Does it matter how many CVCs invest, or in which round they join the syndicate?
The value of having a corporate venture capital (CVC) investor on a startup’s cap table remains a topic of debate within the venture capital community. To help inform the discussion, I turned to a 2008 study by Vladimir Ivanov and Fei Xie, who established, for VC-backed startups, a direct relationship between having at least one CVC investor and higher initial public offering prices, based on price-to-sales multiples. The relationship shown by Ivanov and Xie held over a 20-year period from 1981
to 2000.
Ivanov is currently a financial economist at the Securities and Exchange Commission, and Xie is a finance professor at the University of Delaware. Per the authors, CVCs “aid in the growth and maturation of their portfolio companies” through “access to markets, technical assistance and credibility”. The effect they observed was strongest with strategic CVCs that built a commercial relationship with the startup: “We find that the higher valuations mostly accrue to startups that have a strategic fit with the parent corporation of their CVCs, where strategic fit is defined as the existence of a strategic alliance or close business relation.”
Curious if the relationship still held, I contacted Xie, who knew of no updates to their original study. I then updated the data for the period from 2000–2019 using an accessible approach via PitchBook that directly addressed our key questions about CVC activity. The updated results quantify, for the first time, the boost CVCs provided to IPO pricing in the most recent 20-year period. I also extended the analysis to uncover new information, such as whether there is an optimal number of CVC in a single deal or if there is an ideal investment round for startups to take on a CVC investor.
CVCs boost IPO pricings (2000–2019)
I used PitchBook to examine the last 20 years of data on startups that went public, using the following criteria to capture statistically meaningful IPOs and sales multiples: VC-backed IPO prices for US-based startups; listings on Nasdaq or NYSE; minimum enterprise revenue of $50 million.
According to Pitchbook, during the last 20 years, the median price-to-sales multiple for VC-backed IPOs that included at least one CVC investor (97 of them) was 6.8x, versus 4.4x for VC-backed IPOs with no CVC (117), a premium of 55%.
The average price-to-sales multiple during the same period was 10.0x for CVCs versus 5.8x for VC-backed IPOs with no CVC, a premium of 72%.
While the premiums fluctuate, the relationship appears consistent across the most recent five-year segments. Interestingly, 80% of the data points for this analysis occur in the most recent 10 years.
When stress-testing the parameters of this study, the relationship appears to hold for a lower revenue threshold, including international-based startups on the same exchanges, or excluding biotech startups. I also found that both the CVC and non-CVC cohorts were diverse by industry, with no significant differences in weightings toward higher-priced sectors.
Optimal CVC participation
The majority of VC and CVC-backed startups that went public in this data set had only one corporate investor, with outliers like DocuSign and Lyft having as many as nine.
The benefit of even one CVC investor appears to be significant. While the data shows that participation from two CVCs may generate the highest price-to-sales multiple, it is not clear that there is an “optimal” number of CVC investors.
Touchdown co-founder Scott Lenet indicates that “the original vision for our firm included the idea of multiple CVCs investing together, each adding distinct value for any individual startup”. We may be seeing this effect in the price-to-sales multiples of the IPOs with more than one CVC.
Optimal CVC timing
VCs and startups often contemplate which round of investment is the optimal time to bring in their first CVC investor. In this data set, CVCs first joined the cap table from seed to zeries F and later. Note that the data below indicates round, not stage, as it is sometimes the case that companies raise a Series A or beyond without having released a product.
Price-to-revenue multiples for VC-backed IPOs with CVC participation were consistently above the median of 4.4x with no CVC participation across
all stages.
While we see the highest valuation multiples when introducing the first CVC investor at Series B or later, it is not clear that this suggests a strategy of waiting until later rounds; this is because IPO multiples in companies with seed and Series A participation by CVCs performed better than IPOs with no CVC investors.
The refreshed data set confirms the conclusions of the original 2008 Ivanov and Xie study that CVC participation consistently boosts IPO price-to-revenue multiples, regardless of the number of CVCs investing or the timing of joining the syndicate. While we should further study if this occurs by causation, correlation or some combination of both, startups and institutional VCs should consider adding one or more CVCs prior to going public.