(Bloomberg) -- In boom times many big companies turn themselves into venture capitalists, backing young enterprises in a bid to stay competitive or discover the next big thing. But when the economy slumps -- as it is now -- some corporations rethink their ties to startup funding, as the investment divisions of food giants Kellogg’s and Kraft Heinz show.
Though tech companies like Alphabet Inc. have well-entrenched corporate investment divisions, other firms may lack the same level of commitment to their venture arms, and as US recession signals mount, some are hesitant to keep funding money-draining bets while their sales and profits are shrinking. Any pullback in the current cycle would worsen an already subdued environment for financing new companies.
The value of US deals financed by company investment units in the second quarter dropped 21% from the first three months of the year, while the number of transactions fell 22%, PitchBook data show. Though that’s slightly better than the declines in US venture capital overall, it’s still corporate venture capital’s worst quarter since the final three months of 2020.
One of those changing its strategy is Kraft Heinz Co.’s Evolv Ventures. The division is shifting primarily to financing other venture capital funds instead of direct involvement in growing businesses, though it would make “strategic co-investments and direct investments as it makes sense,” a spokeswoman said. Amid these changes, Steve Sanger stepped down from his role as general partner, according to a post on his LinkedIn profile last month. Sanger didn’t respond to multiple messages seeking comment.
Similarly, Simon Burton departed as managing partner of Kellogg Co.’s Eighteen94 Capital earlier this year. Its last investment was in Sept. 2021, according to PitchBook. Jon Kucinski, senior director of corporate strategy at Kellogg, is now also managing director of the venture division, a Kellogg’s spokeswoman said in an email. “We are continuing to operate 1894 and evaluating potential investments,” the spokeswoman said, saying it didn't list all investments for proprietary reasons. Burton acknowledged his move but didn’t respond to further questions. He’s now at Nourish Ventures, the investment division of Griffith Foods Worldwide Inc. The cereal maker announced in June it would split into three businesses.
The reckoning follows a boom in 2021, with more than 2,000 venture arms making at least one investment compared to about 1,500 in each of the three previous years, according to PitchBook. The current mood is reminiscent of 2009, the nadir of the Great Recession, when the number of corporate startup divisions dropped 25% from the previous year to 402, according to PitchBook. It took until 2012 for the sector to fully recover, contributing to a lackluster few years for funding activity.
“Historically, CVCs have been known to pull back when there is economic turmoil,” says Lee Sessions, who retired from Intel Capital in 2020 after 31 years there. “The economy offers a credible excuse to cut a program that is not offering substantial strategic and financial value.”
The stalwarts of corporate VC are mostly from the tech industry. For example, Alphabet’s GV has more than $8 billion under management and is fed by a steady pace of activity. However, the mood at a June gathering of corporate investors signaled some wariness about the future. While conducting an onstage interview at the Global Corporate Venturing and Innovation Summit in Monterey, California, attorney Sandi Knox confessed out loud what some conference-goers had been whispering.
“We’re all sort of quaking in our boots a little bit,” said Knox, a Silicon Valley veteran and founding lawyer of Sidley Austin’s emerging companies and venture capital practice in Palo Alto, California.
That explains the emphasis at the conference on the importance of getting buy-in from the highest corporate levels. When Patrick Hogan, managing director of Honeywell Ventures, discussed the involvement of Honeywell International Inc.’s board in its venture group, moderator and venture capitalist Farzin Shadpour sounded impressed.
“A lot of people are willing to buy you lunch to learn how to ask for more support from the board, and get it,” he told Hogan.
Companies often see VC as crucial to stay competitive, and that can help entrench their commitment during hard times. Chile’s Empresas Copec SA, which owns gas stations across Latin America, is coming to terms with pressure on its revenue from government goals for electric vehicles. It set up WIND Ventures in 2020, and this year has targeted some electric transportation businesses for investment, among others.
And the allure of involvement in potentially fast-growing startups may persist even as rising interest rates boost returns elsewhere, said Bill Taranto, president of the Global Health Innovation Fund at New Jersey-based drugmaker Merck & Co. Sessions said corporate venture capitalists are more committed in part because some missed out on buying at lower valuations and capturing strong returns after the downturn a decade ago.
New venture divisions are still popping up -- consulting giant Booz Allen Hamilton announced one last month. But it can be difficult for new units to gain traction, particularly in a tough economic environment. Given that so many companies have launched investment units over the years, the number that’s actually active now looks low, said James Mawson, founder of Mawsonia, the media company that ran the Monterey VC conference.
“The fact that so many have stopped investing shows how tough it is for corporate venture arms to get beyond the first few years,” he said. That challenge will likely increase in the coming months as valuations slide at many private companies.
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