ESSENTIALS FOR LEADERS AND THOSE THEY LEAD

There’s no way around it: starting a new business is risky, whether it’s a solo venture or a large corporate spin-off. An estimated 50 percent of small businesses fail within five years, and our research shows that even among corporate-backed ventures with more resources, only 24 percent of new businesses launched in the past ten years are viable large-scale enterprises today. Yet business building remains a powerful way for companies to grow: in times of uncertainty and disruption, it can help organizations “diversify, shore up, protect, and expand when others are contracting,” according to McKinsey experts. Here are some ways to accomplish those goals while mitigating the risks.

AN IDEA

Follow the rule of three

There’s no foolproof formula for building a business, but our study of more than 200 corporate new-business ventures reveals three major approaches that work—if the organization brings the right mindset, people, and processes to the project. For example, one strategy involves setting up an internal venture-capital-style incubator. In this model, teams within the organization pitch ideas to a board of internal and external experts who then select the most promising concepts for development. But this requires the parent company to have a plentiful supply of new ideas and a VC mindset—that is, quickly rejecting ideas without clear potential. “The business has to be vigilant to ensure that the start-up culture ‘sticks,’” caution the McKinsey researchers. “One way to do that is to assign an experienced business-building coach to each team to build up and nurture an agile test-and-learn culture.” McKinsey’s Philipp Hillenbrand, Dieter Kiewell, Ivan Ostojic, and Gisa Springer suggest creating a “growth engine”—a dedicated team assigned to manage new-business building from launch to scaling to maturity.

A BIG NUMBER

29%

That’s the percentage of total organizational revenues expected to come from new businesses developed in the next five years, according to respondents to a 2022 McKinsey Global Survey. To reach that number—more than double the share of revenues generated by new businesses launched in the previous five years—companies will need to go from building 1.5 businesses a year today to 3.5. For organizations with more than $1 billion in annual revenues, the bar is even higher: they’ll need to launch seven new businesses a year over the next five years to meet their revenue expectations.

A QUOTE

‘‘I’m very optimistic that you’ll see an explosion of start-ups all around the world.’’

That’s Sequoia Capital partner Roelof Botha in a McKinsey on Start-ups podcast on how global venture capitalists view the changing investment landscape. Some postpandemic trends—such as remote work—have changed the venture capital industry for the better, Botha points out. For one thing, innovation is no longer restricted to traditional hubs: “The truth is that there are just many more places in the world where people can build interesting companies.” But entrepreneurs who wish to raise capital should still focus on “substance versus form,” he says. “You need to be authentic. You need to just tell your business story, and explain what it is you do, and try not to make it performance art.”

A SPOTLIGHT INTERVIEW

“Some assumptions that we have long held are . . . being turned upside down in terms of how you operate a business, sell products, and serve customers,” says McKinsey senior partner Ari Libarikian in this podcast on building a digital business quickly and effectively. Large organizations may be at a disadvantage because “building a new business requires an entrepreneurial mindset and a different way of working,” he notes. An online business may need to be up and running in weeks or even days, and this means balancing teams of incumbents and newcomers, instilling a start-up culture, borrowing the right assets from the parent company, and tracking milestones—all in the context of a mature organization with an established bureaucracy. “The nirvana here is leveraging the strength of the incumbent but with the flexibility and speed of a start-up,” Libarikian says.

— Edited by Rama Ramaswami, senior editor, New York

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