The Coming Correction: Will Large Companies Pull Back on Tech Investment?

We’ve spent a lot of time in the past few weeks talking with our corporate partners and listening to their views on the market. These conversations provide a window into how the market could evolve. Large corporations don’t have the luxury to pause innovation. On the other hand, a higher cost of capital and economic uncertainty can lead to a slowing in tech investment.

We looked at what happened to corporate venture capital (CVC) during the Financial Crisis and had two takeaways. This provides a proxy for what could happen in the current market environment.

1. It takes corporate investment much longer to bottom out; on average, 4 years versus 12 months for overall venture capital.
2. There is a sharper decline in total capital invested by CVCs as the overall volume of dollars deployed declines and the relative share of CVC participation also declines.

What do Corporate Execs Expect?

To get a better view of what executives believe is likely, we conducted a survey that included some of the biggest players across retail, payments, banking, and insurance.

Interestingly, there was a lack of consensus. Half the group was negative and close to a quarter of respondents believe that more than 25% of CVCs will be shuttered in the next 12 months. The other half was positive, believing that investment would stay at the same levels of the past few years — or even increase.

Executives were much more bullish on broader tech investment beyond CVC, with 93% believing that investment in tech will continue at its current pace and potentially accelerate. More than half of respondents believe that their organizations will actually increase investment in tech. This is especially meaningful as tech investment across commerce sectors hit historic highs during the pandemic.

COVID has clearly accelerated digital acceleration across many aspects of commerce. It has also heightened customer expectations around digital experiences. Yet, we’re still early in the overall digital transformation of our core industries. As executives confront the need to continue to invest meaningfully in this transformation, the majority believe partnering with venture-backed companies is critical to this journey.

So What?

The survey also revealed that nearly two-thirds of corporate executives believe there will be an increase in M&A activity — specifically for venture-backed companies that will be challenged and see valuations reset. As we look ahead, this will be the fundamental question facing many large corporations: deploy capital into new capabilities and tech or conserve resources to wait out the current volatility. Looking at past crises, we saw companies that invested meaningfully in tech were able to outperform their peers in terms of share performance and market cap growth.

We believe the innovation imperative is greater than ever. Large companies who approach uncertainty in the market as a time to invest in new opportunities instead of sitting back will doubtlessly come out on top.