- Ring fencing the venture from business as usual (BAU): In the M&A scouting, diligence and pre-sign phase, discussions and decisions are typically kept to a small, tight group away from the business to ensure unbiased valuation and pricing decisions. Similarly, when building a new business, it must be kept distinct from the core to avoid competing for resources and to enable leadership to make bold, strategic decisions for the venture that may disrupt the core business and existing ecosystem partners (e.g., distributors, customers).
- Funding the venture through balance sheet: Just as acquisitions are funded through the balance sheet, venture-build costs are largely capitalized, minimizing impact to the bottom line of the core P&L.
- Realizing synergies with the core: In M&A, the valuation of the target typically reflects anticipated synergies with the acquiring company. In venture building, these synergies are not just a view of the anticipated potential—they are foundational. The venture is built at the onset by leveraging or synergizing with the core business’s endowments.
When you put these three factors together it is clear that corporate venture building through organic transactions drives market capital growth very akin to an M&A transaction, though with lower-risk stage-gated funding. This makes them an essential tool for companies to realize much needed untapped market cap. And that untapped market cap can be huge: Recent EY-Parthenon research suggests that for the S&P 500 (excluding the “Magnificent 7” tech companies, banks and REITs) to achieve Tier 1 total shareholder return (TSR) growth, companies must find a staggering $9 trillion in untapped market value.
Activating corporate venture building in your company
When executed successfully, organic transactions belong firmly on the CEO agenda alongside M&A and large-scale transformations. Unlike traditional initiatives, venture building requires a fundamentally different approach, though, to drive meaningful accretion across the four critical dimensions of growth—the four “Ms” of venture building:
Market capital: Demonstrating a track record, scalability and predictability in venture performance that translates into sustained TSR growth over time.
Monetization and margin: Delivering outsized growth and margins by unlocking new revenue pools and leveraging endowments to accelerate the venture stand-up and keeping the operating costs lower due to factors such as lower cost of customer acquisition.
Multiple expansion: Elevating the overall multiple as the Street recognizes the venture’s differentiated future potential—driven by an asset-light operating model, deeper customer intimacy and greater control over the value chain.
CEO sponsorship is central to the success of organic transactions to break down silos and allow endowments to be leveraged in new ways. These efforts also align squarely with the CEO’s ownership of shareholder value creation, as they can directly affect TSR, particularly through multiple expansion and market capital growth. In an era of continuous disruption, activating venture building isn’t just an option—it’s a leadership responsibility.
Building support for the new venture
The stage-gated funding of organic transactions, based on hitting certain KPIs, is one of its key benefits. It allows the company to continue to invest as it builds conviction in the business, allowing smaller initial investments the chance to grow. Leadership also has full insight into the new business from the start as it is mostly made up of the company’s own endowments (though a small strategic acquisition can sometimes be used to fill capability gaps needed for the new business).
M&A remains another essential growth tactic, but there can be limits to how much the acquirer knows about the transaction target. It also typically requires a premium to be paid for the potential future growth, whereas the premium of the endowments is organic transactions.
Our venture building team has deep experience in working with corporate leaders in a wide range of industries to unlock multibillion-dollar market capital increases across ventures globally. That experience has led us to strongly believe there may be a billion-dollar business hiding behind every corporation's endowments.
