Building ventures for profits? Forget the Silicon Valley playbook

Every year, corporations launch venture capital units, external accelerators, and entrepreneur-in-residence programs in a bid to mimic the famed Silicon Valley innovation playbook. The playbook is short and sweet:

• talk to customers and launch a minimum viable product into a beachhead market;
• rapidly test, learn, and iterate value propositions until product market fit is achieved;
• test and rapidly pivot business models until profitability is discovered, all the while expanding into new customers segments.

Part of the playbook’s appeal to corporations arguably stems from its license to experiment freely and “fail fast”—a liberating feeling for an innovator accustomed to the various controls instituted by corporate bureaucracies.

The other part of the appeal is presumably its effectiveness. Venture capital funds—the “OGs” of the Silicon Valley playbook—back hundreds of disruptive ventures each year. The global investment community clearly thinks it works, channeling hundreds of billions of dollars into venture capital funds annually. What’s good for the goose must be good for the gander, as they say.

But while VC funds and their investors may find a pot of gold at the end of the Silicon Valley rainbow, corporations mimicking the playbook will be saddled with a shipping container full of IOUs. That’s because the Silicon Valley playbook is designed to build ventures that command big exit valuations, rather than to innovate profitable companies to be held for their cash flows—corporations’ primary goal and source of value.

When corporations pair their “building to hold” intent with VC funds’ “building to exit” playbook, it sets them up for a financial fiasco. The problem boils down to a few key financial parameters.

It’s no secret that the Silicon Valley playbook rarely generates profitable ventures. Startup Genome reports that 90-92% fail to generate returns to investors. That’s a high number, but it’s not the whole story. Only a fraction of the 8-10% of ventures that do exit and return capital to investors ever reach sustained profitability. Extrapolating from the performance of ventures that became public companies over the past decade, the likelihood of discovering a profitable business model is a dismal 1-5%.

The open-ended experimentation and fail fast approach also take time, easily ten years or more, before it’s clear whether there’s a path to profitability or not. And these ventures typically run losses equal to 40% or more of revenue during each of those years.

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GCV’s Venture Building 2025 report features insights from 100 global corporations building ventures.

Venture capital funds tolerate high failure rates, long timelines, and large losses because they spread their money across a hundred or more ventures and sell the few that are growing rapidly, but still loss-making, in six to ten years after investing. Exiting a venture lets a VC fund capture all a venture’s potential future profits in one big windfall.

It’s why First Round Capital could turn its $1.5m seed investment in Uber into a $2.6bn profit nine years later, even though Uber was losing $1bn at IPO and continued losing money, accumulating losses of $33 bn by 2023. It allowed Lightspeed Venture Partners to make $2bn on a $485,000 seed investment into social media startup Snapchat in five years’ time, despite Snapchat being deeply unprofitable, amassing $12.6bn of accumulated losses by 2025. And it’s why Kleiner Perkins’ was able to walk away with $1.3bn on a $1.5m investment into plant-based meat startup Beyond Meat, even though Beyond Meat had amassed $130m in losses at IPO and stayed in the red, accumulating $600m of losses by 2025.

Since the startups have no profits at sale, they are valued and sold at a multiple of their revenues. Therein lies the problem: to offset the mountain of losses from all the failed ventures in the fund, the revenues on which the exit multiple is based must be extremely high—the same way pharmaceutical companies need billion-dollar blockbuster drugs to offset the graveyard of failed drug experiments.
This need for a blockbuster exit is why venture capital funds pressure startups to get quickly into market with an minimum viable product and be laser-focused on demonstrating product-market fit through a rapidly growing customer base. Product market fit is the key performance indicator that drives startups’ valuations and VC funds’ profits.

That’s why it’s a mistake to interpret the Silicon Valley playbook as an innovation strategy. It’s best understood as an investment strategy—one designed to create a high-risk, high return asset class where pension funds, endowments, and high-net worth individuals can park some of their cash in the hope of a big payout, but aren’t fussed if they lose everything.

This misalignment explains why so many profit-oriented corporate venture building units launched over the past 15 years with great fanfare have been either quietly scaled back years later (Google X, Amazon Grand Challenge Lab), “re-structured” into an R&D or strategy cost centre (Danone Manifesto Innovation Accelerator, ING Innovation Bootcamp) or completely shuttered (Walmart Store No8, BP Launchpad). The crux of the problem is that they all lost a lot of money with no prospect of generating profits big enough to pay it all back.

Corporations building a relatively small portfolio of ventures to hold for their cash flows, must maximise the probability of success while significantly shortening the time and decreasing the cash needed to validate profitability. It’s the only way the innovation unit can be “NPV positive”—the measure of profitability used by CFOs that captures the time value of money and an investment’s risk level—and operate as a true profit centre.

Figuring out how to do that has been a 25-year journey of mine, one that included doctoral work on the challenge; running a decade-long innovation lab at Cornell that partnered with companies like SC Johnson, DuPont and Ascension Health to test venture building methodologies; and ultimately guiding over two dozen ventures in corporate incubators at Barclays, Pearson, Mars, BMK UK, Disney, and others.

While the devil is in the details, there are three key strategies that support “NPV-positive” venture building.

• First, design ventures to have a big financial margin of safety—the low end of customers’ willingness to pay is a lot higher than the high-end estimate of full unit costs, including cost of capital. It allows the venture to withstand and absorb higher-than expected costs, lower-than anticipated demand, and unforeseen changes in the market upon launching.
• Second, shape the core product idea to circumvent deep structural barriers to profitability that otherwise hold down customer value and push up costs. Harnessing the product in this way creates operational synergies that “delete lots of parts” as Elon Musk would say, driving down the venture’s cost structure.
• Third, continuously model and stress test the venture to uncover risks and do big pivots on paper. It saves years of time trying to figure out why something isn’t working once in market and loads of money restructuring multiple areas of operation.

Erik Simanis is managing director of the Built to Hold Venture Design Program at Cornell University. This article was based on a Cornell white paper, “Built to Hold: Designing Ventures for Profits, Not Exits”. The full paper is available on request.