Spinning Out from Shell: A CEO Shares Advice

By Nora Swidey |  August 18, 2022

Cumulus Digital Solutions, a Cambridge startup that uses software and sensors to analyze and record the quality of manual work, spun out of the Shell TechWorks innovation center in 2016. Co-founder and CEO Matthew Kleiman discussed how he and his team spun out Cumulus from Shell; why spin-outs fail so often; how Cumulus avoided that fate; and advice for startups looking to work with large corporations. 

History of Cumulus

Shell TechWorks was founded in 2013 after the Deepwater Horizon oil spill in the Gulf of Mexico, with the intention of improving the safety and quality of mission-critical systems by incorporating expertise from other fields. “It wasn’t started with the express purpose of generating a spin-out. It was just something that we thought could happen one day,” Kleiman said.

Matthew Kleiman, co-founder and CEO of Cumulus Digital Systems.

By 2015, Kleiman and his co-founders had developed some of the foundational technology for would eventually become Cumulus. While observing a pipe assembly project on a trip to Samsung Heavy Industries in South Korea, Kleiman thought, “There’s got to be a better way to do this.” 

The company’s prototype workflow software collected data from the torque wrenches used to secure bolted joints — like who had completed the work, and the quality of the work. 

After testing their product in Singapore, Kleiman and his team found they could reduce oil leaks from occurring at roughly 10 percent of bolted joints on piping and other equipment fixtures, down to just 0.1 percent. After this success, they knew they were onto something, but knowing how tenuous spin-outs can be, they proceeded with caution. 

Spin-outs usually fail because they never are actually fully spun out. There’s always a little bit of the company that’s held back… because the technology is so valuable that the company doesn’t want to actually let it go.

Why Spin-Outs Fail

Prior to making the jump to a full spin-out, Kleiman and his team wanted to understand why spin-outs fail so often. 

Kleiman concluded that spin-outs often lack true independence. They’re not a corporate offering, and not really a startup.

“Spin-outs usually fail because they never are actually fully spun out. There’s always a little bit of the company that’s held back… because the technology is so valuable that the company doesn’t want to actually let it go,” Kleiman said. 

He said employees of the spin-out company can also make or break the process. 

“A lot of spin-outs fail… when the early employees have only worked for that large company, and don’t have a broad set of experiences,” Kleiman said. 

Stepping away from the security of a large company can be a psychological barrier to a true spin-out for many employees. 

“The other thing that often happens is the employees who know the technology best and are the natural founding team, don’t want to give up the security they have in a large company,” Kleiman said.

Determined not to fall victim to the same fate, Kleiman and his team made sure they were all prepared to take the big risk. 

“If you’re going to truly be an entrepreneur, be an entrepreneur. That involves taking risks. If you take the risk out of the equation, you’re not really dedicated to making this thing work,” Kleiman said. 

When Cumulus left the mother ship in 2016, it had a team of nine who left Shell. Within the first year, the venture doubled in size, hiring completely outside of Shell. Many members of the Cumulus team had experience working at other startups. 

Challenges Cumulus Faced

Even with the Cumulus team’s advanced planning, the spin-out and early growth process did not come without hurdles. Kleiman recalls a major technical challenge the team faced in scaling up their software, going from a pre-spin-out pilot test of 3,000 bolted joints to meeting a customer need to use the software for 120,000 bolted joints. The team successfully reworked the software so it could handle projects of that magnitude. 

“That was one of the many times that the company could have died,” Kleiman said. 

For the most part, though, “the moment we left [Shell], it became a very typical business development story,” Kleiman said, meaning that Cumulus had to hunt for early customers who were interested in its offering. 

Cumulus’ flagship product, the Smart Torque System, captures data directly from tools to better understand the quality of manual work.

Advice for Startups and Other Would-Be Spin-Outs

Now, four years after fully spinning out from Shell, Cumulus is very much its own entity. Apart from a small royalty that they pay Shell on sales as part of their IP license, Cumulus is an independent Delaware S Corp. 

It has had multiple rounds of successful fundraising and has found big customers other than Shell, including United Rentals, an industrial and construction equipment rental company. 

Kleiman said he predicts that by the end of this year or early next year, data center clients, who use the product to assemble high voltage electrical connections, will overtake oil and gas as its biggest client sector.

“It was an important milestone for us that [Shell is] no longer our largest customer,” Kleiman said. 

Cumulus’ heritage was an advantage in the early days of partnering with large companies. Having Shell, a major corporation, on their list of existing customers from the beginning, helped foster trust with other large companies.

Because of Kleiman’s experiences at Shell, he said he also understood how large corporations view startups, which allowed him to pitch to them more effectively.

For startups without a long list of brand-name customers, Kleiman suggested focusing on ensuring the company can scale up and deliver. During Kleiman’s time at Shell, he says he saw many small companies fail when it was time to transition from a small pilot test to a full-scale deployment.

“That’s a huge point of failure for a lot of companies that we saw when I was a customer of these technologies in Shell,” Kleiman said.

And to intrapreneurs who believe they have an idea that is worth spinning out, Kleiman advised evaluating whether they really have a scalable product. 

“Assume that you [will] never get $1 of business from whatever company that you’re in. How is this going to actually work as a business without that initial one customer?” Kleiman said. “Once you’re out, you’re out. And so you are a vendor: you no longer have special status; you’re no longer on the same email system; you no longer have access to people’s calendars. You are selling back into that same company. My advice is, just because you’ve had internal success doesn’t mean you’re going to have external success.”