Corporate Innovation/Interview/

How is the economic downturn affecting corporate innovation?

Despite the economic downturn, open innovation and corporate venturing are here to stay. 

By Alejandro Tauber

Alberto Onetti

The global downturn has venture capital investors investing less (if at all), at lower valuations and with more stringent demands on startup cashflow.

Startups, meanwhile, have started laying off staff in the US and in Europe, while others are putting hiring on pause, reevaluating their valuations and cutting spending. 

But how is the downturn affecting — or likely to affect — corporate venturing? 

A Pitchbook report on non-traditional investors published in May this year, suggests that savvy CVC investors should keep on backing startups. “Because of likely repricing in the venture market, corporate investors that stay active are likely well positioned to continue putting money to work in startups. More than half of CVC investments occur in seed and early-stage deals, requiring less capital but providing the opportunity for a high non-cash return.”

We asked corporate innovation pros whether they agree. 

No signs of any big changes soon

Alberto Onetti is chairman of Mind the Bridge, an innovation consultancy that works with corporates and startups. For now, Onetti is quite comfortable predicting that in the short term, the effect of the economic downturn and VC slowdown will have little impact on the innovation activities and spending of corporates. 

“Last December we asked the world’s top 50 corporate innovation executives what their plans were for the next year,” he tells Sifted. “Only 7% were planning to reduce the innovation budget, while 43% were planning to increase spending.”

He says he hasn’t heard of any winding back on those plans. “In our regular conversations with innovation executives, the corporate grapevines haven’t whispered over any plans to cut innovation budgets. None that I know has hit the panic button, at least for now.”

Lars Roessler, head of corporate venturing at BSH Startup Kitchen, the venture unit of the home appliances giant, agrees mostly with Onetti. “I don’t see people panicking, or immediately cutting things,” he says. He does foresee a push to reduce budgets in certain areas of corporate innovation at the end of the year or early next year, once the magnitude of the downturn starts becoming clearer. 

So what about the longer term?

Onetti is less certain about innovation activities in the longer term, though, saying “things might change in the next budget allocation cycle”.

As corporations normally allocate budgets year-to-year, his expectation is that the current economic environment might have consequences for next year’s budgets. But also that the effect will differ for different types of innovation activities. 

“I don’t expect companies to cut critical R&D initiatives, but they might cut some low performing, mostly marketing driven initiatives,” he says — things like corporate accelerator programmes, intrapreneurship initiatives and startup event sponsorships.

Roessler at BSH agrees. “If I were running an accelerator programme, or working on experimental stuff with no direct business case, I would be worried.”

Onetti also believes that unlaunched bigger projects which are currently under evaluation might be affected. “Venture builders are a good example here; many companies are planning some form of them, and I have heard that a few have been paused.” 

“Initiatives that are not delivering results will be the first to be cut”

“My experience is that you can only save these projects or initiatives if you have a strong enough sponsor within the company,” Roessler says. “But then again, there might be more cost-efficient ways to achieve the same goals.” 

As a firm believer in the venture-client model, Roessler says it often doesn’t make a lot of sense to try to build everything yourself. He’s convinced that partnering with startups as a client can achieve many of the same goals, while “actually reducing existing costs”.

“It’s about having business impact,” adds Roessler. His tip for fellow innovators? “Focus on saving costs and solving inefficiencies — that will be key for these activities to survive.”

In general, Onetti says that all of this is also dependent on performance: “Initiatives that are not delivering results will be the first to be cut.”

Corporate venture in difficult times

CVC funds are not structured like traditional venture capital funds, with most of them being evergreen –– which basically means that they’re topped off to a predetermined size at regular intervals, rather than depleting over time. 

This makes them both more stable, because there’s less uncertainty about finding money, but also leaves them at the mercy of annual budget negotiations. Roessler thinks the big ones like Intel Capital or Robert Bosch Venture Capital should be just fine. 

“They will be good and they know how to do things. Even if things get tricky, they still know how to get good deals and how to protect their portfolio companies as well as they can,” he says.

He does believe the downturn will affect the number of new CVC funds being set up. 

“The reality is that nobody has a clue”

Depending on how the investment pullback progresses, and the resulting effect on valuations, this could either have a positive or negative effect on next year’s budget, Onetti says.

He notes the recent decision by energy giant TotalEnergies to dismantle its CVC fund in favour of more early-stage initiatives, which was partly due to overheated valuations in the cleantech sector, Onetti says. 

“The big VC pullback started in the US, hitting private equity and very late stage investors.” Onetti sees the pullback as a wave that will take time to hit more early segments of the market, first progressing to Series A and B rounds, and then early and seed stages. 

“In Europe the effect will become more visible at the end of the year or even in Q1 next year,” he says.

Onetti remains realistic about making predictions. “The reality is that nobody has a clue. It’s very difficult to compare different ages and the effects of different recessions, also because the corporate venture environment today is more mature and widespread at global level.”

So what can corporate innovators do?

If done strategically, so the argument goes, investing more in innovation during economic crises can help a company come out on top versus competition that scales back investment. But what can corporate innovators do to convince leadership to take this to heart?

For Roessler it’s totally clear: convince leadership that what you’re doing is strategically relevant or will have high impact. “Companies will not get rid of their strategic priorities, even during a downturn,” he says.

Onetti has a couple of tips. “First, they should do their job properly and be focused on delivering results. Second, these results have to be communicated internally effectively.”

He thinks that many innovation units and CVCs are not putting enough effort into measuring the outcomes of their activities through a comprehensive KPI system to concretely show the value that is being created. 

Having a robust system to measure progress is even more important for projects that will have an impact on the longer term — between two to twelve years. “This is a must, although it is not a walk in the park to show strategic value for these projects,” he adds. 

In any case, Onetti warns corporate innovators to brace themselves: “Winter is coming. Get ready for volatility. But open innovation and corporate venturing are here to stay.”

Alejandro Tauber is a freelance tech and business writer based in Amsterdam. He tweets from @AlejandroTauber

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