Corporate venture teams are pushing portfolio companies to accept more capital during funding rounds to cushion the blow of a stuttering economy.
Andrew Chang, managing director of United Airlines Ventures, the corporate venture arm of the US airline, has a plan for weathering a potential global recession. He is encouraging startups in his portfolio to accept more capital, so that they have enough cash to last up to 30 months before they seek funding again.
The thinking goes that portfolio companies may have trouble raising capital every 12 months like they often did during the past couple of boom years. As the forecasted recession bites, as it already has in Europe, startups will need a bigger cushion to fall back on as it becomes difficult to raise as often as they were used to when funding was readily available.
“You do have to factor in whether you need an 18 to 24 to 30-month cash flow runway rather than a 12-month runway,” says Chang. “Those are the kinds of questions we’re asking to make sure they have enough to weather this near-term potentially recessionary environment, where cash-spend and cash investments aren’t going to be like they were in the last two to three years.”
The economic downturn has led to a pullback in both corporate and financial venture capital. The total value of all venture capital deals in November 2022 was $29.2bn, less than half of the $76.23bn recorded in the same month last year, according to GCV analysis.
There is an estimated $300bn venture capital “overhang”.
But, while there may be a pullback, venture capital funds also have a lot of dry powder that they accumulated when cash was cheap. “There is so much money out there,” says Jay Reinemann, head of Propel Venture Partners, a venture fund that was spun out of Spanish bank BBVA. Reinemann estimates there is a venture capital “overhang” of almost $300bn. “That is years of capital and still there is money being deployed because technology as an industry will only get bigger.”
Will large energy projects slow down?
Despite the large surplus, corporate investors are still cautious about the next couple of years. Roee Furman, head of Doral Energy-Tech Ventures, the corporate venture arm of the Israeli energy company, is also considering how to support startups if a recession kicks in. Like Chang at United Airlines Ventures, he plans to advise portfolio companies to fatten up with cash reserves to see out a downturn.
“We will need to make sure startups will have enough money in the bank and runway – two to two and-a-half years – to grow stronger into their next fundraise.”
Roee Furman, Head of Doral Energy-Tech Ventures
“We will need to make sure startups will have enough money in the bank and runway – two to two and-a-half years – to grow stronger into their next fundraise,” says Furman.
But he is also aware of the need in cleantech to come up with solutions this decade to reduce the rate of global warming. In the energy sector, climate change is the number one reason for accelerating technologies. “We need to reach markets fast with an economically viable solution. We try to find this balance,” says Furman.
In the energy sector, industry observers are worried that capital-intensive projects will have problems finding financing, particularly from growth equity capital funds that entered the sector over the past couple of years expecting startups to produce revenue faster than they are able to.
“What might get tricky are capital-intensive deeptech businesses that will need greater support from growth equity funds. When they need growth equity capital, they will not necessarily have numbers to show yet,” says Furman.
Pradeep Tagare, head of corporate venture investing at National Grid Partners, the corporate venture fund of the UK-based utility, worries that some large renewable energy infrastructure projects will struggle to secure the multi-million-dollar private equity financings they need.
“We might see some delays on the infrastructure side depending on what happens to interest rates. There may be a slowdown in the delivery of these projects,” says Tagare.
For funds that are more exposed to consumer purchasing power, the recession poses a particular concern. The parent company of SABIC Ventures, the corporate venturing arm of the Saudi chemical manufacturer, produces products that consumers typically pull back on during a recession, such as electronics and appliances.
No let-up in dealmaking
Despite the worsening economic conditions, the corporate venture capital firm is not slowing down on the pace of dealmaking, says Aruna Subramanian, managing director of SABIC Ventures. The firm is expecting to do between 10 and 12 deals in 2023 – around the same number it did in 2022. Normally, it does between four and five deals a year.
But the recession is reinforcing the need for investing discipline, says Subramanian. “It emphasises that we need to stick to our guns. We need to stick to what makes sense and not get carried away by the hype,” she says.
Other funds are considering how to manage their portfolio companies so that they can get by with less capital but also have the ability to innovate. “The recession pushes us to think about companies that have a master path to profitability, so they don’t require much capital and maybe focus scaling in a more innovative way, such as using an existing facility rather than building one, so less capital is used,” says Dinsh Guzdar, head of the corporate venture fund of Rich’s, a US food company.
During the past two years when the influx of financial funds, high net worth individuals and impact investors piled into venture capital, pushing up valuations, the competition for dealmaking was intense. Now that valuations have come down, it is a good time to invest, say experts.
“From a corporate perspective, it’s a good market opportunity,” says Florian Noell, head of corporate development and innovation at PwC. “If you’re able to be active, you should be active. Low valuations can be an advantage, as competition may be limited.”
But this may not be so easy for all. For venture capital funds that invest directly from the parent company’s balance sheet, the potential for a global recession will likely put investors on edge over concerns the mothership may start cost cutting.
“The recession pushes us to think about companies that have a master path to profitability.”
Dinsh Guzdar, managing director, Rich Products corporate venture fund
Those that have focused on the long-term vision of venture capital may feel more secure.
BlackBerry IVY Innovation Fund, the corporate venturing arm of the software platform for the automotive sector, is an on-balance sheet fund reliant on the parent for funding. Vito Giallorenzo, head of corporate development at Blackberry, says the risk of the parent company reducing funding is on his mind. “But the counterargument to that, and that’s why I don’t necessarily expect that to happen, is that these are long term bets,” says Giallorenzo.
Back at United Airlines Ventures, Chang is also taking the long-term view. The airline sector in particular has to go through transformational change to meet its carbon reduction goals, which require capital intensive deep-tech investments whatever the economic outlook. “It doesn’t matter what the present is. We are looking out 10, 15, 20 years. The time is always going to be ripe. We need to be investing in this kind of stuff, so the long-term outlook doesn’t change,” says Chang.
