It Was a Very Good Year
How the Stock Price Performance of CVC Parent Companies Varies with the Age of the Venture Capital Effort
We constantly seek data to support our hypothesis that a well-run corporate venture capital (“CVC”) unit provides the parent corporation with a variety of benefits. In January, we published a study of the stock price performance of U.S. companies with CVC units compared to the performance of the market. That initial analysis showed that the median U.S. corporation with an active venture capital unit grew its share price approximately 30% more than its respective market index over a period of about a decade. This update and expansion of our study, which examines stock price performance versus the age of the CVC unit, is the second in an ongoing series that will explore this data set from a variety of perspectives.
In our initial study, we analyzed the 35 public U.S. based corporations on the Global Corporate Venturing 2016 top 100 most active CVCs globally. For this update, we expanded our data set to the Global Corporate Venturing 2016 top 100 most active U.S. based CVCs. This list includes 60 public companies and 40 private entities. Of the 60 publicly traded companies, 21 are in California, 10 in New York, 6 in Illinois, and the remainder are distributed throughout the country.
39 of these companies are listed on the NYSE, while 21 are traded on NASDAQ.
The CVC units analyzed are between 1 and 30 years old, with about a third of them in existence for 5 or fewer years. The corporations studied compete in a variety of industries, including high technology (Intel), software (Google), energy (Chevron), financial services (Visa), waste disposal (Waste Management), and retail (Best Buy). Our methodology for compiling the additional data is consistent with the one used for the original data set.
In our initial study, we found that the average compound annual growth rate of the 35 U.S. public companies’ stock price (measured from the time each corporation announced its CVC) was 7.9% compared to exchange growth (measuring a blend of the NYSE Composite Index and the NASDAQ Composite Index)* of 5.5% on average over a period of about a decade. This 2.4% gross improvement represents an outperformance of 43.8%. 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%.
We observed a similar pattern in our expanded data set of 60 U.S. public companies over the same period. We analyzed these companies from the date they announced their CVC efforts. The average compound annual growth rate of the companies’ stock price over that period was 7.8%, compared to exchange growth of 6.0%. This 1.8% gross improvement corresponds to outperformance of 29.4%. The median gross CAGR differential was 1.2% (6.5% stock price growth for the median company, vs. 5.3% for its exchange), which represents an outperformance of 23.5%.
We sorted the corporations into three-year “bands” by the age of the venture capital program, and analyzed the median stock price change since the program’s inception. As of December 31, 2016, bands A and C had the highest outperformance of the market indices, followed by band D. Bands E and F both underperformed the market indices.
The benefits of a corporate venture program can include public relations, capability and learning, strategic value, and financial return. The contribution of each benefit varies over time and the performance we observed in the corporations’ stock prices may be linked to these factors.
Band A: 1–3 Years
There are twelve corporations in our data set whose venture capital programs are less than three years old. As of December 31, 2016, the median compound annual growth rate of these companies’ share prices since the inception of their programs was 10.5% compared to the median exchange growth rate of 5.3% during the same period. This 5.1% gross improvement represents an outperformance of 95.9%. On average, these twelve companies’ stocks had the largest outperformance of the 60 we analyzed. In the first three years, much of the benefit to the corporation of a venture capital effort may derive from public relations. Corporations that announce a venture effort are signaling to the market a commitment to innovation. Announcements and related press coverage could positively affect the stock’s price within the first few years of the program’s existence.
Band B: 4–6 Years
The fourteen corporations in band B announced their venture capital efforts between four and six years ago. The median compound annual growth rate these companies’ stocks since the inception of their programs was 8.0% compared to the median exchange growth rate of 5.6% during the same period. This 2.4% gross improvement represents an outperformance of 43.5%. At this point in the CVC program, the corporation has likely made investments and reviewed thousands of investment opportunities. Reviewing investment opportunities helps the corporation learn what is happening in the market, reinforces a culture of innovation, and surfaces business development leads. As CVC programs mature, more and more of the value the corporation realizes from the program comes from business development deals that help the parent company increase revenue from existing business units, launch new lines of business, or cut costs. By this time frame in a CVC effort, these business development deals may have produced financial results positively affecting the stock price.
Band C: 7–9 Years
Between seven and nine years ago, seven corporations in our data set announced their CVC programs. The median compound annual growth rate of these companies’ stocks since the inception of their programs was 15.8% compared to the median exchange growth rate of 8.3% during the same period. This 7.5% gross improvement represents an outperformance of 90%. Corporations continue to benefit from learning and business development deals as the venture capital effort matures. In addition, by this time frame, the program should also begin to realize liquidity from its investments and generate financial returns.
Band D: 10–12 Years
Five corporations announced their CVC programs between ten and twelve years ago. The median compound annual growth rate of these companies’ stocks since the inception of their programs was 12.3% compared to the median exchange growth rate of 8.0% during the same period. This 4.3% gross improvement represents an outperformance of 53.1%. At this point, the corporation should benefit from public relations, learning, business development deals, and financial returns, all of which may positively impact financial results and market perception.
After twelve years, it appears corporations’ stock prices underperform compared to their indices. We took a deeper look at the 22 corporations that make up bands E and F by the year they announced their CVC program to understand what might drive the underperformance.
Band E: 13–15 Years
There are only two corporations with CVC units thirteen and fourteen years old, Applied Materials (NASDAQ: AMAT) and Eli Lilly (NYSE: LLY). Both stocks underperformed their indices by 3.8% and 3.2% respectively. Two data points cannot be considered representative of how the median corporation with a fund thirteen to fifteen years old performs. We will continue to monitor corporations as their CVC programs age to see how they perform when they reach thirteen years old.
Band F: 15+ Years
20 corporations have CVC programs that are over fifteen years old. Among these, 13 are vintage 2000 CVC units, meaning they announced their venture capital efforts in 2000. Given the dot-com bubble and subsequent correction in 2000 and 2001, the stock price on the announcement date of 70% of the vintage 2000 funds was at or near the parent company’s all time high stock price. In addition, these same companies are all in the technology and telecommunications industries, which suffered the greatest stock price declines during the dot-com bust. Market conditions at the time of launch may explain the performance of this cohort.
The outperformance of the stocks of corporations with one to twelve-year-old corporate venture capital programs does not necessarily indicate a causal relationship between the program and the stock performance. Other factors could account for these results. These corporations may be successful already, and through good results in their core businesses, have the resources to start a corporate venture unit. Product launches, management changes, or other events unrelated to the investment program also could have led to the stock performance. However, we believe the benefits to the corporation discussed above, even in a small program, can potentially create a disproportionate impact. We will continue to explore the stock performance of public companies with a corporate venture capital function.
*For each company in the data, we calculated the compound annual growth rate of the stock between the date of announcement of the CVC effort and December 30, 2016.
The NYSE Composite Index is a float-adjusted market-capitalization weighted index which includes all common stocks listed on the NYSE, including ADRs, REITs and tracking stocks and listings of foreign companies. The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. All indices used in this article are provided for informational purposes only and are provided for the purpose of making general market data available as a point of reference only. The performance and characteristics of an index used in this report is not an exact representation of any particular investment, as you cannot invest directly in any such index.
Selina Troesch (selina@touchdownvc.com) 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.
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 or to invest in any particular security. 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.
