Amid the venture industry’s funding slowdown in 2022, nontraditional investors like hedge funds and private equity firms ran for the hills. Many assumed that corporate venture capital funds would, too — but they didn’t.
These strategic backers remained consistent in 2022 and, according to PitchBook data, actually increased their presence in venture deals. In 2022, CVCs participated in 26.2% of venture deals, up only a hair over 2021’s 25.6%. While this isn’t a meaningful change by any means, it does stand out because every other category of crossover investor participated less in 2022 than in 2021.
While regular venture firm fundraising isn’t expected to be particularly robust this year — and funding overall has continued to slump so far — there are signs that corporate venture capital will remain a steady source of funds in 2023.
Scott Lenet, the co-founder and president of Touchdown Ventures, which helps corporations set up their CVCs, told TechCrunch+ that the firm is getting more inbound than ever from corporations looking to start a fund of their own.
The volatility of the last few years has led to more funds looking to deploy capital, which should be welcome news to startups. Plus, getting the backing of an investor who isn’t tied to a specific fund lifecycle in an uncertain exit environment definitely has its appeal.
CVCs are great cheerleaders for their portfolio companies and startups could see more benefits in a shorter time frame than they would working with a traditional VC, according to Archna Sahay, the head of platform at Northwestern Mutual Future Ventures. “It’s a dedicated support system with a CVC to hopefully get you to a partnership really quickly with a large customer who also happens to be your investor,” Sahay said, adding that having one of your investors as a customer can also make it easier to bolster a company’s valuation when they raise future rounds.
There are downsides to this type of capital, too, of course. CVCs may not be able to help startups network with later-stage VCs who could lead the later rounds that CVCs often opt out of. Furthermore, the CVC investors wear numerous hats in the parent company and may be less able to help.
But startups looking for capital should still keep CVCs on their list, though there are a few things they should keep in mind while preparing for the pitch.
Sahay said that companies should make sure that they are researching the CVC’s parent company before pitching because most CVCs — but not all — tend to invest strategically in areas that would affect the parent company or its customers.
“They [should be] pitching knowing who the company is, what their core product is, who are their customers and what headwinds they are thinking about,” Sahay said. “We are an insurance company and invest in insurtech, but we are a life insurance company, so PCP [primary care provider] startups won’t work.”
Lenet said one thing for founders to keep in mind for the actual pitch is that while CVCs are both strategic and financial investors, they tend to lean more conservative than a typical VC, and they aren’t as likely to make their decision based on a company’s moonshot story. Andrew Ferguson, the vice president of corporate development and ventures at Databricks, agreed.
“We think hard about this more metric-oriented investment environment,” Ferguson told TechCrunch+. “How are they feeling about customer adoption, retention and churn, and valuation is a lot more top of mind today than it was in 2021.”
Ferguson said that CVCs like Databricks Ventures are looking for companies that offer synergies both in the portfolio and with the CVC’s parent company and its customers.
“If there isn’t a product integration angle, and we don’t see or can’t find evidence that a customer of ours or theirs would want to work together, it would be hard for us to work together,” Ferguson said. “That’s a really important one.”
Lenet added that if a startup does have that customer overlap or is used by the parent company in some way, they should figure out a way to get someone from the CVC’s parent company involved in their pitch.
“Who do you know, and what do you do with them? If you have a champion in a business unit or someone who is working with you — or wants to work with you — and can speak on your behalf on why this [potential deal] is strategic and not just financial, that’s great,” Lenet said.
If fundraising in 2023 shapes up to be the lackluster year that’s forecast — the collapse of Silicon Valley Bank won’t be of any help here, either — CVCs may offer a more stable and willing path for founders looking for cash.