Episode 14 - Venture Capital: Why More and More Corporations Are Getting On Board

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Episode 14 - Venture Capital: Why More and More Corporations Are Getting On Board w/ David Horowitz of Touchdown Ventures

SHOW TRANSCRIPT:

David Horowitz:                And I think, really, at the end of the day, what corporate venture is, is having an allocation outside the corporation.

Dave Knox:                         I'm your host, Dave Knox, and this is Predicting the Turn, a show that helps business leaders meet their industry's inevitable disruption head-on. Welcome to another episode of Predicting the Turn. Today, I'm excited to welcome David Horowitz from Touchdown Ventures. David, welcome.

David Horowitz:                Thanks for having me. It's great to be here.

Dave Knox:                         So I want to dive right into your backstory. You spent 14 years at Comcast Ventures, where you invested in multiple deals that were either acquired or eventually went public. In 2014, you left to start Touchdown Ventures, where you partner with leading corporations to manage their venture capital programs. What inspired you to start Touchdown?

David Horowitz:                Yeah, happy to talk about it. So as you mentioned, I was at Comcast for a long time. I was one of the early people that helped start the corporate venture fund there. I was there for almost 15 years. And what I saw there, a lot of people from the outside, especially other investors that I worked with, and other entrepreneurs, saw how impactful we were to the startups. But what a lot of people didn't see, is how impactful we were to Comcast. And actually, that's probably the one thing that I'm the most proud of. Really almost every new business that Comcast launched during that era either came out ... the inspiration to start that business or how that business was started came out of the corporate venture fund, and so that really generated real innovation impact to Comcast.

David Horowitz:                And also during that time, I started getting a lot of calls from other companies trying to pick my brain on how to do this the right way, meaning corporate venture capital. And at one point, the light bulb went off, and I said, I think there's a real opportunity, a company like Touchdown didn't really exist before, which is a third-party management company that can help manage corporate venture funds. So we came up with the idea, pitched that to a bunch of folks, and got some early traction, and that's when I left Comcast, and that was right in the middle of 2014.

Dave Knox:                         So talking about corporate venture capital, it's one of the fastest-growing portions of the venture capital ecosystem. Corporate VCs participate in one third of venture deals, I believe it was, and the number of corporate VCs has tripled since 2011. 75% of the Fortune 100 have active corporate VCs. What do you think is really driving this recent growth and this resurgence of corporate venture capital?

David Horowitz:                Yeah, and there's never been more of an impetus, and obviously, I know you've written a lot about this in your various books, around innovation and ... you know, we've all read the Marc Andreessen, Software's Eating the World. Software's eating every company, everybody's threatened about some new entrant, whether it be an Amazon or Google getting their business. I mean, Amazon and Google are in every business.

David Horowitz:                So you have a lot of, we'll call them older line companies that have been around for a long time and have never really had to innovate, and now they do. And I think this really goes to add innovate, and there's a lot of proof points, whether you look at what we did at Comcast or other successful corporations that says venture capital is a great way to innovate, and it makes a lot of sense. It's a great vehicle to see a lot of startup deal flow, to get a lot of market intelligence about where the industry's going, and ultimately, and I'm sure we'll talk about this in this podcast, a lot of different ways to, not just about investing, but really work commercially with startups.

David Horowitz:                So I think it will continue to grow, and obviously, you're very bullish on this space, you wouldn't start a company like Touchdown if you weren't.

Dave Knox:                         Yeah, so that's all the ways that corporate VC can benefit the corporate. How do you think the corporate VC really helps the entrepreneurs in their portfolio, to be the best that they can be?

David Horowitz:                Yeah, one of the interesting things about a corporate VC is the amount of depth that corporation has in that industry. Typically they have subject matter expertise and a traditional VC, it's very hard to go very deep because you tend to be more horizontally focused on your agnostic to industry and typically you're looking at investing in the best management team, best product. And a corporate VC, it's really different. If you're in, for example, healthcare, you're really dissecting a particular part of healthcare.

