The current economic landscape is under a lot of pressure. Rising energy prices, wage indexation, global demand decreasing due to the previous factors and, finally, a decrease in investment in the entrepreneurial world. The combination of these four signals presents a pessimistic view of the entrepreneurial world and announces harder times for smaller businesses and energy-reliant companies.
In difficult and uncertain market conditions, SMEs will mostly seek security and ensure their short-term survival by cutting costs and maximizing revenues in the short term. However, long-term needs may not be neglected in these troubled times. Studies show that companies that have not considered the growth side of their business and have focused on cost reduction during difficult times are very likely to underperform companies that pursue their growth. As a matter of fact, 21% of the “cutting cost companies” manage to outperform the “pursue growth” companies after the economy recovers to normal levels.
Assuming the company’s financial sanity is not at stake, the proper approach would therefore be to actively pursue growth even in economic downturns. However, financing in today’s economy is difficult and expensive, especially due to ECB’s rate hikes.
Strategic investment can be a solid answer to this situation. Corporate Venture Capital (CVC) could solve most of the current problems but also provide coverage for future opportunities. The entrance of a CVC in the capital would allow the company to secure resources and gain potential access to new networks and capacity. The long-term viability of the company would ultimately be improved. Industrialization know-how, easier access to financing, access to pipeline acquisition targets, better knowledge of the market, and direct access to smart money, new technologies, new capacities, and new services that would be complementary or critical to their activities.
However, to take advantage of the opportunities offered by CVCs, a proper approach needs to be adopted prior to the investment. Visions need to be aligned and mindset needs to be set right. CVC plans that seem unrelated to your current business might be good opportunities. The CVC arms are meant for exploring opportunities that lie outside their core business. As mentioned in Bain’s (2019) study, companies that operate disruptive and unproven technologies for industry, evolving technologies critical to an ecosystem and requiring an open mindset are the preferable targets. In fact, CVCs are created to explore unknown technologies and seek long-term relationships. Investing a minority stake in a promising company is a way for CVCs to stay in the loop on interesting technologies.
E-Spring Capital is born with the ambition to provide high-level financial and strategic advisory to enable small and mid-cap businesses to reach their full potential. Therefore, we put our 45 years of cumulative experience at the service of our clients to leverage their potential and create value for them.
E-spring has a history of working with VCs and CVCs. Should you be willing to get additional information regarding the potential opportunities that it would mean, do not hesitate to contact us.
Written by François Mathieu, Associate