Traditional venture capital investments are decreasing, but corporate investors are still going strong
Why a Recession Could Be Good for Corporate Venture Capital
Traditional venture capital investments are decreasing, but corporate investors are still going strong
The current economic climate has led to a slowdown in traditional venture capital investments, startup valuations, and exits. However, this may be an opportunity for corporate venture capital to thrive. In this article, we will explore how startups and corporate investors can embrace tough economic environments to refine product or service offerings, attract new customers and invest in the future.
Startups may benefit from increased access to top talent at lower compensation levels and can use this opportunity to pivot and refine their business plans. It is important for startups to remain flexible and create business plans that include expected, worst-case, and best-case scenarios. By doing so, they will be ready to spend less or spend more, depending on which scenario materializes. They should also be open to feedback from customers and employees, pivot if feedback indicates that a new direction would attract more customers or grow revenue, and engage their team to develop innovative solutions.
Corporate investors should conduct careful financial analysis and compare a startup's position to its competitors. They should also consider customer loyalty and adoption of the startup’s products or services. Lastly, corporate investors need to ensure critical factors, such as a startup’s ability to be profitable, having a well-written business plan, and demonstrating a thorough understanding of the competitive environment. These help indicate whether the startup has the potential for strong financial growth in the future.
Why is this a good time for corporate venture capital? Typically, corporate investments are long-term and are made based on strategic alignment and financial return. Given that, there is still opportunity for startups to develop partnerships with global corporations and seek investment. From what we’ve seen, corporate investors have not backed down due to the slowing economy. They want to grow revenue and normally look at a 10-year return on their investments. At our firm, where we invest on behalf of corporate partners, we are investing at the same pace as before the Covid-19 pandemic and subsequent recession.
While it is critical that corporations conduct thorough due diligence, I recommend that they continue to invest during recessionary periods. Since traditional VCs may be investing less, corporate investors can be more selective than usual. Startups that embrace downturns may have less competition and have the opportunity to refine their product or service offering to meet customer demand.
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In a 2022 Harvard Business Review article, professors Vijay Govindarajan and Anup Srivastava urge companies to continue investing in growth during recessionary periods. Part of their argument is that recessions are typically brief and have historically been followed by long periods of expansion. They note that startups that embrace downturns may have less competition and have the opportunity to refine their product or service offering to meet customer demand.
In conclusion, recessions can be a challenging time for startups and investors alike. However, by remaining flexible and open to feedback, startups can use this as an opportunity to refine their business plans and attract new customers. For corporate investors, there is still potential to form long-term partnerships with startups that align with their strategic and financial goals. Conducting thorough due diligence is critical, but corporations should continue investing during recessionary periods as startups that embrace downturns may have less competition and can refine their offerings to meet customer demand.
Corey Singleton
Co-Founder, VCengine