David Horowitz:                So that allows you to, I think, have a lot more knowledge of where that industry's going, have more connections, building up a recruiting talent around that industry. And so I think that's something that really gives corporate venture capitalist an advantage, even over traditional financial investors.

David Horowitz:                But the real way you really add value as a corporate VC is you figure out how the corporation that you're investing on behalf of, can really support the company. And so there's a lot of ways of doing that. A lot of that can even be done and should be done in the diligence process, of figuring out whether to invest. But typically what we'll do, even right after investment, we'll have almost a brainstorm meeting. What's put on the table, on the white board, all the ways we could work together. And then obviously, the hard part is obviously executing that. But just having that mindset that once we close the investment, we have to shift to the mindset of supporting the portfolio company. That's how we certainly think about things and a lot of other corporate VC's do the same thing.

Dave Knox:                         That's awesome. So corporations have a ton of options in their innovation portfolio, ranging from MNA to partnership to venture capital. What advice do you give to corporate partners, regarding this mix of what they need for their innovation? And how does corporate venture fit into that mix, as an overall piece of the pie?

David Horowitz:                Yeah, so I think the traditional model was that 100% of your R&D spend is spent inside the company. And I think really at the end of the day, what corporate venture is is having an allocation outside the corporation. And it's certainly not mutually exclusive, I mean a lot of great corporate venture investments are invested in companies that even supply products or technology, that could work with internal R&D. And that's actually, so I think they're very complimentary.

David Horowitz:                And then on the MNA side, MNA is every difficult. I'm sure you've had other people come on your podcast to talk about that, actually most MNA, especially when you're talking about a traditional older lying company buying a new digital company, the success rate on that tends not to be high. So if you think about it, venture capital is a way of de risking an MNA for corporations starting out, just kind of dating before you're married, starting out as a minority investor, understanding whether this is a good fit and certainly if you like it, invest more. Whether that continues a minor investor or certainly as acquirer.

David Horowitz:                So, actually that's one of the reason's were seeing, going back to your earlier question, of why we're seeing corporations do this. It's because it is a way of getting your toe in the water before making some big MNA bets in the innovative space.

Dave Knox:                         So playing out that analogy a little bit, one of the biggest fears I think entrepreneurs have when they take corporate dollars is, does that dating make me exclusive? That I'm going to the altar with this company or I'm never getting married. How do you talk to an entrepreneur about why taking a corporate dollar won't necessarily limit their choices to be able to look at other acquirers, competitor acquirers, et cetera, down the line?

David Horowitz:                Yeah I mean I think the limiting the choices would be on how you structure the deal. So certainly the advice I would have would be, not to structure a deal that gives you that limitations. I've certainly been part of plenty of examples, even going back to my days at Comcast, where we had even some competitors to Comcast, Dish Network I remember bought one of our portfolio companies. If anything, I've seen the opposite, which is actually other big strategic players, actually get more interested when they see that another player in their space has made an investment or gotten behind a company. So I've seen more of the opposite effect, then necessarily the limiting effect.

Dave Knox:                         Oh I love that. So related to all this space of as you think of corporate VC versus traditional, how's a corporate VC and a traditional VC both similar and different? Both from the mindset of an entrepreneur and just the community as a whole.

David Horowitz:                Yeah, it's a great question. I'll put a bit of a shameless plug out for our blog, which you should check out. Which is called Risky Business, it's medium.com/touchdown. And we publish a lot of great content about corporate VC. So we're actually in the process of writing one on this topic, because we think it's a good one.

David Horowitz:                And I would say that they're very similar, corporate VC and financial VC, the process, especially, I would say first is the corporate VC run professionally and that's probably distinction that maybe we'll talk to on this interview or not. But a professional corporate VC investor should be pretty similar, in terms of looking at financial returns, building a portfolio, being proactive and sourcing deals, the diligence process. The big difference would be the strategic lens of you're not just thinking about whether it's a good financial investment, but what strategically can the corporation do, again whether that's the portfolio value et we talked about or that impact to the corporation.

David Horowitz:                And that's going to be part of the analysis of whether it's a good investment. But, the professionally managed corporate venture firms should be pretty similar to a professionally managed financial venture firm.

