A healthy culture can triple a corporate venture’s TSR by defining underlying beliefs, focusing on leadership, and modeling and celebrating desired behavior.

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It’s easy for a start-up culture to survive in a new corporate venture that comprises just a handful of like-minded people. But when corporate ventures grow to hundreds or even thousands of people, the culture can break down. To avoid this outcome, the venture’s leaders can systematically build and maintain a healthy culture that takes the unique corporate context into account. The cost of not doing so can be high. In fact, our research shows some 26 percent of corporate start-up failures are linked to cultural issues.

Although many leaders appreciate the importance of building a strong culture in their new ventures, they typically don’t take deliberate steps to shape it, wary of slowing growth. To better understand how successful leaders build healthy cultures as their corporate ventures scale, we analysed hundreds of endeavors and tested our findings with six corporate venture CEOs around the world (see accordian “About the interviews”). The results show that instituting a specific set of supporting mechanisms—such as fostering and understanding conviction, role modeling, reinforcing mechanisms, and building skills and capabilities—should be core elements of any venture growth strategy.^[1]

Building a healthy culture is always a challenge, even in a non-corporate venture, and corporate venture leaders in particular need to consider their environments. This article highlights the hidden advantages of a healthy culture in corporate ventures and provides concrete tips for how founders and senior business leaders can create cultures that build lasting value.

A Healthy Culture is a Superpower

Established companies with healthy workplace cultures—that is, the behaviors, mindsets, and beliefs that shape how people work as well as their daily interactions with one another^[2]—significantly outperform their less-healthy peers, as demonstrated through the following metrics:

• TSR. Companies with top-quartile cultures have a TSR three times higher than the bottom quartile, according to McKinsey research.
• EBITDA. Companies that focus on organisational health—that is, how effectively the organisation rallies around a common vision and strategy—show an 18 percent increase in EBITDA after only one year.^[3]
• ROIC. Cultural health is also a strong causal indicator of long-term financial performance, with healthy companies achieving 2.5 times the ROIC of unhealthy organisations.

Just like larger companies, corporate ventures with healthy cultures can outperform those that do not have it. But establishing a healthy culture can be challenging in a corporate venture. For example, many leaders believe they are the culture; they simply need to role model it rather than work on it. However, creating culture does not have an end date, requiring leaders to continually focus on evolving it. In addition, leaders often perceive culture as “soft” and a secondary concern to more pressing business issues. Establishing a new culture from scratch is hard. It requires a tool kit that many leaders in large enterprises lack. When heading up a new venture within their organisation, leaders can feel as if they lack the skills (and mandate) to create a new culture aligned with current trends but also beneficial ties to the mothership.

Corporate ventures can take inspiration from regular start-ups on how to build and maintain their company cultures while rapidly scaling. Based on our analysis of hundreds of start-ups, as well as interviews with CEOs and founders of corporate ventures, we offer the following guidance for business leaders looking to establish exceptional workplace cultures in their new businesses.

Determine the Key Qualities of the Culture and Build Support for Them

Paul Taylor, CEO of HUB—a provider of data-driven software for asset managers and hedge funds that is a joint corporate venture among IHS Markit, PIMCO, Man Group, State Street, and Microsoft—summed up the power of culture in a recent interview: “Our competitors have copied our products, but they cannot copy our culture.”

When it comes to creating a unique culture at a corporate venture, it is crucial for founders and leaders to recognise and adopt the parent company’s values, practices, and organisational behaviors. Although corporate ventures mirror typical start-ups in many ways—nimble, innovation-driven, and horizontal, among other traits—they are not the same as fully independent start-ups. Corporate ventures exist and win by leveraging the advantages of the parent company, which means they should create cultures that support the parent company’s vision and goals. This is particularly true as the corporate venture grows and the culture begins to evolve (see accordian “Maintaining cultural fabric in hypergrowth”).

Leaders can build the support necessary to create a fresh culture by creating direct policies, resources, and support structures. Just as important, leaders of corporate ventures can model behaviors from the parent company, carrying over some of the original culture. On the flip side, leaders from the parent company must actively support the venture’s own unique values. It’s a symbiotic relationship. To ensure alignment and balance, both entities should clearly communicate their core values and expectations from the outset and establish decision rights.

Every corporate venture must decide the extent to which they will adopt the values of the parent company. As an example, a global OEM launched an autonomous-driving corporate venture that drew heavily on the parent company’s core principles and long-term vision. In many ways, the venture’s culture could be seen as an evolution or extension of the parent company, particularly in fostering an inclusive, collaborative environment; supporting continuous improvement; and emphasising sustainable growth and social responsibility. At the same time, the corporate venture developed its own software- and tech-oriented culture to keep up with the latest market shifts and R&D trends. This enabled the venture to favor speed and agility over structured, methodical processes, and to become a flatter cross-functional organisation that enabled quick decision-making.

Joint cultural activities and training sessions that involve employees and leaders from both the parent company and the corporate venture—such as a values day—can also help foster a sense of unity and shared purpose, and allow for the exchange of ideas and cultural values between the parent company and its corporate venture. Regular values-focused feedback and dialogues can help align all employees—both new and established—with the values of the parent company. Formal check-ins can be structured as periodic interviews or surveys conducted by HR or team leaders. They can take place during performance reviews or as stand-alone yearly assessments specifically centered on aligning values.

Attract and Retain the Best People

A well-defined and positive culture is a powerful magnet for talent, drawing in and retaining highly skilled individuals. Specifically, people are drawn to organisations with characteristics similar to the ones they value,^[4] making an engaging culture that supports and empowers employees is crucial. Our research shows that more than 70 percent of job seekers worldwide actively seek referrals from current employees when looking for job opportunities.

