Believe it or not, recessions can be a good time for corporate venture capital (CVC) to invest in startups—here's how.
Corporate venture capital, or investments made by established corporations in startups in exchange for equity or other forms of ownership, represents a significant portion of startup capital. Most obviously, recessions allow these firms to take advantage of lower valuations, enabling them to potentially generate higher returns when the economy recovers.
Next, recessions can also bring about disruptive technologies and new business models. Startups may be more willing to pivot or experiment with new ideas during a recession, and CVC can be in a better position to support these changes. Additionally, startups that survive recessions are likely to be more resilient and have a greater chance of success in the long term. This kind of inventive ingenuity can also push startup owners to seek out new revenue streams and diversify their portfolios. CVC can be a way for established companies to explore new markets and technologies they may not have otherwise considered.
Recessions can also lead to increased competition among investors, resulting in more favorable investment terms for CVC—especially if a CVC can make a name for itself as one that thrives despite a crumbling economy. With fewer investors in the market during a recession, CVC may have more leverage to negotiate better deal terms and secure favorable investment opportunities.
Despite the many benefits of working with a startup during a recession, it is essential to note that investing during a recession also comes with high risks. Startups may have limited access to funding, making it more difficult to survive and deliver returns. CVCs must be careful about ensuring that they're investing with the right companies. The uncertain economic climate may make it difficult to predict which investments will be successful accurately, but some ideas are riskier than others or only indicative of passing trends.