DESPITE their challenges, economic downturns have often been times of innovation, as forward-looking entrepreneurs look to set up for eventual recovery. For example, recall that companies like Airbnb and Uber emerged during the 2007-09 Great Recession. Today, large established corporates - or incumbents - are also looking to reignite the entrepreneurial spirit of a startup by building new ventures outside of their core business.
According to a McKinsey survey, more than half of global executives now consider venture-building among their top three growth priorities, compared to 30 per cent before the pandemic. In Asia, this increase is even more pronounced: 55 per cent of respondents from the region consider venture-building a top-three priority, up from 20 per cent pre-pandemic.
Governments are also encouraging corporates to launch new ventures. In Singapore, the Economic Development Board (EDB) recently launched the Corporate Venture Launchpad, a S$10 million pilot programme to support large and established Singapore-based companies in incubating and launching new ventures to pursue growth. In addition to co-funding, EDB has appointed specialised venture studios, including McKinsey, to help these companies improve their odds of success.
However, despite this growing momentum for corporate venture building, success remains elusive. Only one in four new ventures launched by incumbents in the past decade have become viable large-scale enterprises today.
Why is this the case? Our experience working with corporates uncovered three common pitfalls: a lack of adaptability, an inadequate strategy for scaling up, and a lack of commitment from top management. Successful venture builders took the time to understand these pitfalls, and took proactive steps to avoid them.
Avoiding the pitfalls: Lessons from successful venture builders
Firstly, on adaptability, successful corporate venture builders understood that there will be bumps along the building journey, either from external market disruptions or internal teething issues. To better navigate these bumps, they create what we call "learning buffers" - budgetary cushions that allow them to adjust to changing conditions.
Successful builders also constantly test their new products or services with customers, combining qualitative feedback with rigorous metrics from product marketing or existing customer data. The resulting insights can unveil opportunities and identify potential risks early, giving them valuable leeway to react and pivot.
Secondly, on scaling, McKinsey's experience shows that underperforming venture builders are half as likely (23 per cent) as high performing ones (52 per cent) to have a strategy for acquiring customers profitably at scale.
Scale is crucial. Two-thirds of the value created from building new corporate ventures is achieved when the venture scales up to penetrate a significant portion of the target market. Successful builders use meaningful metrics that show real customer demand, not phantom demand that comes from unprofitable deals or blanket social media ads. They have a scaling plan from the beginning, including a clear strategy for attracting new customers profitably through initiatives like affinity programmes, or partnerships with complementary companies. Some pursued micro-targeting, going after specific, highly profitable niches.
Lastly, successful builders leverage the natural competitive advantages of their corporate parent to successfully build and scale new ventures. Unlike startups, corporate parents can offer resources like in-house talent, funds, market insights, brands, intellectual property, and data. To do this, top leaders have to give new ventures their focused attention, ensuring that they can acquire necessary assets and change processes as required. In one successful venture, the parent company established "startup-like" processes to ensure that the venture could recruit talent in less than a week and that it could procure raw material in the shortest duration possible.
Beyond addressing the pitfalls, having a long-term view is vital
In sharing how successful corporate venture builders addressed common pitfalls, one common thread ties these lessons together: having a long-term customer-backed strategy from the start with a process for validating it as new insights arise. Forty-seven per cent of ventures that scaled successfully reported having clear processes in place for the whole journey. Of those that failed to scale successfully, only 25 per cent had such processes.
How does one begin to conceive this strategy? Our experience observed that successful builders did the necessary homework to find sizeable, growing markets in which they could play. Many benefited from taking an "outside view", which means building a commercial assessment of a new venture by examining a reference class of similar ones. They also constantly ensure that the new venture solves a compelling need. For example, a Thailand-based Internet provider brought in its customer research team at the incubation stage of its new venture. That team provided valuable inputs on customer needs and desires, such as easy parental control of home Wi-Fi.
Other companies are taking advantage of the momentum for sustainable business opportunities, such as in low-emission energy production. In Singapore, for instance, a number of energy players have launched new sustainable ventures, or revived previous venture efforts that they had on backburners.
Leadership is critical to overcome obstacles
New ventures can be challenging for incumbents. For instance, senior leaders may have to deal with internal doubts that the company can succeed outside of its core business. They may also face investors who are sceptical whether new ventures can yield better returns than other growth opportunities. Operational obstacles such as outdated processes and slow decision-making may also exist. For example, we frequently see new ventures delayed because they share functions, such as HR or procurement, with their corporate parent.
It is therefore vital for the CEO and the head of the new venture to collaborate in overcoming these challenges. We have seen the effectiveness of this collaboration in a leading South-east Asian corporate, where the CEO and a board member made the new venture their top priority, and worked with the head of the new venture to ensure that the parent company rendered necessary support with minimal bottlenecks.
Persistence breeds success
On a more encouraging note, our research shows that practice makes perfect. Corporates that have launched at least four new ventures in the past 10 years were more than twice as likely to generate returns of five or more times their investment than less frequent venture builders. This suggests that venture builders can learn from experience and improve their rate of success. In fact, eight out of 10 of the world's largest companies are serial venture builders.
To get started, establish the right governance and support
To balance risk with execution speed, new ventures require a tailored, light-touch governance and operating model, tied closely to the top of the parent organisation. This could include a dedicated unit with specific talents, such as serial entrepreneurs, software or data engineers, and product designers. A number of leading companies, including one South-east Asian conglomerate, have achieved this by creating a "growth engine", a separate entity tasked with taking a strategic portfolio of ventures from incubation to scale-up and maturity.
Venture building offers incumbents a unique opportunity: the chance to marry their resources and experience with a startup's agility and rapid growth potential. That's a powerful combination, but one that can require major shifts in strategy, management, and operations for success. Done right, venture-building can help incumbents grow faster than their peers, respond better to volatility and shocks, and thrive in an age where corporate longevity is at an all-time low.
This article has been republished with permission from McKinsey & Company.
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