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 US-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 instalment of the series, we refreshed the data as of June 28, 2019 and found that the stock price of the median US corporation studied appreciated 21% more than the price of its listing index from the time of CVC unit establishment through 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 US corporations and 61 international businesses.
In this 2019 update, we analysed the 26 public, US-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 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 years, with a median age of 10 years, which we believe is enough time for a CVC 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 organisations.
As of June 28, 2019, the average compound annual growth rate (CAGR) of these 26 companies’ stock prices (measured from the time each corporation launched its CVC) was 12.7% compared with a time-weighted average exchange growth (measuring the NYSE and NASDAQ) of 9% 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.
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 analysed 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.
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 CVCl programs.
We plan to continue to expand and revisit this data to test how a CVC 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.
