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average increase in market to book ratio among top performers.
financing rounds per year improve market to book ratio by +0.66 between 2010 and 2020.
years of average experience for the most successful CVC investment managers.
publicly listed corporates with headquarters in Europe across all sectors analysed.
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Partner Transaction Consulting and Valuation, PwC Germany
Tel: +49 30 2636-2119
Corporate Venture Capital (CVC) is an innovative, more and more common form of investment for corporates. They consider CVC to generate higher returns and to seize strategic growth options. Given the rapid pace of technological change and stronger global competition, they are increasingly being forced to explore new options to remain innovative and to obtain strategic advantages.
But what makes CVC investments, e. g. in innovative start-up companies, successful? How do such investments affect the performance of the investing parent companies? And which factors define the top performers? Answers to these and other questions can be found in the current “Corporate Venture Capital Value Impact Study” conducted by PwC Germany.
For the report, PwC examined the CVC activities of 123 European listed companies with a market capitalization of more than €2 billion using publicly available data, covering the period from 2010 to 2020.
“CVC activities offer significant opportunities for the investing parent companies. In our opinion, our results for European, publicly traded companies are equally relevant for all companies, listed or otherwise.”
A note in advance: Corporate venture capital often has a positive connotation. Yet, there is occasionally a lack of empirical evidence that investing parent companies actually achieve the competitive advantages they expect from their CVC investments. The study we present here fills this gap.
To measure the success of CVC activities, the study uses Tobin's Q as a business key figure, among others. It identifies the enterprise value based on the market to book ratio. If the result is greater than 1, stakeholders have a positive perception about future growth opportunities of the respective company. If it is smaller than 1, the stakeholders’ estimates about these opportunities are rather negative.
One of the key findings of the research: Intensive CVC activities – measured by the number of investment rounds per year in which the CVC unit is involved – have a significantly positive impact on how stakeholders assess their growth opportunities. In fact, participation in more than 10 financing rounds per year increased the market to book ratio by +0.66 during the observation period.
Further factors have a beneficial effect on the value created by CVC: For instance, the study shows that CVC units with a higher share of women on their investment team were able to increase their market to book ratios more strongly. For example, a corporate which improved the female share of its CVC staff from 20 % to 30 % (+10%) obtained +0.2 increase of its market to book ratio during the observation period. Top performers also relied on a management team that had, on average, more than 10 years of venture capital investment experience.
Another important factor for an increased value of the parent company through CVC investments is the coverage of CVC activities by stock market analysts. 10 broker reports covering a corporate’s CVC activities resulted in 0.6 increase of the corporate’s market to book ratio. However, focussing CVC investments on certain regions or sectors did not have any significant impact on the CVC value creation, neither positive nor negative.
“Remarkably, the size of the investment teams is not crucial. Among the top CVCs there were small and large teams alike. Far more important is that the internal processes work well and the members work together efficiently.”
By conducting regression analyses, the study determines how certain factors influence certain variables and which are more important than others. In addition, this study employed a wide arrange of empirical techniques: It started out testing for linear interdependencies, considered firm-specific effects (in the context of a so-called panel analysis), checked for non-linearities, and applied a variety of robustness checks. The analysis covered the entire sample period, from 2010 to 2020, as well as sub-periods to capture potential lag effects.
The focus of this study is whether corporates can create strategic value with the positioning of their CVC unit and whether investment intensity pays off, as measured by participation in a larger number of VC investment rounds. When examining the causal effect of CVC activities on competitive advantage, the study employs Tobin’s Q as a value impact proxy. It has been confirmed that the number of CVC investments is one of the most important value influencing factors for the respective company.