software) - we have two separate and distinct product lines (b2b communication middleware vs. b2c mobile coupons), with no overlap as far as customers go. Organizationally speaking, the marketing resources and efforts are distinct too, but there's overlap as far as engineering resources.

In our case, it has been determined that the "newer" product line needs to stand on its own legs, and not be handicapped by the budget constraints that are applied to our regular line. Specifically, the management feels that new funding can and should be raised for it, without the baggage of having to prove how the funding would not get redirected to other efforts. This is after nearly two years of facing questions from our existing customers regarding our overall vision and how the product lines tie together (they don't!)

So the strategy that is being put in place is to spin off the line as a new company (not a wholly owned subsidiary), with some key employees being offered the choice of where they would like to go. We're hoping that because of the traction that the new product already has, raising funding will not be an issue and any manpower gaps can be filled in relatively quickly.

So my take on your questions would be:

Yes it is acceptable to create a new company. We found that there was quite a bit of precedent for doing so in our industry

The decision to spin off or retain as a separate division should be determined by a number of factors, including:

1. Whether or not it confuses your customers

2. Whether or not it makes financial sense for the company (are you willing to take a possible loss on your books for the first X quarters while your new business gains ground)

3. Whether or not it dilutes your existing recognition

Good luck either way! No two companies are alike, and what works for one may not for another.

It may actually be appropriate to set up a new company - unless you want to piggy-back on your brand for the old product.

From a business perspective, your P&L in the development and launch of this new product should probably be absorbed (and losses carried forward) on its own right including all sunk costs for R&D.

Another reason to set up a new company is to insulate liability. Any claims by customers of the first product shouldn't sink the new product or entity - a separate entity will insulate you from that happening. Likewise for protecting the new product assets, whether intangible or tangible.

There are a number of strategic considerations when you are building your empire. Tax and legal considerations are just two.

Unless you need the product branding of the first entity, I would probably recommend setting up a new company for the second product. I can't think of any downside but can think of substantial upside.

Good luck!

Ideally, you would separate the two efforts so that the individual teams can focus on the end products. That would mean you would setup a separate entity that would handle the new product.

Practically, you might want to hold off on spending the money until you have some traction. One thing that companies do is setup a "Labs" division that incubates technology and products until they are ready for a formal business structure. You may want to consider that as a way to separate the effort yet not spend the overhead on a formal entity until you have too.

I don't think you have to worry too much about the customer reaction or confusion until you gain traction with the new product.

If you plan on doing this more often, you might want to create a parent company that owns these divisions or other companies. That way, you can build it out under a different brand and not worry about your main line business getting confused.

For example, you could call the parent company "The Innovation Group" and have your desktop brand and then your web brand under it. Clearly, this will cost some money up front but might be a better way to go if you plan on doing more of these.