Dive Brief:

• The average investment that companies are making to bring a new corporate venture or lines of business to the break-even point fell to $77 million this year compared to $125 million in 2024, according to a report released this week by the consulting firm McKinsey & Company.
• Despite the uncertain economic climate that has tightened funding for new ventures overall, the report found an uptick in appetite for AI or data-focused businesses, with 56% of respondents saying their firms plan to build data, analytics or AI-driven businesses, up from 49% last year. 
• “People are still thinking of business building as a relatively affordable way to achieve growth,” Jason Bello, a senior partner at McKinsey said in an interview Monday. “However, we are seeing the appetite for giving businesses a really long leash has gone down…companies are expecting returns on their businesses earlier than they have in the past and the average investment to receive those returns has gone down.” ​​

Dive Insight:

While data, analytics and AI-driven businesses are the favored type of ventures most respondents expect to see built in the next five years, the forecasts vary by industry, with tech, media and telecom the top sectors seen looking to capitalize on data, followed by financial services, healthcare and pharma. In contrast, in the consumer goods and retail space, more executives said they expect their firms to prioritize developing consumer-centric products or physical businesses.  

The funding that companies are ponying up to launch their new ventures has gone down for a number of reasons. While part of it is caution related to the uncertain macroeconomic climate, Bello said companies are using technology which makes business building easier as well as becoming more efficient, moving faster to launch and not waiting for the perfect minimum viable product.

For CFOs strategizing around budgeting for such investments, Bello said finance chiefs should think about financing the businesses differently than they do their regular operations, which are typically on an annual or semiannual cycle. 

“These businesses are most successful when funded in a milestone-based way,” he said. “So you give a tranche of money for evaluating the feasibility and testing go, no-go assumptions. You then give a tranche of money to design out the business and do what we would call ‘blueprinting’ and get it to a stage where you are ready to start implementing. You have a tranche of money to get to an MVP. You have a tranche of money to scale. And it’s a little bit of a different way of funding the rest of the businesses.” 

In addition, he said it’s key for CFOs to think about the businesses as a kind of portfolio of investments. Serial venture builders or companies that develop multiple businesses and make hard decisions are more successful, he said. 

“One of the reasons they’re successful is they’re managing it as a portfolio: they are closing down the businesses and business concepts that aren’t working; they’re moving capital towards the business and business concepts that are working,” Bello said. “Taking that portfolio eye-view of their businesses in the same way they’d take a view of other investments the organization has is a critical role for the CFO.” 

Finally, he said new ventures typically do better when they have the attention of the C-suite and the finance chief. That’s because to do best ventures often need to break rules or pivot from norms, such as hiring a different type of talent or pursuing a different way of marketing, he said. “To be successful you have to challenge some things and having an engaged CFO is really important to the success of these businesses,” he said.

The findings in McKinsey’s sixth annual report on corporate ventures are based on a survey of over 700 executives, including 295 C-suite executives in 66 countries, at companies with at least $100 million in annual revenue.