By Praveen Arivazhagan and Chris Stutzman
More corporate leaders than ever are sharpening their focus internally to build their next big business. But to make their venture-building investments turbocharge market cap growth, many need to radically change their company’s mindset.
Business leaders directed an average of 15% of their operating budget toward venture building in 2023 — almost double the amount in 2022, a recent EY-Parthenon survey of 1,000 C-suite executives showed. These executives believe they have achieved some success: 45% of respondents launched a venture generating at least US$100 million in annual revenue in the past five years, an argument to potentially shift even more corporate development funding to venture building.
Yet for a large-cap corporation, the incremental value of a new business must be much more significant to noticeably grow the organization. These companies need to develop a “corporate unicorn” — a new business that can scale at a higher multiple than its parent and contribute at least an additional US$1 billion in market cap.
Not surprisingly, ventures that achieve corporate unicorn status are a select few. Why? Despite the many competitive advantages (or endowments) at the disposal of large corporations, scaling an enterprise venture presents a unique set of challenges that requires a specialized approach to business-building.
Departing from legacy approaches is a must, given the speed with which new businesses now grow. For example, in his book “Creative Destruction,” Richard N. Foster revealed that the rate that companies fall off of the S&P 500 is accelerating. In 1958, the lifespan for a company on the list was roughly 61 years, a figure that fell to just 18 years by 2017.
That’s why CEOs of large corporations must change the way they approach new-business building, by pairing the nimbler practices of the venture capitalist (VC) world with their significant endowments their corporations can invest.
The venture building mindset
One out of four executives whose latest venture had significant impact on mid- to long-term growth say launching a development program to educate leadership and foster venture-building capabilities internally was the most important measure of their venture-building endeavors.
A practical strategy of educating leadership on corporate venture building is to align early with stakeholders and sponsors on what success looks like at different stages of the venture lifecycle. When leaders recognize that KPIs of a new venture will differ from those of a traditional capital expenditure project, the likelihood of success increases substantially.
Companies whose ventures reached the highest level of revenue, at least US$1 billion, are 20% more likely to prioritize customer adoption, loyalty and acquisition cost indicators during pilot and growth phases than other corporate ventures that focus primarily on revenue growth and operating margin. Achieving early wins in customer adoption, loyalty, and acquisition cost indicators that prove out value proposition stickiness builds conviction among stakeholders and sponsors, paving the way for the venture to mature efficiently.
Accelerating scale-up while minimizing costs
Corporations possess significant competitive advantages to test and scale ventures into adjacent or entirely new fields of play.
Large existing customer bases offer data and segmentation capabilities for personalized, targeted offerings. Unique distribution networks can reduce go-to-market costs and enhance customer experience. Having brand equity can increase the probability of trial and extend customer lifetime value. Holding proprietary data and solutions can build competitive moats against both incumbents and disruptors.
Still, while more than one-third of business leaders agree that their endowments helped them reduce cost, accelerate time to market, and de-risk their venture building efforts, fewer than a quarter of them believe they translated those endowments into a sustainable competitive advantage for their new ventures. So how can corporate venture builders bridge this gap?
In addition to educating the leadership team, standing up a dedicated venture-building team with the skill and will to move quickly — and that also has strong relationships within the broader organization — can help avoid conflicts. Having that team in place can also make it easier to strategically plug an incipient venture into the larger organization without constraining that venture.
Establishing a fit-for-purpose operating model to tap into key subject matter experts provides access to the gatekeepers of the organization’s most differentiated assets. Constructing an internal network that foments cross-pollination between the venture and the core business is essential for harnessing organizational endowments to scale corporate ventures into sizeable, sustainable businesses.
Principles for establishing a venture-building engine
Five key steps can help business leaders of large organizations consistently grow new ventures into the next corporate unicorn:
1. Get buy-in: Align key decision-makers on a clearly defined set of success criteria to ensure new ventures get the appropriate amount of runway to succeed.
2. Keep it separate: Ringfence personnel, resources, and capital from the core business, so the venture does not compete with core business priorities yet can still tap the endowments of the core business.
3. Reward quick wins: Deploy a series of capital funding rounds as the new venture reaches milestones that prove its viability and build the business with conviction.
4. Don’t go it alone: Deploy a “build, buy, partner” model that uses internal endowments, brings along ecosystem partners, and strategically acquires complementary capabilities, market access or both.
5. Cross the chasm by starting small: Use bite-sized experiments that identify a scalable recipe at low cost or risk, rather than making a large investment in untested solutions with a high risk of failure.
Venture-backed startups have been disrupting traditional businesses for years. To develop their own disruptive corporate unicorns, CEOs need to change the incumbent mindset by adopting a venture-building model that mirrors key traits of a VC model while using the endowments their company can invest in it.
Learn more about how the EY-Parthenon Corporate Venture Building team helps companies originate, build and scale new businesses and reimagine their core business for growth.
Praveen Arivazhagan is the Chief Venture Builder and EY-Parthenon Americas Venture Building Leader, Ernst & Young LLP.
Chris Stutzman is a Principal with EY-Parthenon Venture Building team at Ernst & Young LLP.
EY-Parthenon Venture Builders, Anand Ganapathy and Daniel Weil also contributed to this article.
The views reflected in this article are the views of the authors and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.
