The VC downturn and CVC’s coming of age

The funding downturn that began in 2022 hit its lowest point last year, with a 53% fall in Q1 alone. I’m hopeful that conditions will improve for founders and investors alike in 2024, however the caution in the tech markets is unlikely to disappear entirely.

As investors press pause on FOMO-driven decision making we’re seeing the emergence of an interesting trend: specialist investors filling the void left by the reduced capital deployment of institutional funds. I, along with many of my corporate venture capital (CVC) peers talked at length about this with one another in 2023. And whilst skimming through the ‘predictions lists’ that dominate our feeds at the start of each year, it seems others are starting to agree.

Investors, founders and journalists alike are proclaiming 2024 to be the year of the hyper-specialist investor. Investors like corporate funds. The market correction has accompanied a widespread reimagining of many CVC operating models. Broad theses, slow decision making and opaque value add have been replaced with investment discipline, speed and dedicated platform offerings. In the face of the downturn the corporate venturing industry has shown resilience and maturity, with many new units entering the market last year. Whisper it quietly, but CVCs are coming to the fore.

Startups seeking stability

The market slowdown has moved the needle from quick capital to discipline and domain expertise. A recent Global Corporate Venturing report revealed that corporate backed startups are more likely to survive, and founders are increasingly drawn towards CVCs that promise measurable impact on the long term growth of their business. Traditional founder apprehension is being replaced with an interest in shareholders that are able to demonstrate sector knowledge, relevant networks, and a tangible ‘value add’. As such, funds with a narrower focus or clear strategic purpose are coming into their own. 

At InMotion Ventures we provide founders with focussed support in a very specific way. Through our connections to thousands of subject matter experts within Jaguar Land Rover (JLR) portfolio companies have access to high-value opportunities with the business: knowledge sharing, testing environments, PoCs and in some cases commercial partnerships. Developing revenue streams in a harsh economic climate strengthen a startup’s balance sheets, and collaborations with the corporate parent goes a long way towards proving product market fit in the run up to future funding rounds. Put simply, we, like many of our CVC peers, allow startups to validate their technologies in a particular sector.

Adding value at the early stage

As with all VCs, capital gains are front of mind for corporate investors, we always say that there’s nothing strategic about losing money. However we are just as committed to being a good partner to our founders and generating strategic returns for our sole LP, JLR.

This has a direct impact on the way we operate. We’ve come to understand that our value add as investors lends itself better to companies at the beginning of their journey. Early-stage capital offers founders a route into the highly lucrative automotive sector and an opportunity for JLR to learn from startups, without the commercial pressure that might accompany a growth stage investment. We’re not alone in adjusting our thesis, in the first nine months of last year seed funding rounds comprised between 22% and 24% of all the corporate-backed startup funding rounds.

The recent ‘State of European Tech’ report by Atomico revealed that alignment of vision is currently the most important founder consideration when considering which investors to work with. One of our founders recently told us that, if it was up to them, they would fill their cap table with CVCs because there was a clear alignment of objectives. The ‘growth at all cost’ mentality is replaced with a commitment to sustainable product development, and our interest in strategic returns permit us to take a longer term view on our investments than financial-first VCs. Early stage founders have much to gain from a considered approach to scaling, especially in today’s market,

Looking towards the future

Single LP CVCs such as ours are fortunate to not face the fundraising pressures of our institutional peers, allowing us to invest more capital, time and resources in our existing portfolio. Combine this with the aforementioned benefits of corporate venture capital and it’s not a stretch to imagine that strategic investors will continue to be sought out by founders and VCs alike in the coming years.

The past 14 months has been one of our busiest periods to date. We made more investments in the first 7 months of 2023 than the previous three years combined, and with four investments under our belt this year we’re continuing that momentum in 2024. But the hard work is only just beginning. CVCs need to capitalise on the next 18 months to build credibility as trusted partners to founders in their verticals so that they remain the investor of choice when the wider market bounces back.