Here is an excerpt from an article written by Sonia Barquin, Ralf Dreischmeier, Sascha Hertli, Jerome Königsfeld, and Andrew Roth for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out others, learn more about the firm, and sign up for email alerts, please click here.
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Scaling new businesses is where the value is
While most companies tend to focus on launching new businesses, the real value comes from being able to scale them up. Based on an analysis of US venture-capital (VC) data, two-thirds of value is created when a company scales up to penetrate a significant portion of the target market (Exhibit 1). VC firms have a clear understanding of that value. Of the $135 billion invested by US VC firms in 2018, 63 percent was deployed to enable successful start-ups to scale their product or service (series C funding and later).
Among the start-ups that have successfully built a product and completed at least series B funding, only 22 percent succeed independently at getting to that stage. Another 27 percent are absorbed at some point through an M&A transaction and are successful. About 51 percent manage to sustain themselves but cannot scale, or they just die off.
While there is less data publicly available about the success of corporate-backed ventures, we observe similar patterns there as well. Many corporates operate “innovation factories” to launch new businesses, but few of them ever become a sizable new business unit of the parent.
There is a way to significantly increase the odds of success. From our work helping 35 corporations scale their new businesses, there has emerged a clear recipe that has increased the scale-up success rate to 60 percent, from 22 percent.
Avoiding the six most common issues that undermine scale
Our experience and analysis show that successful corporate-backed start-ups follow a precise playbook that covers seven areas (Exhibit 2). At first glance, the seven areas are unsurprising and likely on the agenda of each corporate-sponsored venture. The difference between successes and failures, however, lies in the ability to reach threshold levels of proficiency in all of the seven areas. We have seen new corporate-backed businesses fail to scale when they have performed well in five areas but not in the other two. Even within a given area, failure in a single practice can be enough to torpedo the entire venture’s ambitions for scale.
Among the many “failure modes” that can undermine a new business’s ability to scale, we have identified six that are particularly prevalent among corporate ventures.
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Here is a direct link to the complete article.
Sonia Barquin is a partner in McKinsey’s Jakarta office, Ralf Dreischmeier is a senior partner in the London office, Sascha Hertli is a partner in the Zurich office, Jerome Königsfeld is an associate partner in the Cologne office, and Andrew Roth is an associate partner in the Singapore office.