We constantly seek data to support our hypothesis that a well-run corporate venture capital unit provides the parent corporation with a variety of benefits. In January, we published a study of the stock price performance of US companies with CVC units compared with the performance of the market.
That initial analysis showed that the median US 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 a series that will explore this data set from a variety of perspectives.
In our initial study, we analysed the 35 public US-based corporations on the GCV 2016 top 100 most active CVCs globally. For this update, we expanded our data set to the GCV 2016 top 100 most active US-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, six in Illinois, and the remainder are distributed throughout the country – 39 are listed on the NYSE, and 21 are traded on Nasdaq.
The CVC units analysed are between one and 30 years old, with about a third of them in existence for five 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 (CAGR) of the 35 US public companies’ stock price – measured from the time each corporation announced its CVC – was 7.9% compared with exchange growth, measuring the NYSE and Nasdaq, of 5.5% during the same period. This 2.4 percentage point gross improvement represents an outperformance of 43.8%. The median gross CAGR differential was 3.5% stock price growth for the median company vs 10.4% for its exchange – an outperformance of 29.5%.
We observed a similar pattern in our expanded data set of 60 US public companies. We analysed these companies from the date they announced their CVC efforts. The average CAGR of the companies’ stock price over that period was 7.8%, compared with exchange growth of 6.0%. This 1.8 percentage point 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 age of venture capital program, and analysed the median stock price change since the program’s inception. As of December 31 2016, bands A and C had the highest outperformance of 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 12 corporations in our data set whose venture capital programs are under three years old. As of December 31 2016, the median CAGR of these companies’ share prices since the inception of their programs was 10.5% compared with the median exchange growth rate of 5.3% during the same period. This 5.1 percentage point gross improvement represents an outperformance of 95.9%. On average, these 12 companies’ stocks had the largest outperformance of the 60 we analysed. 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 signalling 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 14 corporations in band B announced their venture capital efforts between four and six years ago. The median CAGR of these companies’ stocks since the inception of their programs was 8.0% compared with the median exchange growth rate of 5.6% during the same period. This 2.4percentage point gross improvement represents an outperformance of 43.5%. At this point in the CVC program, the corporation is likely to have 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 exposes business development leads.
As CVC programs mature, more and more of the value the corporation realises 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 timeframe 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 CAGR of these companies’ stocks since the inception of their programs was 15.8% compared with the median exchange growth rate of 8.3% during the same period. This 7.5 percentage point 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 timeframe, the program should also begin to realise liquidity from its investments and generate financial returns.
Band D: 10–12 years
Five corporations announced their CVC programs between 10 and 12 years ago. The median CAGR of these companies’ stocks since the inception of their programs was 12.3% compared with the median exchange growth rate of 8.0% during the same period. This 4.3 percentage point 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 12 years, it appears corporations’ stock prices underperform compared with 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 13 and 14 years old – Applied Materials and Eli Lilly. 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 13 to 15 years old performs. We will continue to monitor corporations as their CVC programs age to see how they perform when they reach 13 years old.
Band F: 15-plus years
Ther are 20 corporations with CVC programs over 15 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 telecoms 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 12-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 could also have led to the stock performance. However, we believe the benefits to the corporation discussed above, even in a small program, could create a disproportionate impact. We will continue to explore the stock performance of public companies with a corporate venture capital function.
Touchdown Ventures president Scott Lenet contributed to this article, which is an edited version of an article first published on Medium