However, when market downturns occur, corporate priorities can shift dramatically, demanding a more immediate focus on short-term needs.

This shift often translates into heightened emphasis on quarterly earnings, reallocating funds previously earmarked for CVC investments, and increased scrutiny of venture activity performance. Simultaneously, liquidity within existing CVC portfolios may dwindle due to unfavourable capital market conditions precisely when needed.

So, how can CVCs navigate this challenging environment of intensified cost and profitability scrutiny? Several strategies can be employed:

• Strategic Realignment: Implementing hiring freezes, reducing new and follow-on investment activities, and concentrating support and resources on the existing portfolio.

• Portfolio Optimization: Exploring portfolio exits and divestitures to unlock capital and sharpen strategic focus.

While the prospect of selling assets or spinning out teams during a downturn might seem daunting, it presents a unique opportunity to proactively reshape the portfolio, enhance economic alignment, incentivize the CVC team, and divest non-strategic assets. Just as C-suite executives make decisive moves during downturns, so too should CVCs adapt to shifting priorities.

Divestiture: Refocusing Capital and Effort

Selling assets, whether individually or as a basket, can be a powerful tool for corporations to refocus their efforts and capital on the most promising portfolio companies. CVC, inherently a "numbers game," involves making numerous smaller bets with the hope of uncovering strategic value. As non-core companies attract follow-on capital and drift further from the parent company's core strategic objectives, they can become liabilities, especially in a downturn.

Mike Piechalak, Partner at Rakuten Capital, highlights this point: "Selling a non-core portfolio can be instrumental in sharpening the organization's priorities and redeploying capital into more strategic businesses."

While exit valuations may not be optimal during a downturn, any cash generated from secondary sales, particularly when M&A and IPO are subdued, provides valuable capital for new CVC investments. This is especially advantageous when reinvested in earlier-stage companies, as round valuations tend to be lower during such periods.

Spin-outs: Fostering Independence and Alignment

Executing a corporate venture spin-out is a complex endeavour regardless of the economic climate. It demands a confluence of factors, including a motivated team, adequate resources and capital for the spin-out entity, and unwavering support from the corporate parent. During a downturn, corporate willingness to engage in spinouts can fluctuate significantly due to the aforementioned shifts in priorities.

CVCs that have weathered changes in corporate priorities understand the critical importance of diversifying investor bases and establishing robust long-term economic alignment. Chris Langford, Founder of Lowes Ventures and Partner at Home Technology Ventures, experienced such a shift firsthand while at Lowes. He notes, "For CVCs managing portfolios that have diverged from core operations, a spin-out can be an effective solution. It allows parent companies to generate proceeds, reset CVC priorities, and empower former portfolio companies to seek out investor bases better aligned with their future growth."

Fundraising undeniably becomes more challenging during economic downturns. This is where secondary transactions can be crucial in generating liquidity for corporate parents, enabling them to reinvest as primary commitments in the spin-out entity. While any path forward will present challenges, securing new capital for an independent organization can be highly rewarding for team members. Implementing carry and performance-based bonuses helps align fund managers with their limited partners.

Third-Party Capital: Injecting Expertise and Incentives

Beyond full spinouts, alternative solutions can be tailored to meet a CVC's specific needs. For instance, a continuation vehicle can be established to transfer CVC assets into a new entity with revised economics without requiring a complete separation from the corporate parent.

Bringing in third-party capital while retaining corporate sponsorship as the anchor investor can facilitate the incorporation of attractive GP terms, such as management fees and carried interest. These incentives can be instrumental in enhancing CVC unit retention, attracting top talent, and driving strong financial performance.

In this context, it's crucial for CVCs to partner with experienced investors who can offer customized solutions as they evaluate their options.

Thriving in the Face of Adversity

In conclusion, during economic downturns, CVC teams must be agile in adapting to parent company needs and responding swiftly to changing market dynamics. Embracing this period of change is in the CVC unit's best interest. The hard work and strategic investments made during a downturn can ultimately give rise to the most compelling opportunities when the market rebounds.