When considering launching a corporate venture capital (CVC) unit, executives at public companies may wonder how analysts and the stock market at large will react to the news of an investment programme.
To help executives at our corporate partners and friends in the CVC community address those concerns, we began studying the stock price of public companies with CVCs. Our 2019 analysis of US-based public corporations on the “GCV 2018 top 100 most active CVC list” showed that within our study, the median corporation’s stock price appreciated 21% more than the price of its listing index from the time of CVC unit establishment through the end of 2018. This year, in the fourth instalment of this series, we refreshed the data as of 28 May, 2021 and found that the stock price of the median US corporation studied appreciated 45.8% more than the price of its listing index from the time of CVC unit establishment through May 2021.
The GCV 2020 top 100 most active CVC list consists of 80 public companies and 20 private entities. It includes 40 US corporations and 60 international businesses.
In this 2021 update, we analysed the 28 public, US-based corporations on the list. Of the 28 publicly-traded companies, 15 are based in California, four in New York, two in New Jersey, two in Washington state, and the remainder are distributed throughout the country.
Fifteen of these US companies are listed on the New York Stock Exchange (NYSE), while 13 are traded on the Nasdaq.
The average age of the corporate venture groups in our analysis was 12 years, with a median age of 10 years, which we believe is enough time for a corporate venture capital programme to demonstrate results. This duration also includes business cycle fluctuations and management turnover. Because maintaining a CVC programme during an executive transition can be a challenge, we believe the length of the programmes studied also shows commitment by these organisations.
As of 29 May, 2021, the average compound annual growth rate (CAGR) of these 28 companies’ stock prices (measured from the time each corporation launched its CVC) was 13.9% compared with a time-weighted average exchange growth (measuring the NYSE and Nasdaq) of 10.8% during the same period. This 3.1 percentage point gross difference represents outperformance of the index of 28.7%.
Since the mean can amplify the effect of outliers, we also looked at median performance. The median gross CAGR differential was 4.4 percentage points (13.9% stock price growth at the median versus 9.5% for the exchange), which represents a 45.8% outperformance. In the first chart on p. 63, each line represents one CVC arm, organised by age. The second chart on p. 63 shows the 28 parent corporations of the CVC units analysed, organised 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 analysed performance only from the time of the initial public offering to the present. For stock performance, we used the 28 May, 2021 closing price on Yahoo! Finance. The NYSE or Nasdaq performance in this analysis is measured for each CVC separately and is calculated since the programme’s inception. The median compares the average of Intel and Alexandria Real Estate’s stock performance (as they are median performing stocks in the study) with the NYSE since each company’s first investments in 1991 and 2013 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 programme’s inception.
As noted every year, the correlation observed in this data set does not prove that starting a corporate venture unit will cause a company’s stock price to outperform the market. The observed effect could be the result of other factors. With the global pandemic and stock market volatility in 2020, the impact of covid-19 on the industry of each company in our study likely affected short-term stock price performance and these results. The companies we studied were also the most active in a challenging economic environment, further indicating that underlying strength in these businesses’ fundamentals might also contribute to stock price outperformance.
We plan to continue to expand and revisit this data to test how a CVC capital effort relates to other observable characteristics of publicly traded businesses, like revenue growth and profit margins. We hope to identify additional patterns that demonstrate the potential shareholder value of this increasingly vital innovation function.
Also published on Medium