How corporate venture builders can unlock the next $1 billion in value

Companies are investing more in corporate venture building to respond to continued disruption of traditional business models: 22% of respondents dedicated at least one-fifth of their operating budget to venture building in 2023 and plan to maintain similar levels of investment in 2024. This represents a five-fold increase in the number of companies that dedicated at least 20% of their budget to venture building in 2022. (Figure 1).

Figure 1: What percentage of your annual operating budget was directed to venture building in fiscal years 2022 and 2023?

Survey findings also show that across industries, venture building investments are allocated similarly toward building capabilities internally and partnering or acquiring capabilities. Executives dedicate on average half of their venture building investments to building internally, with the remaining 50% going toward accelerating venture building through M&A and partnerships. This suggests that business leaders are becoming more intentional about when to build, buy or partner to avoid overspending and enhance their returns as the cost of capital remains elevated. Certain tenets regarding the nature and importance of an asset or capability can help inform which approach is best suited for a given venture building endeavor:

• Build: A core component of a new venture’s competitive moat. One that leverages strategic competitive advantages the parent organization has built over an extended period of time.
• Buy: Capabilities that are unique to a handful of players that complement the venture value proposition, accelerate time to market, or expand reach.
• Partner: Capabilities or assets more widely accessible through mutually-beneficial agreements.

In fact, a deliberate, cost-efficient investment strategy has boosted bottom line results: 79% of corporate venture builders say their most significant new business reached profitability in three to four years.

Despite their focus on venture building as a key growth lever, about 80% of business leaders say their most successful new venture launched in the last five years did not significantly impact the mid- to long-term growth of the parent organization. Insights from the survey can help corporates make the leap from launching a new venture to building a scalable growth engine for large corporations.

Several key tactics can help companies develop and scale profitable new ventures. These include:

Leveraging the parent company’s endowments: 

Despite disruption brought by new, nimbler entrants, enterprises still possess competitive advantages, or endowments, to compete amid new industry dynamics. Moreover, executives that have launched a $1 billion+ annual revenue corporate venture tend to harness more strategic endowments such as IP, as opposed to focusing on enabling assets such as technology, or data. In fact, $1 billion+ venture builders are more likely than their lower-revenue-generating peers to cite having leveraged differentiated assets such as proprietary knowledge (41% vs. 31%) and distribution channels (27% vs. 18%) for their venture building initiatives. (Figure 2).

Figure 2: Which are the three most important strategic assets of your core business that you have leveraged when building ventures in the last five years?

While companies agree that their endowments enable them to de-risk investments (36%), reduce costs (35%) and accelerate returns (32%) of venture building investments, only 24% of companies believe they were able to sustain or amplify their competitive advantages by leveraging the parent company’s endowments. Translating strategic assets into sustainable competitive moats for a new business requires a thorough understanding of an organization’s capabilities and identifying novel applications for those existing capabilities. Developing this type of holistic approach to corporate venture building requires a shift in the corporate mindset.

Developing a new growth mindset:

One quarter of leaders that launched a corporate venture with significant impact on the parent company’s growth cite having an internal development program to educate leadership and foster venture building capabilities as the most important measure adopted in their venture building endeavors. Establishing the definition of success early on and aligning a venture building roadmap with tangible KPIs help build conviction among key stakeholders and mitigate risks as milestones are achieved. These strategies help guide leaders to approach building new ventures differently than running core business operations.

Applying behavioral science to accelerate customer adoption and garner stakeholder buy-in:

Corporate venture builders show a strong propensity for incorporating behavioral science techniques in designing solutions with product-market fit and in creating sticky customer experiences that drive commercial traction. The $1 billion+ venture builders are also more likely to have adopted behavioral science to accelerate customer adoption and loyalty. One survey respondent said their company used social proof to gain market interest for initiatives, which helped get support from investors and customers for new initiatives. This resulted in more funding and greater confidence in demand for the new business’ products and services.

