Imagine a game where the objective is to create $1 billion in new value at a large corporation. EY says it has the cheat code: internal venture building.
But a major impediment to company’s creating their next unicorn, according to a new report from the firm’s strategy consulting arm, EY-Parthenon, is that many approach venture building with the wrong mindset.
Interest in corporate venture building is growing, according to the report, which found that “22% of [survey] respondents dedicated at least one-fifth of their operating budget to venture building” last year, a “five-fold increase” YoY. Nearly 8 in 10 respondents said their new business turned a profit in three to four years, but the same number also noted their new venture “did not significantly impact the mid- to long-term growth of the parent organization.”
One of the major reasons why, according to EY, is a lack of growth mindset.
Big corporations have massive budgets dedicated to executing pricey mergers and acquisitions, when they could instead spend a fraction of that capital to build a new venture and deliver similar value creation in a handful of years, Praveen Arivazhagan, EY-Parthenon Americas venture building leader, said.
“Unfortunately, [corporations] find it easier to spend billions in buying companies versus spending 10 cents on that dollar to building companies, because they believe it is a harder muscle you need” to create a billion-dollar venture internally, Arivazhagan told CFO Brew.
“So the problem here is not that they don’t have capital; it’s not that they don’t have the willingness to spend,” he added. “It’s more the question of having that layer of capability and a set of people with the willpower, and the experience, and the incentive to go do this.”
Get your mind right. One-quarter of respondents who developed a new business that added significant value to the parent company said their most important measure of success was an internal program “to educate leadership and foster venture building capabilities,” according to the EY report.
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The report also found that new ventures were 20% more likely to generate higher revenue when leaders tracked KPIs such as customer adoption and acquisition cost indicators early on, and switched focus to operational efficiency and operating margin in later stages. Arivazhagan said organizations shouldn’t treat a new business venture like a manufacturing plant. Whereas it makes sense to track operational efficiency on Day 1 of the factory, a new venture requires more patience.
Corporations also tend to make the mistake of viewing venture building as more an operating expense. This thinking creates a challenge for the CFO, Arivazhagan said, because ventures “are never baked into an annual operating plan” because these plans usually focus “on the business as usual” and can’t easily be diverted to “driving something new.”
“In my view, the real unlock is if corporate development and strategy and the CFO lens can come together to say, let’s take 5%, 10% of the corporate development M&A pool to drive some organic venture building,” he said. “Call it ‘organic transactions,’ if you will.”
Good habits. The EY report also found that business ventures are more likely to reach unicorn status when they “harness more strategic endowments” as opposed to focusing more on technology and data. Billion-dollar-plus ventures were more likely to cite proprietary knowledge, distribution channels, and ecosystem partnerships among their most important strategic assets than ventures that haven’t reached that level.
A strategic endowment could be anything from a brand to a large sales force, according to Arivazhagan. A business venture benefits from an established army of salespeople to bring in new business, as opposed to a startup that has no established sales force.