Can Corporate Venture Capitalists Help Startups Go Public?
A majority of venture-backed IPOs have corporate investors
Many venture capitalists consider an IPO to be the most prestigious type of exit for their portfolio companies. Public offerings are rare and lucrative — according to NVCA and Pitchbook’s Q4 2018 Venture Monitor report, 10% of venture-backed exits in 2018 were IPOs, but these IPOs represented $63.6 billion of the $122.0 billion of exits that year — over half of the total exit value. Further, the median venture-backed acquisition in 2018 was $105 million, compared to $348 million for the median IPO. That means the median IPO is worth 3.3x the median M&A deal for VCs. So given the financial importance of IPOs, we were curious about the relationship between corporate venture capital (“CVC”) funding and startups exiting via IPO: our below analysis of venture-backed IPOs between 2004 and 2018 shows that while an average of 13.3% of venture capital deals every year had a CVC investor, 61% of VC-backed companies that went public during this period had at least one CVC investor.
Our hypothesis was that startups might benefit from CVC funding in ways that could make them more likely to go public. We looked at the venture-backed IPOs of the past 15 years to see whether CVC backing correlated with a greater likelihood of IPO.
Using PitchBook, we identified 421 U.S. headquartered venture-backed IPOs between January 2004 and October 2018.* We then populated the date of the IPO and the syndicate of investors that funded the companies before the IPO date, including traditional VCs and CVCs. We defined a CVC investor as either a corporation or corporate venture capital unit.
Of newly public companies in our sample with a CVC investor, most had 3 or fewer. One company, DocuSign, boasted 12 corporate backers, making it a notable outlier in our sample.
The majority of IPOs in our sample were tech, pharmaceutical with more than $1 million of revenue*, or healthcare companies.
Our results show that 61.0% of the companies analyzed had at least one CVC investor before their IPOs. This stands in contrast to just 13.3% of venture-backed deals receiving CVC funding over the same time period, a 4.5x over-representation. Furthermore, in 12 out of the 15 years we analyzed, the number of CVC-backed companies that went public either equaled or was greater than the total without CVC participation. The consistency of this correlation suggests that CVC backing could be related to completing an initial public offering.
Several mechanisms might explain the correlation. First, CVCs often coordinate with business units at the corporation to facilitate commercial agreements. As Scott Lenet describes in his article Bending Bullets, these commercial deals can include “technology licensing, supply chain collaboration, distribution or reseller agreements, co-marketing arrangements, and even straightforward vendor relationships.” Commercial deals with their corporate backers can have a variety of benefits for startups, including increased revenue, decreased distribution, marketing, or manufacturing costs, and increased credibility with prospective customers. Any of these could create potential advantages that could result in market leadership and the potential for a public offering.
Second, even if without a formal commercial deal, investment from a CVC may provide the startup’s management with access to the expertise of the corporation. Whether the CVC has representation on the board, or an executive acts as an advisor, the startup may be able to tap into industry expertise more easily. Again, this could lead to competitive advantage.
Third, equity investment from a CVC could extend the corporation’s “brand halo” to the startup. The corporation’s involvement may provide the startup with credibility when pitching prospective customers or seeking an investment banker to underwrite the IPO process. In highly competitive markets, the reputation of a corporate backer might help a company differentiate itself from the crowd.
A possible counter-argument to our theory that startups gain advantages from corporate backers is that CVCs cherry-pick successful companies for funding just prior to an IPO. If true, this would create a false signal of corporate benefit to startups. We plan to investigate the timing of CVC funding in a subsequent study.
As I frequently note in our research posts, correlation is not the same as causation. It may be just as likely that companies with the characteristics necessary to go public (for example rapid revenue growth, profitability, or market leadership) seek out corporate funding. We will continue to examine the financial performance of this population of companies in future research.
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*Our sample excludes pharmaceutical companies with less than $1 million of revenue that went public to raise money for clinical trials. These pharmaceutical companies are very early stage businesses that are not comparable to typical companies going public in other industries.
Selina Troesch (firstname.lastname@example.org) is a Senior Associate at Touchdown Ventures, a Registered Investment Adviser that provides “Venture Capital as a Service” to help leading corporations launch and manage their investment programs. Touchdown’s President Scott Lenet contributed to this article.
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