Despite ongoing economic uncertainty, businesses are increasingly enthusiastic about creating new ventures, according to McKinsey’s latest global survey on new-business building.1 More than 50 percent of surveyed CEOs cited new-business building as one of their top three priorities—unlike in the previous two years. And a majority of CFOs see business building as the single most likely strategic action on the corporate agenda. Investors are equally excited, valuing each dollar created in adjacent businesses at two times the rate of each one generated by the core business. In this episode of The Venture, Paul Jenkins, senior partner and global coleader of Leap by McKinsey, sat down with McKinsey’s Tomas Laboutka to discuss the survey’s findings, which include a priority on creating green and gen AI−related businesses, why the current climate favors incumbents, and the need to adopt a portfolio approach to corporate business building.
An edited transcript of the podcast follows. For more conversations on venture building, subscribe to the series on Apple Podcasts or Spotify.
Podcast transcript
Tomas Laboutka: Paul, welcome to The Venture. Great to have you.
Paul Jenkins: Delighted to be here.
Tomas Laboutka: Let’s go straight into it. Paul, McKinsey’s latest business-building report asked over a thousand business leaders what they think about building new ventures and why it matters. This has been a year full of headwinds, from the macro-environment to real shakedowns to geopolitics. What did we hear from the survey, and how much is business building top of mind among leaders we surveyed?
Paul Jenkins: It’s the fourth year we’ve been doing the survey, so we can track how people are feeling about new-business building over the years. I think we were all waiting with eager anticipation to see how much of a priority new-business building would be in the current macroenvironment. And the surprising, positive thing is that it has become a greater priority, with more than 50 percent of global CEOs naming new-business building as one of their top three priorities. That wasn’t the case in the past two years.
Tomas Laboutka: That’s quite surprising. What is behind it?
Paul Jenkins: I think there are two factors at work. New-business building is successful, but maybe more importantly, it’s also truly valued by the markets. We can measure the fact that one dollar created in an adjacent business has two times the value of one created in the core business. And that’s got something to do with the fact that it’s completely new revenue with higher growth, and the market clearly values that additional revenue you’re creating.
From our own businesses we’ve been building, we certainly see success. We’ve been privileged to build more than 600 businesses with our clients. You never achieve 100 percent success, but 90 percent of them are still around, and 70 percent of them have scaled. We’ve created enormous amounts of revenue, with 20 unicorns and a couple of decacorns (start-ups valued at $10 billion or above). So I think point number one is, if done well, it works, and the markets value it.
But I think there’s one other factor at play here. Because there’s less funding right now for start-ups and scale-ups, it’s slightly less competitive out there. So if you’ve got a proposition that is going to work, in most cases, it’s going to create value the market likes. But also, it’s a little bit easier because it’s just not quite so competitive right now.
Tomas Laboutka: That’s interesting. Among start-ups and founders, I hear quite a lot in terms of the fundraising winter. But it’s a little bit of a springtime for the corporate venture builders who are leveraging their unique assets. You have a leg up from the assets and then have less competition because of the fundraising.
Paul Jenkins: The other thing, of course, is the availability of talent, because some of those start-ups and scale-ups are not getting funding. And, for the businesses I’ve been building with my clients, it’s so much easier to attract distinctive venture-building talent willing to give it a go in the corporate environment if the conditions are attractive.
Tomas Laboutka: What types of businesses do you think leaders will prioritize building in the upcoming year?
Paul Jenkins: We see an interesting shift this year. Not surprisingly, analytics or gen AI−enabled businesses are top of mind for executives to go out and create. I don’t think we’ve seen too many of those yet. We’ve seen people dabble with gen AI for productivity, for cockpits, and software enablement. We haven’t seen too many of the truly disruptive gen AI businesses. But it’s definitely top of mind for executives who are thinking about the kinds of businesses they can create.
