Leaders are leaning into building new ventures as a strong financial strategy to drive growth and outperform the market. Global research revealed that companies investing 20% of growth capital into building new ventures achieve revenue growth that’s 2% higher than those not investing. Paul Jenkins, Senior Partner at McKinsey, discusses how leaders can build a financial strategy around building new ventures and what type of ventures are likely to be the most popular in the next five years.
In a period of sustained disruption, both geopolitical and financial, many CEOs are facing a critical choice: should we buy or build new capabilities as we continue to pursue growth? While mergers and acquisitions remain a viable option, our research highlights that for many companies, venture building can be the stronger financial strategy.
In fact, regardless of the bumpy ride since COVID first hit, CEOs’ commitment to venture-building has remained resilient – even as interest rates have fluctuated from pre-COVID lows of near 2% to the recent highs of around 5%.
This isn’t necessarily reflected across the C-suite, though. Our latest global survey of over 1,100 senior business leaders, including 177 CEOs, shows that CFOs and other leaders tend to respond to economic pressures by focusing on organisational restructuring. CEOs, on the other hand, want to launch new ventures to drive a potential 1.5x organic growth. Our study revealed that only 22% of CEOs expect to complete a merger or acquisition in the next year, but over 60% expect to build a new venture.
It can feel counter-intuitive in such a volatile market, but the right amount of investment in venture-building can unlock significant growth. Here’s why the C-suite should unite around venture-building.
The financial strategy case for venture-building
Let’s dive into the finances on this and see the link between venture-building and Return On Investment (ROI). This is really the key finding: our research suggests that companies that invest 20% of their growth capital or more into building entirely new ventures end up seeing revenue growth that’s two percentage points higher than companies who aren’t investing in venture-building.
This trend is even more pronounced with larger companies: when organisations with over US$1 billion in annual revenues invest 20% or more of their growth capital in venture-building, they gain revenue growth 2.5 percentage points higher than those who aren’t investing. To put that in context, the mean growth rates globally for those large companies are 5.2%, so a 2.5% uplift translates to 50% additional growth. If you compare to the median growth rate of 3.7%, the incremental uplift is even greater.
At the same time, that 20% investment figure is something of a sweet spot when it comes to getting the greatest ROI. Invest less, and you don’t get a correspondingly lower ROI – in fact, you get much less ROI. By the same token, if you invest more, you don’t always get greater ROI. The rate of return starts to peter out after 20%. This provides a compelling counterpoint to an issue we often see, which is that companies approach building a new venture as a bit of a side project and don’t invest enough. That’s a surefire recipe for failure. Just 38% of respondents are investing 20% of their growth capital, suggesting that nearly two in three are leaving potential value on the table.
We also looked at the share of investment required for new ventures to deliver the total revenues desired by their parent organisation. On average, respondents expect to derive 24% of their revenues from new ventures in five years’ time. But to achieve that, many companies will need to meaningfully increase their investment. We found that the companies that do achieve that kind of revenue share from new ventures have invested on average 2.4 times more than those that don’t.
Venture-building begins at home
In short, venture-building can form the basis of a successful, growth-orientated financial strategy, driving strong ROI and enabling sustainable business success. But if that’s the case, where should the C-suite be looking for venture-building opportunities?
First off, for most companies, there’s plenty of opportunity to build new ventures out of existing assets. Nearly nine in 10 of the leaders we surveyed said their organisations have at least one asset whose commercial potential hasn’t been realised. Most often, that asset is some form of data, intellectual property or novel technology.
The potential for turning existing assets into new ventures varies by industry. For example, healthcare, consumer goods and retail companies most often say they’ve developed products for internal uses that could be sold externally, while those in financial services point to data assets that could be monetised. In advanced industries and technology, media and telecommunications, respondents often say intellectual property or new tech could form the basis of a new venture. So, for senior leaders, the first question to ask is: ‘What are we sitting on already?’
AI and sustainability ventures driving growth
That’s just the beginning, though. Businesses can also look to fresh ideas and offerings. In 2023, our research showed that data, analytics and AI platforms were the top form of new venture respondents expected to build in the next five years. This year, the findings show respondents are even more likely to plan for these kinds of ventures. Most surveyed leaders whose companies are planning new ventures see potential value in developing something in the Generative AI space. Six in 10 say their organisations are already pursuing them.
In this field, ‘copilot businesses’ are the most expected GenAI use case – in other words, using GenAI to reduce effort or improve decision-making. About half of business leaders looking at new venture building expect to build a copilot venture. To give an example of what that might look like, healthcare organisations could use scribing solutions to capture medical notes and document medical follow-ups and prescriptions, while virtual assistants could optimise both provider operations and patient experiences.
New ventures centred on environmental sustainability are now the second-most commonly planned type over the next five years, up from fourth in 2023 and sixth in 2022. Sustained interest in these ventures coincides with recent technological advancements, such as cleaner materials, and with companies building better, more sustainable new products.
In many ways, the sky is the limit. C-suite leaders can have confidence to invest in new ventures, whether rooted in existing assets or pushing into adjacent fields. If they commit to investment at that 20% threshold, the results can make a real difference to the company’s growth.