Time for CVCs to meet a new investment climate

When I penned last year’s foreword, we were still in a boom: valuations were hitting all-time highs, the economy was roaring and jaw-dropping exits were the headlines of the day. Today we face a different reality.

Much has been written about the venture pullback, both in terms of startup funding and fundraising by firms. But how does CVC fit into this picture? The data paints a more nuanced story, one somewhat more open to interpretation.

In 2022, venture as an asset class saw a 25% drop in the number of deals, while CVC-backed deals fell 2%. Indeed, CVC-backed deals now account for 19% of all venture deals globally. Is this a testament to the inherent robustness of CVC, or is it indicative of a delayed reaction to market conditions? After all, quantity should never be confused with quality and decreased investment can be a good thing if it is the result of a broader strategy, such as deliberately shifting to seed or earlier-stage deals.

Reliable partners

The biggest indication of CVC resilience lies in the 101 new CVC units formed throughout the year, an all-time record and 19% higher than 2021. Even in the face of a turbulent market, it is clear that corporates view venture investing as a necessity, not a luxury. This flies in the face of stereotypes of CVCs as flighty partners. We have shown ourselves to be reliable providers of capital, even in challenging circumstances.
Beyond simply deploying capital, I believe this is the moment for the “C” in CVC to show what it can do. It is time to bring the entire weight of the platform and parent company to bear in support of the portfolio.

Help your portfolio companies secure short-term cash to make it through a crunch, provide references, connect them with your corporate or other big potential customers – this is exactly the value a CVC brings. Even during a reset, our corporate parents need to pursue innovation and reinvent aspects of their businesses. That creates opportunities for fruitful and well-timed partnerships with portfolio companies, even in the midst of a downturn.

It also might be a moment to leverage the “C” in CVC to get a foot in the door with previously inaccessible deals. The strategic imperative of CVCs frees us as investors to take a deliberate hit to venture-level returns and “lean in” to do more frontier deals than was previously been possible. The opportunity set is shifting beneath our feet. Can we turn our unique circumstances to competitive advantage during a market reset? Leaning into strategic value might be a compelling response.

Or, it might not. Ultimately, CVCs are asset managers. We must ensure the legitimacy and longevity of our programmes. Unless a CVC is so dialled towards the strategic end of the equation that returns do not matter, then you need to focus on returns. In this environment, that means working harder, negotiating tougher, maintaining discipline around valuation and terms. It is also important to know when to walk away.

Balancing our goals

This is one of the biggest challenges of being a CVC today. How do we balance our strategic and financial goals? In recent years, many CVCs and their corporate parents have refused to make a false choice between them. But that does not mean there are not trade-offs.

At the #GCVI Summit in Monterey, we are discussing how to manage for both strategic and financial returns, considering the at times zero-sum interplay between the two. As the CVC industry has grown and professionalised, it is time to face this tension head on.

Though the market may be topsy turvy, the fundamentals remain strong. Areas of high impact continue to have venture tailwinds. Corporates continue to rely on innovation to build their futures, and that is what we as CVC investors are here to help them do.

It is our moment to decide how to do so stronger and better than ever before. Let’s meet the moment.