The second thing that’s top of mind, particularly in certain regions such as my own, Europe, is green business building, where the funding is still flowing. I think we’re all aware—painfully aware—of the need to take action here. So for businesses associated with sustainability and carbon capture, these things are definitely still top of mind.
What’s dropping down a bit in terms of priority are direct-to-consumer (D2C) businesses. The pandemic saw a huge lift in creating those businesses, since it was the only way to reach customers. Maybe too many of those have been built, but we see less priority for that type of business these days.
Tomas Laboutka: I imagine the pressure to make the unit economics work is adding to the pressure on many of those D2C businesses. The perspective for many investors is, “D2C is a channel, not a business per se. It has to make money.” But some of those were a lot more dependent on external funding that ultimately runs out.
Paul Jenkins: I think that’s right in the start-up space. In the corporate space, many of those have been built, and there’s a lot more you can do with them. But when executives are asked about the kinds of new businesses they’re going to build, they tend to focus more on things like, “What does gen AI enable for me?” But depending on the sector, this whole sustainability agenda is clearly still very much top of mind.
Tomas Laboutka: That makes sense and resonates with what we see on the ground as well. You also mentioned talent, and how it’s easier to find right now. We all know talent is one of the biggest unlocks, but what are the other ones?
Paul Jenkins: You just mentioned the single biggest one. It doesn’t matter whether you are a start-up or a corporate building an adjacent venture. The single most important factor is to get the right team, a diverse team, a team of talent that is going to get their hands dirty and really deliver and do things. Get that right and you have three times the probability of getting to scale with your corporate venture. I think that also goes back to why now—because it’s easier to put that corporate venture founder team together.
But there are four other unlocks we see as being critical for success. The first one is sponsorship. A new venture does need to be CEO- and board-sponsored. That helps attract attention and helps ensure they’ll not just fund it for a quarter and then give up to save money.
The next unlock is one many corporates wrestle with, which is getting the right governance in place and setting up your venture close enough to the corporate to exploit all those competitive advantages you described earlier. You need access to the brand, customers, and some of the partners. That’s the unique advantage you enjoy as a corporate.
But at the same time, you need to be far enough away so you can move at the speed and pace of a start-up, so that you can test and learn. Getting that right is easy to say, but harder to do, and we see it as the third key success factor.
Tomas Laboutka: This resonates big-time. As you said, it’s easier said than done. What I find helpful is having the sponsorship clearly aligned. Having a bold CEO who sees the next S-curve within the new business, who does see the two times the value you mentioned, and who is ready to roll up their sleeves and help unlock any of the synergies that you need, while being respectful and understanding the need to build a new culture. You have to be empowered, but not controlled.
Paul Jenkins: I’ve seen large respected global names who build businesses and get this quite fundamentally wrong. All the policies and procedures of the corporate are smothering this new venture, so it controls when you can market, how you can market, even blackout periods in advance of company quarterly results. If there are so many restrictions put in place, then it’s almost not worth trying.
The magic happens when you get that interplay you just described. You’ve got access to all of the unique advantages, but you’re also able to move at speed and pace. And yes, there are some checks and balances. You iterate your way to product−market fit the same way a start-up would.
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Tomas Laboutka: That’s really true. What’s important in building corporate ventures is stepping back and being clear with stakeholders by explaining how you’ll all review progress, unlock decisions, come to agreements, and move on. If you don’t do that in advance, it’ll come back to bite you big-time. In one of the ventures we are building on these principles, we started attracting digital talent. But suddenly, out of nowhere, HR issued a policy that the digital talent would have to clock in at nine every day and would have to dress up. It’s almost laughable. You just have to plow through many of these roadblocks.
Paul Jenkins: I agree. And I think your point is also well made. Because there are some things that are nonnegotiable. You are making use of these assets—the brand, the customer base. These are things that have real value, but you could do damage to them. So be very clear up front. What are the rules of the road for the new venture? Which customers can they reach out to? How can they reach out to them? How are you going to use the brand? Is it going to be the same brand? Are you going to have a sub-brand?
