The Corporate Capital Correlation — One Year Later
Revisiting whether a corporate venture capital program may have a positive effect on stock price performance
Well-run corporate venture capital (“CVC”) units can deliver many benefits to their parent companies. A year ago, we hypothesized that CVC efforts could positively impact corporate stock price, because of the long term benefits of venture capital investing. Our analysis showed that the stock price of the median U.S. corporation on the “Global Corporate Venturing 2016 top 100 most active CVC list” appreciated 30% more than the price of its listing index since the establishment of its venture capital program through the end of 2016. To monitor this result, we refreshed the data as of the end of 2017. We found that the stock price of the median U.S. corporation studied appreciated 42% more than the price of its listing index from the time of CVC unit establishment through the end of 2017.
The “Global Corporate Venturing 2017 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 refreshed piece, 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 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, 2017, the average compound annual growth rate of these 26 companies’ stock prices (measured from the time each corporation launched its CVC) was 11.8% compared to a time-weighted average exchange growth (measuring the NYSE and NASDAQ) of 7.8% during the same period. This 4% gross improvement represents an outperformance of 50.6%. Since the mean can be skewed by outliers, we also looked at median performance. The median gross CAGR differential was 3%, (10.1% stock price growth at the median vs. 7.1% for the exchange), which represents a 42.1% outperformance. 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 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 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, 2017 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 Citi and J&J’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.
The correlation observed in this data set obviously 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’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.
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 EBITDA margin or revenue growth. We hope to identify additional patterns that demonstrate the potential shareholder value of this 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. 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.