Should You Do Business With an Ex-Employee? – Featuring Jack Smith, President of Sanford Rose Associates® – Milwaukee

By Mark Henricks – Published on American Express – Open Forum,

After news anchor Soledad O’Brien leaves CNN, she’ll start doing business with her former employer as head of a new production company supplying documentaries to the news channel. That will let O’Brien pursue her entrepreneurial visions, while the broadcasting company can keep her familiar face on its shows. It’s an approach all business owners would be well-advised to use.

“Actually, working for a former employer is an absolutely typical path to entrepreneurship, and the employer is often delighted that it worked out that way,” says Rita Gunther McGrath, a Columbia Business School management professor and author of the upcoming book, The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast As Your Business.

Ex-employees who become entrepreneurial suppliers—or “extropreneurs”—can offer advantages for both sides. “Former employees are a good bet as they can often be trusted and know the company well, so it can work out as a win-win for all,” McGrath says. Companies often find it’s cheaper and simpler to contract former employees to do work that the same employees had done in-house, she adds.

It’s also very common. To begin with, experience gained working for someone else is by far the most typical source of an idea for a new business.

Sourcing an Idea

When researcher Amar Bhide, now a professor at Tufts University, surveyed fast-growing firms for his book, The Origin and Evolution of New Businesses, he found 71 percent were started by founders who “replicated or modified an idea encountered through previous employment.”

The next most common method for identifying a winning business idea was “serendipitously,” according to Bhide. Just 4 percent of the founders he talked to used a systematic search to identify a new business opportunity.

This finding is particularly relevant to small-business owners, because entrepreneurs are much more likely to have worked at small companies than large ones before venturing out on their own.

Trying to understand this phenomenon, researcher Simon C. Parker of the University of Western Ontario examined the possibilities in 2009. He found that the most likely explanation is that future entrepreneurs simply prefer to work in small organizations.

Jack Smith has experienced the extropreneur phenomenon from several angles. As a corporate employee with a large manufacturing firm, he initiated an in-house environmental remediation service that eventually spun off with him as the head. After that company was sold to another firm, he returned to the corporate world.

As a corporate human resources executive, Smith had one of his employees express a desire to start his own company. Smith not only encouraged him, he became a customer. “When he got set up and his partners were ready, I invited him back as a supplier,” Smith says.

Eventually, Smith himself left his job to start his own business. At Sanford Rose Associates, the five-person-retained search firm he runs in Milwaukee, Smith says it’s common for employees to get some experience and then leave to start their own firms. He’s fine with that, up to a point. “As long as they’re not taking my customers away, if somebody working for me wanted to launch something, I would facilitate that,” he says.
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