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Dave Knox:                         Being at the front seat of the world of startups for the last two decades, you've been there seeing how somebody does that professionally manage and really works closely. But you've also seen a lot of corporations, whether it's ones you work with or in the industry as a whole, step on some landmines when it comes to working with startups. What advice do you give to corporations as they start engaging and working with startups to avoid maybe tripping over themselves?

David Horowitz:                Well I'd like to think the ones that are working with us aren't tripping over the landmines, because we're helping to avoid that. But in all seriousness, yeah I would say it comes down to this are you managing it professionally or not? And so, some examples of some of the mistakes that I've seen some corporations make, the first one would be not to have any goals. If you think about, in our belief, if you're starting a corporate venture fund or program within a company, that's like a new business. And the new business is to make venture capital investments.

David Horowitz:                So anybody would tell you, if you launch a new business, you should have a business plan. And a business plan should have what your goals and objectives are of success. And so, that's mistake number one that most corporations don't have that, so then their executives check in to see how the program's going, they can't articulate how the program is doing.

David Horowitz:                The second piece would be purely acting for strategic reasons. I can understand why a corporation would do that, but at the end of the day an entrepreneur probably won't want to take an investment with somebody who's interests aren't aligned with that entrepreneur and the other co investors. So I see that as a mistake.

David Horowitz:                The third one is, you see some corporations, I've seen this a lot, rush out and will make a lot of investments. They have a checkbook and they all of a sudden want to spend all the money and you learn a lot that there is no rush, it's a long game. And if anything, especially if you're relatively new at this, seeing more deal flow and trying to understand exactly what the right fit is, both financially and strategically. That might take some time. And so typically when we're starting up a new corporate venture fund, I mean we certainly violated this a few times, but we usually might wait even three or six months before we make our first investment, because we want to make sure once we make that investment, you own that for a very long time and you want to make sure you're making the right investments.

David Horowitz:                We've seen some corporate funds in the first month make four or five investments, that just doesn't make a lot of sense to me. Most likely there's going to be a failure rate and there's where the landmines potentially come in.

Dave Knox:                         Yeah. So I want to dig into the second point you made there of the interests being aligned, because I think that's one that actually a lot of corporate VC's and a lot of corporations, as I get into this, they misunderstand. Joe Medvet from [inaudible 00:12:18] Hippo, when I was sitting down with him as I was starting WPP Ventures, he said it's so important for the corporate VC's to realize both the entrepreneur and the traditional VC, their interests are aligned because they both want to make a lot of money from this investment.

Dave Knox:                         Some corporate VC's aren't structured that way. So, how do you coach people through that, of understanding the financial side of interests being aligned?

David Horowitz:                Yeah, it's a great question. We learn a lot from some of the comments that Fred Wilson, who's a very obviously respected and one of the best venture capitalists of our era for Union Square, he's actually been a big critic of corporate venture. I think he said corporate venture's the devil in one of his talks. And I think we've dug into that a little bit and I think there's a little bit of, I would call it our justice system is innocent before proven guilty and this is kind of the opposite of this, which is guilty before proven innocent. Which is, I don't know whether you're going to do the right things.

David Horowitz:                And I think the issue with that is you have to prove yourself, you have to build your reputation. And this is one of the ways you build your reputation, by acting just like a traditional financial investor would and that's where I think you get access to better deals, people want to work with you. And ultimately, I think to be successful in this business, you do want to make good financial investments.

David Horowitz:                There's a famous, I think line in corporate venture that says, it's never strategic to lose money and nobody wants to go to the CFO or CEO and say, "We've lost money". So yeah, we don't believe in, I think corporate venture is hard because you have these two lenses, that I mentioned before, you have the financial lens and the strategic lens. And you really should invest when companies check both boxes. And if it checks a strategic lens, it's okay you could do a commercial partnership, there are other ways you can work with a company. But you shouldn't invest if you don't believe it can make money and that's a fundamental belief of our team at Touchdown.

