The Curious Case of the Corporate Capital Correlation
Or, How Corporate Venture Capital Efforts May Boost Public Stock Share Prices
We are a little obsessed with demonstrating that corporate venture capital creates value, so we constantly look at data to find patterns that show the benefits of a well-run corporate venture capital (“CVC”) program. In that vein, we recently analyzed how the stocks of corporations with VC programs have performed versus the market.
Our experience and instincts tell us that having a CVC group positively impacts a company’s long term performance, and therefore should boost stock price, too. But what do the facts say? We created a data set from Global Corporate Venturing’s 2016 Top 100 most active CVC list (based on investment volume from 2011–2015), and our analysis shows that the median U.S. corporation with an active venture capital unit grew its share price approximately 30% faster than its respective market index, over a period of about a decade. Our methodology is described below.
The Global Corporate Venturing 2016 top 100 most active CVC list includes 80 public companies and 20 private entities. This group consists of 35 U.S. corporations and 45 international businesses, with 28 in Asia, 16 in Europe, and 1 in Africa.
To start, we analyzed the 35 public companies in the United States on the list. We intend to widen our study to include a larger number of U.S. corporations with CVC programs, as well as the non-U.S. CVCs on the Global Corporate Venturing top 100 list. Of the 35 publicly-traded companies, 12 are based in California, 7 in New York, 4 in New Jersey, and the remainder are distributed throughout the country.
24 of these U.S. companies are listed on the NYSE, while 11 are traded on the NASDAQ. The data set for these 35 companies and their exchanges can be downloaded from our web site at www.touchdownvc.com.
The average age of the corporate venture groups in our analysis was 11.0 years (with a median age of 8.9 years), which we believe is enough time for a corporate venture capital program to demonstrate results. This duration also includes some business cycle fluctuations and some management turn-over. Because keeping a CVC program during an executive transition can be a challenge, we believe the length of the programs studied also shows commitment by these organizations.
As of December 31, 2016, the average compound annual growth rate of these 35 companies’ stock price (measured from the time each corporation launched its CVC) was 7.9% compared to a time-weighted average exchange growth (measuring the NYSE and NASDAQ) of 5.5% during the same period. This 2.4% gross improvement represents an outperformance of 43.8%. Since averages can be skewed by outliers, we also looked at median performances. The median gross CAGR differential was 3.1% (13.5% stock price growth for the median company, vs. 10.4% for its exchange), which represents an outperformance of 29.5%. In the chart above, each line represents one corporate venture capital arm, organized by age. The chart below shows the 35 parent corporations of the CVC units above, organized by stock price growth since the launch of each CVC.
Our methodology included determining the start date of each CVC via its website and its first investment recorded on Crunchbase. If the corporation started its CVC before going public, we analyzed performance only from the time of the IPO to the present. For stock performance, we used the December 31, 2016 closing price on Yahoo! Finance. The NYSE or NASDAQ performance in this analysis is measured for each CVC separately and is calculated since the program’s inception. The median compares Intel Capital’s stock performance (as it is the median performing stock in the study) with the NASDAQ since Intel’s first investment in 1991. The mean difference is calculated as the mean performance of the individual CVC parent stocks less the weighted mean performance of the NYSE and NASDAQ since each program’s inception.
The correlation we saw in this data set is obviously not proof that starting a corporate venture unit will cause a company’s stock price to beat the market. The effect we noticed could be the result of other factors. For example, it’s possible that companies form CVC units because they have forward-thinking executives, and it is this visionary leadership that is the cause of the stock performance. Or perhaps because the business is successful, it accumulates cash, has better than average stock performance, and also has the capital resources to form a CVC.
As a result, we plan to continue to expand and examine this data. We want to explore how these same stocks performed versus the market prior to starting their CVC efforts — maybe these are simply high performing companies. It would also be interesting to see if the corporations with more established CVC programs perform better. We also want to look at the impact of EBITDA contribution to stock price to assess how much of the effect may be due to the financial returns of the venture capital investments, versus any strategic benefits.
To this last point, typical CVC programs deploy relatively small amounts of capital compared to the overall resources of the balance sheet. So why would these programs have a meaningful impact on public stock prices? It’s a bit counter-intuitive that a small allocation of capital can have such a disproportionate impact.
But there are also a few reasons why the correlation may be causal, and why even a small program can create a disproportionate impact. We believe that the presence of a CVC unit can have a transformative effect on a company’s (i) innovation culture, (ii) facility in executing transactions with startups and other venture capitalists, and (iii) ability to anticipate disruptive incursions from startups.
(i) Culture — Big companies are stereotyped as moving slowly, but the venture capital function injects urgency into any company’s culture. Because entrepreneurs and their investors are focused on growth, speed, and scale, some of these values “rub off” on established corporations with venture capital arms. The result can be a more innovative overall culture.
(ii) Deal Skills — Just as a corporation’s culture may become more innovative, the transactional skill set for large companies can evolve, too. Large organizations are accustomed to doing deals a particular way, but transacting with entrepreneurs and VCs requires fluency with the latest deal terms and ways of doing business. These transactions include not only equity investments, but also M&A and business development deals, which can be “trickle-down” benefits of managing a venture capital pipeline.
(iii) Radar — One of the primary benefits of any venture capital program is an increased focus on potential market trends. When reviewing hundreds or even thousands of startups, venture capitalists become aware of many nascent market niches by hearing the pitches of entrepreneurs who perceive opportunity. Discerning which of these potential trends will become real markets — while they are still years away — can provide critical strategic insight for any corporation attempting to anticipate how to manage risk for the company’s core business.
These strategic benefits of corporate venture capital, along with the investment returns from successful investments, should offer the potential for improved financial results for the corporation. And these benefits should, in our opinion, eventually be reflected in superior stock performance, the ultimate bottom line for corporate shareholders. We plan to continue to track the stock performance of corporations with venture capital programs; hopefully we will find additional patterns that reinforce the value of this essential innovation function.
Eric Budin (firstname.lastname@example.org) is a Venture Partner at Touchdown Ventures, a Registered Investment Adviser that provides “Venture Capital as a Service” to help leading corporations launch and manage their investment programs.
This article includes information from third party sources believed to be reliable; however, we make no representations as to its accuracy or completeness. References to strategies are for illustrative purposes only and should not be relied upon as a recommendation to engage in any particular strategy. Opinions expressed herein are based on current market conditions and may change without notice and we reserve the right to change any part of these materials without notice and assume no obligation to provide an update. Recipients are advised not to infer or assume that any securities, strategies, companies, sectors or markets described will be profitable or that losses will not occur. Any description or information regarding investment process or strategies is provided for illustrative purposes only, may not be fully indicative of any present or future investments and may be changed at the discretion of the manager. Past performance is no guarantee of future results.