VC money is drying up, but CVC is quenching founders’ thirst

It used to be easy for entrepreneurs to get venture capital. They could say, “Show me the money,” and it would be there. Not now.

Venture funding in the most recent quarter fell by 53 percent, or $90 billion, year-on-year, per Crunchbase. In fact, the funding amount for Q3 set a nine-quarter low, according to the National Venture Capital Association.

But as corporate venture investors, we’ve seen a totally different trend. This same Q3 data showed that 25.6 percent of deals done included a corporate investor. And according to the NVCA data, CVCs were involved in nearly 45.3 percent of deal value this year.

Not a fluke

Record-level involvement of corporate venture has been happening for a while; it’s part of a long-term trend. It’s not going to decrease.

Over the last decade, corporate venture deal value has also increased more than 10x, according to a 2022 report by Bain Capital, which also found that CVCs’ annual deal volume has grown at about 7 percent between 2017 and 2020.

And the number of CVCs grew nearly 6.5x between 2010 and 2021 according to Silicon Valley Bank. There are now more than 4,000 CVCs actively making investments.

This increased number of investors means better outcomes for start-ups and other companies. Corporates play a critical role in the expansion and success of a company. Consequently, it is vital for entrepreneurs to monitor and understand shifts in the investor landscape as investors can influence everything from capital allocation strategy to the operations of a company.

No longer are corporates sitting on the sidelines as passive investors. The days of not participating in the decisions of running a company are gone. This continued participation of corporate investors is vital for companies, especially with likely continued uncertainty in the financing environment.

Financial stability

Corporates are in more financially stable positions. Often, they have just one limited partner, which means they aren’t distracted by fundraising. They also typically don’t have a 10-year time limit on their funds, allowing corporates to truly play the long game. And with trickier times ahead, it is even more important to have board members that have experience building and running a successful business, as well as giving portfolio companies access to services that are beyond the realm of traditional VCs.

Mostly, VCs are there to write checks, make connections and give advice. They’re great at IRR, but perhaps it’s not the optimal capital mechanism for scaling sustainable change within and across real-life institutions.

Corporates offer platforms that can bring revenue, distribution and product expertise, which leads to getting the product out to market and reduces risk. They can also help get commercial deals done. They’re effectively forms of non-dilutive capital, providing a unique competitive advantage to companies. Most importantly, given the power of their balance sheets corporates can also invest through market down cycles.

The good news is also that CVCs are doing what too many VCs aren’t doing in these tough times — focusing on scaling innovation. Executives know that their future success is dependent on innovation.

Innovation allows organizations to stay relevant in the competitive market. It also plays an important role in economic growth. And given these tough times, growth is survival. The ability to resolve critical problems depends on new innovations, and today it is more necessary than ever.

Bill Taranto is president and general partner of the Merck Global Health Innovation Fund, a $500 million evergreen fund and corporate venture arm of pharmaceutical company Merck. He can be reached at william.taranto@merck.com.