Dave Knox:                         Yeah. So one of the industries that I come from, that we've seen a ton of change, is in fast moving consumer goods. The P&G's, Kellogg's, et cetera of the world. Kellogg's, there is one of your clients that you work with, with Touchdown. And a lot of these consumer brands have been buying emerging brands, Kellogg's bought RX Bar, Unilever bought Dollar Shave Club.

Dave Knox:                         And you touched earlier that acquisitions sometimes don't always go great. You've had that unique seat that Touchdown sees a lot of these acquisitions happen from your portfolio and you were part of Comcast buying a lot of these, including some really successful ones that became business units. What coaching do you give to your clients and just other corporations of, how should they think about acquiring a company? How should they handle that, to make sure that it keeps growing and doesn't become a bad investment or a bad acquisition?

David Horowitz:                Yeah, one of the strategies that I've seen some corporations and I don't know, I know your answers on the CBG space, but I think it's a general rule of acquisition, especially of an earlier stage company, try not to integrate it as much initially. I think that always goes well, try to keep it a little bit arms length, try to keep the culture. Ultimately, at the end of the day, when corporations buy companies, they're really buying people. And some of the people that are not good at acquisitions, don't understand that and they are focusing much more on the asset and the business and the revenue and want to preserve that and don't really have the right incentives to keep the people.

David Horowitz:                And I think the right incentives to keep the people is to continue operating the business, giving them incentives to grow the business and some cases, especially if it's a startup, they're most likely capital constraints. So can you make them uncapital constraint, because the corporation has access to other capital. So, in essence you take the benefits of corporate VC and you bring it into the element of a wholly owned acquisition.

David Horowitz:                So, that's my best advice. But if you can't keep the talent, it's hard to imagine these being successful acquisitions. What I've seen with some of the companies that you mentioned, I think the brand extension has been pretty interesting. So I know both, you mentioned Dollar Shave Club and you mentioned RX Bar and when they were originally acquired, they were effectively single, at least from my understanding, single product companies and now they've created a series of products under that brand, they have a customer base and obviously some of the CPG companies, Kellogg's is really famous for that, in terms of how they've grown their business and how they've run their brands and certainly same with Unilever and Proctor and Gamble and others.

David Horowitz:                So, I think you'll see more of that, but it goes back to the team. That's what the team should execute on and that's a good justification, so that's why that's I think particularly important.

Dave Knox:                         Yeah. And on that part of, how do you keep the team incentivized. Because a lot of these folks that end up being the founders or the early employees that join these companies, they're incentivized by going big. They don't want a bonus structure that's 10% of their base pay is their bonus. They're swinging to change the game. If they've crossed that finish line of being acquired, how do you keep them motivated and incentivized to keep growing while not maybe alienating another division that is somebody that's in the traditional kind of job?

David Horowitz:                Yeah that's challenging, especially in a public company environment, because I think the first instinct is I'm going to give the team a lot of shares in my company and I do want them to help drive the stock price. I've seen it work better in a private environment, because there's no stock price. And a lot of private companies have some form of phantom stock, phantom equity plan and you can do that even on a divisional basis where you can say, "Okay, what's the value of this division within the bigger company?". Maybe you can give them both, because maybe you want that manager to also look out at the whole company.

David Horowitz:                But I think it's harder in a public company environment, I think it probably comes down to reevaluating your entire compensation structure, which I think is very difficult for, most companies would resist that type of change. But probably it's something that most companies are going to need to do to retain the talent.

Dave Knox:                         Makes sense. So venture capital and particular corporate venture capital, goes through waves that are often tied to economic cycles. The massive growth of corporate VC has been tied to a pretty good time period we've been in and the stock market and the economic cycle. What do you think and how are you coaching the folks you work with of, what the next five years look like? And if we do hit that economic downturn, how do they keep going through and realizing full potential?

