What surprised CVCs in 2022

2022 was a year of dramatic change for investors. This time last year, everything was looking rosy. The global economy was enjoying its nascent recovery from the pandemic, the dry powder was pouring into startups – whose valuations were stratospheric – left and right, and apart from a still-weak IPO scene, it all seemed like peaches and cream.

But, starting with Russia’s invasion of Ukraine in February, a cascade of factors cast a chill over the global economy and brought investment activity down.

How well did corporate investors react to the changes? We asked several corporate investors across several industries about their expectations versus reality.

What went well: valuations became more reasonable

From an investor’s point of view, one of the most visible – and consequential – differences between 2021 and 2022 has been the crash in startup valuations. It has made deal making easier.

“The favourable marketing conditions last year were more skewed towards the people raising the capital. I think we, as an investor, were a little bit frustrated at some of these astronomical valuations,” says Andrew Chang, managing director of United Airlines Ventures, the corporate VC arm of the US air carrier.

“This year was a better year for us. You had much more reasonable discussions, you had more negotiating leverage. You had a better appreciation for what we could bring rather than just the cheque-book.”

While the early-stage nature of young startups lends itself to a subjective, though seldom downward, malleability in valuations, it had reached a point last year where it made more sense to take pause and look at alternative companies.

“I think we are more favourable on the outlook this year in terms of people just being a little bit more reasonable and not being so fantastical on business strategy, execution and objectives. I think we’ve made more investments this year, it’s been more constructive,” he says.

United Airlines Ventures wasn’t the only CVC to have increased its deal flow this year. Saudi chemical company SABIC’s unit, SABIC Ventures, was also taken aback by how much it got over the line in the past 12 months.

“We are seeing an extraordinary amount of activity. This year, we are looking to finish the year with 10 to 12 deals as opposed to the four to five that we normally do. Next year looks to be the same. We have 10 deals already that are in the pipeline and will probably close in the first four months of next year. And we will still be finding some more. It is mad out there,” says Aruna Subramanian, managing director of Sabic Ventures.

What went well: energy and decarbonisation sectors grew faster than expected

Certain legislative changes, notably the Inflation Reduction Act in the US, have had benefits even beyond what had been expected.

“We anticipated the US government would support the Inflation Reduction Act, but one of our startups won $480m in grants. It is amazing. We knew there would be money, and this significant funding contributed to our position as a global market leader,” says Roee Furman, managing director of Doral Energy-Tech Ventures (Doral Tech), the CVC unit of Israeli energy company Doral.

For Doral, segments such as battery technology, which it has invested heavily in, grew at a pleasantly surprising clip.

“We underestimated the market for battery recycling. We thought it would evolve in the future, but we see it happening today, far earlier than we expected when we made the decision to invest,” says Furman.

It’s not just specific sectors that saw surprising growth, but the strengthening focus on themes that transcend industries, such as decarbonisation, has also gathered pace.

“We were pleasantly surprised the industry focused on decarbonisation. For a lot of net zero plans that were announced four to five years ago the question was: is anyone going to act on them. We were surprised that there were a number of technologies that not only got funded but started doing pilot projects. Decarbonisation as a theme got real in 2022. We were surprised at that,” says National Grid Partners’ head of corporate venture investing, Pradeep Tagare.

Could have gone better: deals and projects slowed

For others, 2022 had its disappointments. “We expected there would be more high-quality deal flow this year despite what we expected would be a difficult year. I don’t think anybody knew how the year was going to roll out exactly. If you’d asked me this time last year, I would have expected to have more new logos in the portfolio this year,” says Rob Coppedge of Echo Health Ventures, adding that its focus in 2022 pivoted mostly to support its existing portfolio as it gets ready for 2023.

It’s not just been the deals themselves that have been lacklustre in their frequency. In other sectors, such as automotive software, the market itself has not moved as quickly as has been anticipated this year, with large market players dragging their feet.

Vito Giallorenzo, chief operating office of BlackBerry’s IoT business and head of its vehicle software-focused BlackBerry IVY Innovation Fund, says that it had hoped the large companies and automakers would have moved their projects ahead faster, especially after some had made public announcements and hired more people.

“You have seen publicly, some EV companies have run out of cash or run into troubles, so they have to slow down their plans. Some big companies, sometimes by virtue of being big companies or freshly new merged entities, had some internal churn that they need to work through. We would have hoped that that transition was faster. You have to be patient, it’s a long-term play. I would like the more innovative new projects to have moved faster,” he says.

Could have gone better: some parts of the market are still in denial

The exuberant investing of the past couple of years is over — but not everyone has come to terms with this. “What has made 2021 and the early part of 2022 somewhat different and even more challenging [than usual] was the fact that we’re, for most ecosystems and verticals, in an unprecedented level of exuberance and risk under appreciation. That’s a bubble for you, where the word ‘strategic’ could be used and abused to justify any capital decision,” says Mario Augusto Maia, head of biotechnology company Novozyme’s CVC unit, Novozymes Investments.

“The next challenge, going into 2023, will be helping founders and investors who were born in the exuberant days to understand that the music has stopped. In some circles, many are still in the denial phase and 2023 will be when reality and valuations come to terms with the old, basic concept of risk-return.”

Challenge ahead: War in Ukraine makes it harder to innovate

The geopolitical story of 2022 was a new war in Europe that had global implications. It’s not just energy prices that got thrown into disarray, but global supply chains and food security was thrown into question, affecting a range of industries around the world.

Ukraine’s position as one of the world’s foremost producers of grain such as wheat meant that the food supply chains were particularly disrupted, and had knock-on effect’s across continents.

“On a macro level, our biggest issue was the Ukraine war. The economic impact was significant to the food system and slowed down the supply chain and the production of wheat and, in turn, raised the prices of fertiliser, which goes to Brazil to produce the cattle that is shipped to China,” says Dinsh Guzdar, managing director of Rich Products Ventures, the venturing unit of baked goods company Rich’s.

“This has such a massive ripple effect in the system that put every company on its heel and made it harder for the sector to innovate and, in turn, made investment harder. If we had prevented this war, this would have been a big upturn for us.”