To attract and retain the best people, founders and leaders of a corporate venture can build teams with attitudes, beliefs, and behaviors that align with the parent company’s values—but also seek out individuals with more nimble mindsets who would thrive in a flat, fast-moving start-up environment. Giving corporate ventures the leeway to build their own cultures through independent hiring practices is a good way to strike this balance. While like-minded colleagues can facilitate collaboration, start-ups grow through out-of-the-box thinking from diverse teams—not mono-cultures. Inclusive hiring practices, diversity training for employees, and a culture of open communication and respect can help guard against the implicit biases that can stifle innovation and cause ventures to myopically miss opportunities.

On this point, companies can adopt rigorous hiring processes that include value-fit interviews to help determine whether employees are likely to succeed in the start-up work environment. As an example, a European company that started as a third-party installer of solar panels eventually developed a new business venture to help small and medium-size businesses and households navigate the energy transition. To support the corporate venture’s ambitious growth plan, which included hiring more than 500 new employees, leaders created a hiring process that included an interview dedicated to assessing cultural fit. After hiring this new team, the corporate venture’s leaders went further to create a unique culture separate from the parent company; for instance, they instituted multistep decision-making. Furthermore, the company launched a training academy for female installers to expand the industry’s gender diversity and pool of skilled talent.

Compared with typical start-ups, corporate ventures have some advantages in sourcing and attracting talent because they have established credentials and more financial and institutional resources. Our research shows that early involvement of in-house talent specialists can help corporate ventures avoid some common pitfalls when it comes to setting up people plans. By involving corporate HR early on, corporate ventures can define outcome-based hiring metrics, identify potential obstacles, and gain transparency on recruiting efficiency. However, corporate ventures also face hiring challenges, including convincing the most cutting-edge developers and entrepreneurial talent to join their ranks. Corporate ventures, no matter how innovative they may be, are often seen as an extension of the parent company, and much of the best talent may prefer to join buzzy Silicon Valley start-ups on fast growth trajectories.

Steps to Build a Healthy Culture that Creates Value

Based on our experience, founders and leaders at corporate ventures can take the following three steps to create an authentic and lasting culture.

Step 1: Define underlying beliefs

Defining core underlying beliefs can help create a shared understanding of values from the get-go. Founding team members will not accept a venture’s culture if they are not part of defining and sharing it. At circulee, a German sustainable IT hardware and services company, the culture was determined early on during the hiring process. According to the company’s CEO, culture creation involved everything from how team members interacted with customers to how they marketed environmental impact. With underlying beliefs defined and reinforced, the company focused on hiring only the right people with the right mindsets. As a result, everyone was on the same page when it came to doing business with suppliers and working together as a team.

Although a corporate venture’s culture should be consistent, it will likely evolve as more people are hired. On this point, company leaders and founders can identify shared problems, particularly with people who were not hired by the founders. In doing so, company leadership can stay on top of the changing culture by articulating a vision early, holding ongoing conversations with different groups, and keeping the culture alive with stories and transparency between departments.

Step 2: Focus on leadership

When forming the leadership team for a new corporate venture, deciding whether to hire internally or externally is a critical step. In many cases, hiring an external CEO or managing director (MD) offers at least an equal chance of success as choosing an internal candidate. In fact, McKinsey research shows that within the top 5 percent of CEOs, almost one-half were hired externally. However, bringing in external leaders requires a careful balance with the rest of the team.

For certain roles, opting for an internal candidate can be highly advantageous. For example, a CFO promoted from within already knows the company’s financial policies, systems, and procedures, making it easier to tap into existing infrastructure. Similarly, if the venture requires large partnerships or commercial agreements with enterprise customers, an internal revenue leader can leverage existing relationships.

By contrast, when a corporate venture aims to develop new technologies or adopt agile ways of working to accelerate its speed to market, an external hire may bring the fresh perspective and expertise needed. This approach also applies to the talent function: Although many ventures try to use their existing HR teams, traditional HR policies can slow down hiring and other processes or block innovative compensation models. A dedicated HR leader—whether internal or external—who has some independence from legacy policies can be a significant advantage.

Ultimately, the right mix of internal and external hires depends on the desired culture. A higher proportion of internal hires typically infuses the “mothership” culture into the new venture, while a greater number of external hires can help establish a distinct culture and new ways of working.

Step 3: Model and celebrate desired behaviour

The most important factor in establishing a corporate venture’s culture is leaders who model that culture: what they do, who they promote, and how they communicate verbally and nonverbally. Celebrating desired behavior is just as important as calling out unwanted behavior, regardless of who performs it. Leaders, managers, and employees are all on the same team, rowing in the same direction to establish and uphold the start-up’s culture—and everyone should be held accountable. Leaders can align team norms and values around cultural artifacts, and they can celebrate their teams’ differences in geographic locations, backgrounds, and working styles while upholding a central culture unique to the venture itself.

Authenticity in culture is non-negotiable. Attempting to fake or force a culture will disrupt operational efficiency and mar a corporate venture’s reputation. A genuine culture, anchored in the core values of the parent company, is essential for employees and also has a positive impact on the bottom line, ultimately helping the parent company build a fledgling corporate venture into a fast-growing business that delivers long-term value.

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About the Author(s)

Markus Berger-de León is a senior partner in McKinsey’s Berlin office, where Maria Ocampo is an associate partner; Paul Jenkins is a senior partner in the Oslo office; and Ralf Dreischmeier is a senior partner in the London office.

The authors wish to thank Asmus Komm, Edlira Kasaj, Hugo Martensson, Michael Schultheiss, Tomas Laboutka, and Xiaoyan Xu for their contributions to this article.

The article was first published by McKinsey & Co.

Photo by RDNE Stock project on Pexels.com.