Higher-revenue-generating venture builders are also twice as likely to have applied behavior science within their own organization to garner business support and drive change management (Figure 3). Behavioral science techniques are proving effective at earning support from boards and executives for new business models from concept design to commercial rollout. Equally important, the techniques that create ongoing engagement with newly launched products can be used to sustain organizational momentum to reach each new growth milestone as the venture scales. One technology organization, for example, elicited help from a firm that specializes in the application of neuroscience for leadership development to implement gamification tools that facilitated a departure from ingrained leadership norms and behaviors as the business prepared itself to launch entirely new business models.

Figure 3: Has your organization adopted behavioral science techniques to improve change management/garner stakeholder buy in and improve customer adoption/loyalty in for venture build?

Matching the right KPIs for each stage of venture maturity:

Companies that track the appropriate KPIs based on the ventures’ stage of maturity are more likely to generate higher revenue from those ventures.

According to our survey, companies that launched more successful new ventures are 20% more likely to prioritize customer adoption, loyalty and acquisition cost indicators during the pilot and growth phases. Conversely, less successful corporate ventures focused primarily on revenue growth and operating margin.

Once the new venture has scaled, successful venture builders are more likely to shift their focus to operational efficiency and operating margin KPIs more suited to measure the impact of a more mature business. By tailoring the definition of success to the stage of maturity of the corporate venture, business leaders can provide the right amount of runway for a new business to prove its viability, while also managing resource allocation and minimizing risk.

Survey respondents expect venture building to expand its impact as a growth engine for their organizations. On average, business leaders expect to dedicate 14% of their operating budget to corporate venture building, a 75% increase from the average amount reported in 2022.

Companies are investing heavily in corporate venture building to drive their strategic priorities, namely to reinforce their position in the value chain as it pertains to increasing customer intimacy. The $1 billion+ venture builders are more likely than others to prioritize new ventures that draw them closer to their customers, with 47% expecting to prioritize business-to-business-to-consumer ventures and 44% prioritizing direct-to-consumer ventures in 2024 (Figure 4). Increasing ownership of the customer relationship enables businesses to better shape the customer experience and unlocks new revenue streams such as monetizing customer data, an opportunity that is not possible when data is owned by a third party.

Figure 4: What were the top three venture building priorities in fiscal year 2023? What are your top three business building priorities for 2024?

Decentralizing venture building operations is another notable trend. Companies overall intend to shift corporate venture decision-making authority, giving other leaders more autonomy to shape new businesses. Chief Growth Officers, Chief Strategy Officers and Business Unit Presidents are expected to become key financial sponsors of new ventures going forward. (Figure 5)

Figure 5: Who were the financial sponsors for venture building in 2023? Who will be the sponsors going forward in 2024?

As corporate venture building increasingly proves its impact with boards and the C-suite, companies are more likely to increase decision rights for executives who are closer to the company’s day-to-day operations and who hold a deeper understanding of their customers and the organization’s strategic assets.

The survey highlighted critical success factors that help explain the delta between high corporate venture performers and the rest of the pack:

• Deploy a fit-for-purpose buy, build or partner strategy and harness strategic endowments to accelerate time-to-market and reinforce competitive moats.
• Institute a new growth mindset within the parent organization.
• Apply behavioral science techniques to gain key stakeholder support and accelerate customer adoption and increase stickiness.
• Clearly define success for each phase of the corporate venture’s lifecycle and track the most important KPIs for the particular stage of maturity of the venture.

Companies striving to build the next growth engine to turbocharge their P&L can also adopt the following incremental measures that are core to a comprehensive venture building approach:

• Ensure strong executive sponsorship with a clear mandate to incubate a net new business as opposed to driving a core business strategic initiative through legacy investment and governance models.
• Ringfence investments and leverage endowments to prevent competition for resources and extract value from existing strategic assets- drawing from Corporate Development or CVC (Corporate Venture Capital) funds are alternative sources that can ease funding pressures.
• Conduct a series of investment rounds that are unlocked as milestones are achieved to build stakeholder conviction in the venture.
• Utilize bite-sized experiments to identify a scalable recipe at a lower cost or risk.

About the survey: The EY-Parthenon Venture Building survey of 1,000 C-level executives in the United States, conducted by FT Longitude between January and February 2024, was developed to help companies understand how to improve their venture building capabilities and enhance their returns. Thank you to CB Insights for research assistance.