By Jeff Schumacher and Walter Delph
The climate of venture capital has shifted dramatically. The influx of cash that flowed freely from venture capital firms to global startups for most of 2015 has slowed down — way down. Market turmoil and the future of early stage investing were major themes at the World Economic Forum in Davos over the past few days, and the venture capital investment trend has had a major part to play in this conversation.
The overall macro economy may be reverting to the mean with a slowdown in the market, which leads some experts to suggest that the tech bubble may deflate. For example, there was a 30 percent global decrease in venture-backed funding in Q4 of 2015, the most restrictive quarterly deal movement since Q1 of 2013.*
Whether or not that is the case, investors have become more cautious, and startups have braced themselves for additional markdowns from late-stage investors. As a result, the days of mega-rounds and over-funding may be decelerating, and early stage startups have the most to lose.
In a tougher macro economy, the IPO window will start to close. If mergers and acquisitions close as well, venture capital firms will require liquidity to function. They’ll focus solely on their highest-performing portfolio companies and starve the rest. Startups require this cash to function, and a slowdown might mean suffocation for some burgeoning companies.
We should also state the obvious here because investing in “unicorns” has always been a risky business since 30 percent of these exits fall below valuation marks.** Still, this doesn’t mean the end of venture capital. The most advanced firms are developing strategies to insulate from these types of market pressures.
In corporate venture capital, we partner leading corporates with startups. This relationship has unequaled mutual benefits for both parties — cash and new exit paths for startups and growth opportunities for large organizations. At BCG Digital Ventures, in particular, we’re focused on shielding investments against losses by balancing market value and corporate strategic value, utilizing a portfolio approach and acquiring struggling startups that are open to new exit strategies.
In this more collaborative model of corporate venture capital, we’re able to marry market value and strategic value to create an unfair advantage. We’re also able to tap into unused resources from the corporate capital parked on balance sheets to create new businesses and products that impact millions of consumers across the globe (thus leveraging corporate assets and entrepreneurial vision to change the world).
The startup marketspace isn’t entirely dependent on traditional venture capital investments either (even if the investment trend sees another spike). The startups that partner with corporates and VC disruptors are uniquely positioned to prosper in a more restrictive investment climate.
Jeff Schumacher is the Co-Founder and CEO of BCG Digital Ventures. Walter Delph is an entrepreneur and now a Partner in the firm’s Manhattan Beach headquarters. To learn more on this topic, visit http://techcrunch.com/2016/01/21/jeff-schumacher-of-bcg-digital-ventures-on-the-merits-of-corporate-vc/ to hear Jeff Schumacher’s interview with Mike Butcher from TechCrunch.
* KPMG and CB Insights reported a 30 percent global decrease in venture-backed funding in Q4 of 2015, which is the most restrictive quarterly deal movement since Q1 of 2013.
** Regarding “unicorns,” the CEO of Spoke Intelligence, Phillipe Cases, pointed out that 30 percent of these exits fall below valuation marks.