Finding balance in building corporate ventures to spur growth

COVID-19 has accelerated the already rapid pace of transformation happening across businesses worldwide, as companies search for new ways to adapt and ignite growth. In line with this, Singapore's Emerging Stronger Taskforce shared five recommendations earlier this year to achieve a "virtually unlimited" Singapore that offers limitless and sustainable growth opportunities.

These recommendations include positioning Singapore as a hub to serve local and global demands, particularly in sustainability, and enabling a broad base of innovative companies to succeed. To unlock both, corporate venture-building could be the key.

Already a top priority for many business leaders, our global survey show that 74 per cent of companies that chose venture-building as their main organic growth strategy and executed successfully, grew at rates above their industry average. Venture-building surpassed all other organic growth initiatives. An industry leader put it well at a discussion under the Singapore Economic Development Board's Corporate Venture Launchpad programme: New ventures "act as the second engine of growth" to the core business.

This should not come as a surprise. Established companies, or incumbents, are competitively advantaged when it comes to building new ventures, compared to a standalone startup. Corporate venture builders can combine a startup's agility with the incumbent's experience and resources such as talent, funds, market insights, intellectual property, brands, data and other assets, which may otherwise be unavailable or difficult to obtain.

For example, when an energy multinational corporate was building a new venture out of Singapore, they provided the new venture access to a wealth of customer insights from different functions across more than 150 companies, including senior management, IT, operations and marketing. This helped the new venture to expedite product-market fit assessment and the development of a full life cycle management solution.

Most companies, however, still struggle to execute the immense potential of corporate venture-building. Only 24 per cent of new ventures launched in the past decade are viable large-scale enterprises today. Many lacked a strategy to scale the business, were unable to flexibly adapt to unexpected circumstances, and also failed to ensure that top management was truly on board with the effort.

McKinsey's experience shows that while there are a number of common pitfalls across industries - such as unclear vision and strategy, ill-defined success metrics, lack of customer-centricity, emphasis on planning instead of execution - the clash of cultures between the corporate parent and the new venture is the single biggest challenge in scaling new ventures.

A seasoned venture-builder in Indonesia's financial sector observed that when incumbents embark on venture-building, two cultures emerge: one is the culture that exist within the core business, traditionally the main revenue generator, and the other is the culture of the new venture that is a lot more flexible. While this flexibility is essential for the new venture to operate nimbly, it can also be a source of "jealousy" for the former which has more governance.

TO HELP, NOT HINDER

Business leaders have to be masterful at this balancing act. While some level of autonomy for the new venture is vital, the venture and the corporate parent should also have a shared vision of a tailored, light-touch governance and operating model, establishing just enough oversight to help and not hinder. This enables the new venture to strike the delicate balance between spending on execution and mitigating risks. In fact, 47 per cent of new ventures that scaled successfully reported having clear processes in place for the whole journey.

With a Singapore-based global food and agribusiness, they were deliberate about this. Their new ventures played by different rules from the incumbent, but there were guard rails nonetheless. They still had KPIs to meet, protocols to follow - in cybersecurity and data privacy for example - and funding processes to manage. Each of these was redesigned to enable a supportive environment that fostered creative thinking, enabled agility and attracted talent.

For an Indonesian financial conglomerate that was building a new venture to serve digital-first consumers, its leaders eschewed the traditional five-year plan to guide the venture's progress. One of them commented that even an annual plan felt a bit inhibitive and suggested quarterly or half-yearly alignments. In an increasingly fast-paced environment, driven by shifts in supply chains, trade flows and consumer behaviour, this allowed the new venture to pivot strategic direction as and when needed.

Too often, incumbents expect unicorn-level success from their new ventures but are unwilling to implement the environment and incentives that encourage the necessary risks to be taken. At the same time, without these factors in place, the best and most proven talent will not be attracted to join the new venture.

As corporate longevity reaches an all-time low, venture-building offers a compelling opportunity for incumbents to drive sustained growth. It can be a powerful lever for successful innovation - whether the goal is to diversify revenues, increase organic growth, parry disruption, or rapidly meet the changing needs of existing and new customers. By getting culture and talent right, incumbents will find their odds of success much improved - and take a significant step forward in unlocking "virtually unlimited" growth.

• The writers are McKinsey & Company partners based in its Singapore office. They are the South-east Asia leaders of its venture-building unit Leap by McKinsey.

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