One more year (and that makes three), McKinsey published its conclusions on the situation of new-business building and corporate venture building. Their surveys ask CEOs from around the world, and assess the importance of building new ventures, and how present this subject is on their companies' agendas. We already know this: the more time the CEO dedicates to new-business building, the more priority this has.
Corporate venture building for large companies is our venture studio’s specialty. At Corporate Lab we work precisely on this. That’s why, today we review the most relevant aspects of the McKinsey annual publication on the importance of creating new ventures for large corporations.
👀📝 In order to read the full report, visit McKinsey's site.
1. The valuation of new business is up to two times higher
One of the points that most captivates my attention is that the launch of these new businesses can be valued up to two times higher than the core business.
My thoughts on that? Optionality: Existing businesses are easy to evaluate and predict. It always progresses linearly. That is, a new machine can generate an increase of X% in production, a new salesperson can acquire X customers. But be careful, these old sources of income can grow 10% above the market average in some of the companies surveyed. However, a new business can bring surprises (positive or negative), which is why its valuations can become much higher, due to the optionality that it brings to the enterprise value.
💰 Respondents say their new businesses report double the profits of their core business.
2. Launching new businesses is a priority for most CEOs
The interviewed CEOs are already pushing initiatives to launch new businesses and consider launching more in the next 5 years a priority. The success or failure ratios are clear, so it's time to double the bet and increase the volume of successes.
On average, 1.5 new businesses are being built per year. If an average company wants to achieve its objectives, it will have to increase this average to 3.5 new businesses per year. On the other hand, the largest companies will have to create up to 7 new businesses a year.
👨💻80% of CEOs surveyed place new-business building in their top 5 priorities, despite economic instability.
➡️ On average, companies are creating 1.5 new businesses per year.
↗️ In 2023, an average of 3.5 new businesses will be created per year.
⬆️ The largest companies will have to create up to 7 new businesses a year to cope with this rate.
3. How much should be invested in the creation of new businesses?
Investment is an important issue. How many resources should be allocated to create these new businesses? According to this study, the average practice is to allocate 5% of income, hoping to increase it in the next 12 months. This percentage does not apply to all types of companies. In this case, we are talking about companies that can reach revenues of 1,000 million dollars per year.
The expected results are that 30% of the income will come from new business in the next 5 years. This translates to about $300 million.
🌱 On average, 5% of income is usually allocated to the creation of new businesses.
💲 30% of the income of these companies will come from the creation of new businesses.
4. Which sectors opt more for venture building? What are they going to do?
The sectors that see the greatest need for new ventures are consumer goods, financial services and energy. These types of companies choose to create new business models related to new digital businesses and sustainability. Furthermore, more than half of those surveyed say that regardless of their industry, AI will be part of their focus – great news for our fellow analytics, big data, and AI specialists at Kraz.
These three sectors that we just mentioned will have to triple the income generated by new sources of income. And how are they financed? Mainly with the company's budget, but there is also room for other financing channels, such as venture capital and private equity. This is a very positive sign, because it shows that you are not cheating at solitaire. If a fund outside your company decides to invest, the signs are real.
🌿 Sustainability and new digital businesses are the focus of new businesses.
📊 The sectors that most need to create new businesses are consumer goods, financial services and energy.
💰 It is estimated that these sectors will have to triple their investments in new businesses to meet market demands.
🤝 You don't invest in new businesses by yourself: most of the financing comes from the company itself, but it can be supported with venture capital or private equity.
5. Beyond the McKinsey study
Despite being vast and revealing, there are still facts that I would like to know about creating new businesses from a large corporation. How do you distribute investments with respect to proximity to the core of the business? How much goes to disruptive businesses in their own industries? How much to launch adjacent businesses or just new channels? Another important point is the methodology: how are these new businesses launched?
From my point of view, the execution in the launch of any startup is key. If we have to launch 7 businesses in a year, we need a proven and flexible methodology, an experienced team and being aware that resources are limited: corporate premises don’t work here.
Having external teams to help lead the launch of these ventures will undoubtedly help us increase the current success rate. For this reason, partnering with a venture studio is key for all ideas to see the light of day in the form of new, validated and profitable businesses. Contact the Corporate Lab team to start creating your new ventures.