McKinsey partners: you need to protect successful new ventures from the core business

Growth strategies typically involve three options: acquisition, development, or collaboration. Traditionally, acquisitions have enabled CEOs to expand rapidly, while partnerships have enabled the pursuit of opportunities that are difficult to attain independently. However, advancements in AI are transforming the development landscape: reducing experimentation costs, accelerating development cycles, and enabling AI-native businesses to be designed from the beginning.

This shift has expanded the range of new ventures that can be created and accelerated their growth rates. Successful ventures now achieve $10 million in revenue within 31 months on average, compared to an earlier average of 38 months, and break even with 40% less capital. Yet, there is a challenge. As ventures become more successful, protecting them becomes increasingly difficult.

The systems that govern the core business, such as governance, teams, processes, and controls, can hinder the scaling of the new venture. Consequently, CEOs need to be prepared to intervene. Before CEOs can safeguard the growing asset, they must first identify a venture with scaling potential. Often, the strongest ideas are found at the intersection of a growing market, a valuable customer problem, and an area where the company can establish a unique, sustainable advantage.

However, selecting where to focus also requires determining how far to go. Should the venture remain closely aligned with the core business, or should it venture into new markets? What happens if it begins competing for the same customers or revenue as the business currently generating income? Alternatively, can the new venture contribute to growth alongside existing revenue streams?

Honeywell demonstrates what can be achieved when a company develops around its distinctive strengths. It established Honeywell Connected Enterprise to leverage decades of industrial expertise into recurring software revenues. By 2023, the business had grown to approximately $1.5 billion in annual sales and is expanding at nearly three times the rate of Honeywell overall.

To achieve success, companies should invest in multiple ventures simultaneously, leveraging the portfolio approach. This strategy can result in up to 30% higher revenue growth compared to a single venture. Saudi Telecom Company Group exemplifies the advantages of a portfolio approach, with consistent success across various domains such as payments, internet of things, cybersecurity, data centers, and cloud infrastructure.

Its subsidiaries are growing 10 to 15 times faster than the core business. One of the reasons ventures fail is when leadership focuses on project milestones rather than evidence that the business is thriving. The critical indicators of success include customer adoption, engagement, and willingness to pay, as well as improving economics.

Funding decisions should be based on similar evidence-driven criteria, with short review cycles and clear thresholds for continued investment. This approach allows CEOs to intervene when evidence indicates that a venture is not progressing. While funding a new venture inside a corporate offers advantages comparable to those gained by independent startups, the challenge lies in accessing these benefits without inheriting the constraints that come with them.

Research by BCP found that balance when it launched Yape, a mobile wallet, staffed with product development, engineering, and design talent rather than traditional bankers. As Yape grew to become a super app with over 18 million users, it drew on BCP's strengths while maintaining its unique identity. However, as ventures succeed, maintaining this balance can become more challenging.

More organization parts become involved, governance expands, and the venture may gradually become influenced by the core business processes it was initially protected from. In these situations, CEO involvement becomes crucial. By removing internal barriers, opening doors to partners, providing funding as growth accelerates, and safeguarding promising ventures from premature integration into the core, CEOs can make a significant difference.

Companies where CEOs actively prioritize venture building have experienced new businesses contributing nearly 20% of enterprise-wide revenue within five years. CEOs cannot—and should not—make every decision. However, staying close enough to the facts to recognize when to intervene and performing tasks uniquely requiring their expertise may be the key to transforming business building into a consistent source of growth.