To your point about talent, which is so important, how are you going to think about the compensation packages? Or your example of what they’re going to have to wear. Go through that up front, being very clear around what things you can compromise on, what things you can’t, and also where the value is coming from. Then you avoid a lot of the pain later in the process.
Tomas Laboutka: That’s very true. We covered a few of the five factors. There’s the sponsorship, and there is being close to the mothership, but not too close. And of course, the talent, which we mentioned. What are the other factors?
Paul Jenkins: There are two more that come through for us loud and clear as real scaling factors. The fourth one is related to the funding. You do need to manage these ventures differently than a project or business unit. You need to think about funding for the long term. No unicorn was ever created in three or six months. You need to think about funding for the 12, 18, or 24 months it’s going to take to reach scale and prove success.
But at the same time, you can’t write a blank check. You need to be funding more like a venture capitalist (VC)—funding for results, funding for the first minimum viable product (MVP), funding for the first thousand customers. So the fourth thing is having control over the release of funding, anchoring it to success, and committing up front that you’re going to fund the venture long enough to see it through to success.
The fifth one is partnerships. Partnerships can help you access capabilities you don’t have from corporate or the corporate venture. But they can also be an incredibly powerful way to reach customers. We see close to two times the success for companies that very early on think about potential partners and, in particular, partners related to that go-to-market space.
It’s not about doing it all yourself. If I’ve got something that’s truly distinctive, it really is about, “Who out there can bring me capabilities?” or, probably even more importantly, “Who can get me rapid access to a broader customer base to sell my product and realize success?”
Tomas Laboutka: That’s so true, and it jolts my memory. Quite a while back, we spoke to Austin Bryan from CLP Group, who pointed out that sometimes corporate ventures try to reinvent the wheel and just build everything from scratch even though there are tons of the solutions available within partnerships. And from what I’ve seen, many of the corporate ventures might not do that as a first reaction. They actually do the opposite.
Paul Jenkins: And that’s very different from what a start-up would do. A start-up would be more likely to take things off the shelf because they just don’t have the money or the time to build it themselves. In the corporate world, you do have the money and time to build a lot of your own technology solutions. So it’s more ingrained to think that way. I think it’s important to challenge that mindset and recognize that there are so many options to get yourself to market very rapidly. That’s another example of a start-up lesson you can apply to the corporate world.
Tomas Laboutka: There are corporates who are not just building one venture and giving their all and doing everything right. They’re also building businesses at scale, building multiple new ventures at the same time, with an approach similar to that of a VC in funding them. I know we have quite a few insights on this. What are some of those insights you could share?
Paul Jenkins: First off, we see more and more companies—maybe because they’ve achieved success the first time—thinking about this as a portfolio and deciding they’re going to be serial business builders. They’re going to create a string of pearls with these new ventures. They’re not doing hundreds. They’re doing two or three ventures per year, but they have a much higher success rate. They’re building three successful businesses for every unsuccessful one.
Another powerful element they have is, because they think about these ventures as part of a portfolio, they close down or repurpose those that are not succeeding. If you’ve only got one venture, you’re more likely to keep on going and going, even if it hasn’t achieved product–market fit or liftoff. And that can be a detriment.
Whereas you could be thinking, “I’ve got three this year, I had three last year, and out of the six, one of them isn’t quite performing. Why don’t I then double down on the five and think about how I can extract something out of the sixth?” We see more and more companies doing this kind of serial business building. They also seem to be more successful at it, probably because they’re following proven success factors they’ve learned. But part of the reason they’re successful is because they’re closing or repurposing things that aren’t as successful as they would’ve liked.
Tomas Laboutka: I imagine that closing down or repurposing ventures that are halfway on the journey is not easy. Do you have some war stories and examples where you faced difficult choices when you might not have been 100 percent sure? Where there’s some traction, and success is maybe just around the corner? What are some of the lessons learned?
