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New Trend: VCs are reducing funding and corporations are picking up, even in a slow economy
For a successful organization to grow, they need innovation and investment to access the right tools and resources. Most innovation comes from funding internally created solutions, ventures, or by creating corporate teams. Innovation provides a great number of benefits to any corporation, but the current state of the economy has made internal innovation a struggle. The past few years has seen an increase in technological innovation along with an increase in tech venture investments. Startups in the tech industry have risen to about 70% of investments in early 2021, but that pace has slowly declined within the past year. VCs and CVCs are looking to find new innovation and strategic investments through unlikely places.
For years, Venture Capitalists (VCs) have dominated the investing world with traditional startups that revolve around tech. Their backing out has given investors in other industries, such as finance, the chance to gain access to impressive returns provided by the venture community. VCs have been recently slowing the distributing capital to private tech companies within a year of rising interest rates, geopolitical risks, and public market volatility.
Deals involving Corporate Venture Capital (CVC) accounted for 26% of all funding in the first quarter of the year. It has risen slightly compared to the percentage last year, which was at 20%. Many reasons behind the decline in VC investment could be related to the current state of the American economy.
In 2020, 22.7% of the total capital funding took place in Silicon Valley. It was the lowest percentage it had been for about 10 years. According to CNBC, Silicon Valley’s share of total funding has been in decline since 2006 due to startup founders finding Silicon Valley to be a less desirable place to live. CVCs and VCs are looking to find more security and confidence in their investments. CVCs wants to tackle business challenges, address customer needs, and pinpoint new strategies for growth.
With VCs reducing startup investments, startup companies have to turn to strategic investors and corporations to find a path to success.
New Insight: Corporate Investors Looking for Innovation ROI
According to Bain & Company, continued geopolitical tension, stubborn inflation rates, macroeconomic instability, and banking sector turmoil have become big concerns among VC investors who are slowing down their investment activity, with average early-stage deal size declining 13%. This hasn’t prevented investors from finding a few select opportunities. OpenAI has shown record fundraising rounds with about $10 billion. Stripe has contributed 37% quarter-over-quarter growth at around $6.5 billion in the United States.
Any downturns will set up room for disruption, where a company can rapidly seize market share or lose it to another company by investing in startups. The biggest factor when investing in a company is the Return on Investment, or ROI. The best way to ensure a good ROI is to launch or accelerate innovation efforts and invest in ways that allow a company to expand. If companies are unwilling to brace for a downturn, it means they will lack the know-how and capabilities to transform ideas into real, manageable business opportunities.
For ROI, companies can shape innovation into a managed portfolio of viable investments. A narrow focus will allow for bigger market interest and require measuring the performance of both the portfolio and individual ventures as they evolve. The companies who persist through this economically challenging environment will benefit from cheaper acquisitions, knowledgeable talent, and evolving customer needs that fit with new market trends.
Further from Bain & Co, “A downturn is more than just a good reason to pull the plug on projects that can’t get off the ground: it’s a potential catalyst. Downturns create opportunities for disruption, moments when your company can rapidly seize market share … or lose it to someone else.”
It’s important to still have access to tools and assets that allow the company to grow during a downturn. The opportunities exist for Corporate VC to take advantage of lower valuations and less competition with traditional VC funds out of the way.
New Action: Explore Startup Investing
As more large companies see massive benefits from startup investing, smaller companies are starting to get into the game. These companies realize that they have a lot to offer a startup. A small business, even one with $5-10m in annual revenue, can help a startup in the following ways:
Invest $25k. A relatively small sum for an established business can give a startup months of runway.
Help the startup pilot within your business. Learn quickly how new technology will impact your business.
Introduce the startup to trade shows and networking groups you’re a part of. Be seen in the industry as an innovative, forward-looking company.
Help shape the startup’s product based on your needs. Get an external team to solve your most pressing problems.
A small or mid-market company clearly has a lot of value to give a startup. And in exchange, you would be able to access the financial, strategic, and commercial benefits that large companies have reaped from startups for decades.
Are you ready to explore startup investing? We can help you evaluate the market and determine the best next steps. If you are interested N³ Innovation can help you! Contact us today!
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