The Corporate Capital Correlation in 2019
Year 3 update on corporate venture capital programs’ potential impact on public stock price performance
Executives express a common concern when considering a corporate venture capital (“CVC”) unit: namely, market perception. Stock price is one potential sign of that perception, so two years ago we began studying the stock price of public companies with CVCs. Last year’s analysis of U.S. based public corporations on the “Global Corporate Venturing 2017 top 100 most active CVC list” showed that within our study, the median corporation’s stock price appreciated 42% more than the price of its listing index from the time of CVC unit establishment through the end of 2017. This year, in the third installment of the series, we refreshed the data as of June 28, 2019 and found that the stock price of the median U.S. corporation studied appreciated 21% more than the price of its listing index from the time of CVC unit establishment through the June 2019.
The “Global Corporate Venturing 2018 top 100 most active CVC list” consists of 77 public companies and 23 private entities. It includes 39 U.S. corporations and 61 international businesses.
In this 2019 update, we analyzed the 26 public, U.S.-based corporations on the list. Of the 26 publicly-traded companies, 12 are based in California, 4 in New York, 4 in New Jersey, and the remainder are distributed throughout the country.
14 of these U.S. companies are listed on the NYSE, while 12 are traded on the NASDAQ.
The average age of the corporate venture groups in our analysis was 11.0 years, with a median age of 10.0 years, which we believe is enough time for a corporate venture capital program to demonstrate results. This duration also includes business cycle fluctuations and management turn-over. Because maintaining 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 June 28, 2019, the average compound annual growth rate of these 26 companies’ stock prices (measured from the time each corporation launched its CVC) was 12.7% compared to a time-weighted average exchange growth (measuring the NYSE and NASDAQ) of 9.0% during the same period. This 3.7% gross improvement represents an outperformance of 36.8%. Since the mean can be skewed by outliers, we also looked at median performance. The median gross CAGR differential was 1.9%, (9.5% stock price growth at the median vs. 7.6% for the exchange), which represents a 21.3% outperformance. In the chart above, each line represents one corporate venture capital arm, organized by age. The chart below shows the 26 parent corporations of the CVC units analyzed, 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 PitchBook. 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 June 28, 2019 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 the average of Merck and Intel’s stock performance (as they are median performing stocks in the study) with the NYSE since each company’s first investments in 2010 and 2015 respectively. 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.
As noted in prior years, the correlation observed in this data set does not prove 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 could be that businesses with good fundamentals, which tend to have stock performance better than the indices, have the resources available to launch corporate venture capital programs.
We plan to continue to expand and revisit this data to test how a corporate venture capital effort relates to other observable characteristics of publicly traded businesses, like revenue growth. We hope to identify additional patterns that demonstrate the potential shareholder value of this increasingly essential innovation function.
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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 (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.
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.