Paul Jenkins: I think the first lesson is that it’s much easier when you’ve got a portfolio because you’ve still got lots of other things to love. Also, I think it’s easier with a portfolio because you can—taking my six-ventures example—pull funding away from the sixth one that isn’t performing and divert it to the other five for additional growth there.
A second lesson is being dispassionate about defining these success factors you want to achieve. We talked about funding them like a VC. You define a successful MVP. You set timelines for attracting the first thousand customers, or when you’re going to hit $10 million in annual recurring revenue (ARR), or other very clear operational and financial milestones you’re tracking toward. Of course, you can flex a little bit, but you should be pretty firm in hitting those.
The third one involves other companies in the venture. There’s nothing more powerful than having someone else who’s co-invested in some of your ventures. Because they didn’t create it, they are going to be a bit more dispassionate about what you should do with it. For any of us who’ve built businesses, you get so attached to them that you want them to be successful. So acknowledging that maybe the money is better spent elsewhere is always a hard thing to do.
Tomas Laboutka: You mentioned bringing in outside partners. This year, we surveyed venture builders, corporate leaders, and investors on how they’re looking at these corporate venture builders and how they’re valuing them. Is this something that has value as opposed to start-ups, who clearly can be valued from the outside in a more straightforward way? What are the lessons learned and the insights we gained this year?
Paul Jenkins: This was the first year we surveyed the investor community. I think it revealed some interesting findings. I touched on one of them earlier, about the valuation investors put on these new ventures, the two-times multiple for businesses adjacent to the core.
I think companies need to bear in mind that investors are very rational. They don’t expect to see more than one in three genuinely successful corporate ventures. Maybe two in three that generate something. That’s perfectly understandable and acceptable. That was the first thing we found: that investors understand, even with all of those unique advantages we’ve been discussing, that success is not guaranteed with an adjacent corporate venture.
The second thing we found was that investors were more patient in terms of the time it takes to become profitable and reach scale. Corporates may not expect great returns in year one, but they do have much higher expectations for years two and three. The investor community understands that it takes at least three years, maybe even four, before one of these new businesses becomes truly profitable and starts to generate real returns.
And that is absolutely in line with our own research. The first year, nothing. The second year, a little bit, if you’re lucky. By the third year, you start to see something. The fourth year is when you really see something. So it was interesting to see the understanding by investors that these businesses are not all going to be successful, but also that they have the patience to see the real returns come through.
Tomas Laboutka: Paul, we’ve covered quite a lot of ground. We talked about the real results we are seeing from venture building, and whether and how it is top of mind for corporate leaders. We talked about what kinds of businesses are a top priority right now and will probably be built in the months and years to come, what success looks like, serial business building, and the investors’ lens. It’s been a very rich conversation. Is there anything else you would like to add or share before we wrap up?
Paul Jenkins: I think maybe just to reiterate some of the key points. We’re finding that despite the macroenvironment, now is an exciting time to create new businesses. The megatrends are still there. We still have gen AI, and we haven’t really worked out all the things we can do with it. We still have the need for green business building, and you’ve got availability of talent that you wouldn’t have had before in this less competitive landscape. So now is the time to think about building a business.
Secondly, we’ve kind of decoded what it takes to be successful. You can set these ventures up in a way that is far more likely to be successful, with the sponsorship, the governance model, and the funding. And finally, start thinking about venture building as a portfolio. Recognize that you’re more likely to create that additional value if you avoid putting all your eggs in one basket. Instead, create two or three adjacent businesses, all exploiting your unique advantages, and manage them as a portfolio. I think the companies that do this are going to create that value and be rewarded in the market. That’s effectively what our research is showing.
Tomas Laboutka: In spite of the headwinds, the time is now, and the time is right. Paul, thank you so much for joining us.
Paul Jenkins: Tomas, thank you for a great conversation.
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