The Current Downturn and Corporate Venture Capital

Economic downturns affect public and private companies alike regardless of how frequently your valuation is updated–economic impact is agnostic to how your equity is held. The adjustment is a matter of when. The effects are also agnostic to the age of your company. What may matter most is what industry you are in, the health of your balance sheet and what is driving the downturn.

When it comes to corporate venture capital, there is your balance sheet and the balance sheet of your investments to be contended with at the same time. Historically, the effect on CVC has resulted in a pullback in activity, even in the face of what may be an attractive investment environment. For example, after the stock market crashed in 2000, companies such as Amazon and Starbucks dropped their CVC programs or ignored their investments. Similarly, Hewlett-Packard’s CVC program, which invested in hundreds of startups, was largely ignored after the tech bubble burst.

Like in other industries, this economic downturn has and will have lasting effects on the venture capital industry. Global corporate venture capital investment dropped more than 40 percent between March and April, according to PitchBook. What may be different this time is the response by today’s corporate venture capital industry.

• First, this recession is different. It did not emanate from an imbalance in the financial sector but rather from a sharp reduction in demand caused by a global health pandemic.
• The CVC industry is significantly larger and as sophisticated as purely financial venture capitalists.
• CVC programs use balance sheet cash as the primary source of funding, and corporate balance sheets were healthy. Furthermore, liquid asset value is relatively unaffected by dips in the stock market.
• Target asset allocation rebalancing is mostly irrelevant. Few CVCs having outside limited partner investors and a company’s dedication to its innovation toolkit is driven by other factors.

CVCs have the most structural opportunity to stay in the game, rather than rushing for the exits when economic downtowns happen. PitchBook said it expects those CVCs with dedicated investment teams and raised venture-focused funds to “continue investing prudently.”

Locally, CVCs such as CUNA Mutual Group’s CMFG Ventures and the American Family Insurance Institute Impact Fund have participated in recent funding rounds. CMFG Ventures invested in Jenny Life, a company that aims to help women and mothers apply for life insurance policies, without requiring health exams or extensive paperwork. Meanwhile, the American Family Insurance Institute Impact Fund contributed to funds for Biobot Analytics, which is applying its technology to the coronavirus pandemic and helping local governments better estimate COVID-19 cases by looking for the virus in wastewater.

As endless articles are written about what will be different, it is heartening to see the different responses of the CVC industry to the current downturn. What will be the same is an eventual recovery and rewards for those long-term, strategic investors willing to stay the course.