David Horowitz:                Yeah, as a couple points, I mean I think the first one is I really believe, based on the comments that we talked about earlier, that this era is different. In the downturns of 2000 and 2008, if you did nothing in status quo, you'd probably be fine. And now it's different, you have retail stores closing shop, automotive companies are under threat by the Google's and Tesla's of the world. Amazon is putting a lot of hurt into any company, selling anything at retail. You've got Netflix, Apple are the media business now. There's no industry that's really immune from this. So I don't think you can just say, "We'll go back to status quo", I think you have to keep innovating and so it comes down to whether you believe venture capital is a tool in the innovation toolkit.

David Horowitz:                The other thing that I would say and I think this is harder for a newer corporate venture fund to understand, actually some of the best investments, so if financial is an objective, which it should be, can be done during these times. Other investors pull back, so if I go back to Comcast ventures, but you can even look at other just financial VCs, some of the best investments were in 2001, 2002, 2003, 2009 was a terrific year for venture capital investing, right after the 2008 recession.

David Horowitz:                So you want to stay in because the financial opportunities, but you want to stay in really because you need continued innovation. So, but there will be people that leave and those might be the people that don't survive and are filing chapter 11 or have bigger issues. But the big incumbents that continue to innovate, I believe will be in this business in good times and bad times.

Dave Knox:                         Yeah well and I think that's so important because the average age of a corporate venture fund, I think is like at four years. You've been doing this for 20 years, you've lived through two economic downturns that have happened and to your point earlier, about people are what matters, oftentimes those people that are in really good jobs, working for a big company, being paid a lot of money, the risk of them leaving isn't there. But, when a downturn happens, they might be forced to leave and suddenly they're on the market to go do a startup and that's a great time to be able to jump in and capitalize as an investor, to find great talent.

David Horowitz:                Absolutely.

Dave Knox:                         Yeah, so people underestimate that for sure. So, related to that then, companies and employees need to be in this state of what I call continuous beta. This place where they're constantly evolving and changing and recognizing all of this evolution that's going on in our industries and our careers. Today you sit there as a founder and a CEO that has to think about how do you, yourself, continuously evolve, but how do you keep Touchdown evolving?

Dave Knox:                         So how are you doing that? How are you thinking about the change that you need to drive for your people, for your company and for yourself?

David Horowitz:                Yeah I mean I think we have a number of different constituents, which certainly makes it hard. So the [inaudible 00:21:48], it's our people are our biggest asset, which we've talked about. So, we try to spend a lot of time in areas like training development and we'll have, we'll pick a topic and usually we'll have, this'll come from some of the folks on our team and an area of development and we'll either figure out someone on our team that has expertise or bring someone from the outside. So I think this idea that you're always training and professional development, which is pretty important in venture capital overall.

David Horowitz:                The other key piece is really listening to the corporations that we work with and this is actually a pretty good advantage of the Touchdown model. So what we've seen is, some of our best ideas of how we do things at Touchdown, come from the corporations themselves, say, "Have you thought about X Y or Z?". Or have given us a new lens. And one of the nice things, if it really works well, we can take that idea and go to another corporation that we work with and really test that out and all of a sudden can demonstrate more value.

David Horowitz:                So there's an interesting kind of network effect from that perspective of our model. So, those are some of the things we continue to think about what other opportunities are there for Touchdown in the corporate venture market and right now, our focus has principally been if you're a new corporation that is evaluating whether to do corporate venture, we are really good potential partner to work with, especially given our expertise and our ability to really get up and running quickly, which we've done with a number of corporations.

David Horowitz:                So we continue to think about, what are the other areas of corporate venture where our expertise can be valuable? So those are some things that I'm sure you'll see from us, as we think about growing our business.

Dave Knox:                         Awesome. Well really enjoyed the conversation. You mentioned earlier that you guys share your writings on medium at /touchdownventures on Risky Business.

David Horowitz:                Touchdown VC actually.

Dave Knox:                         Touchdown VC, there you go. So, if somebody wants to get ahold of you and learn more about what Touchdown's doing, what's the best channels to do so?

David Horowitz:                I think any, LinkedIn's made the world so flat, so certainly reaching out through that or being referred by a mutual connection is always great. I mean obviously on our website we have our email address, but I'm sure there's a number of ways to get ahold of us.

Dave Knox:                         Awesome, well thank you so much again. That was a great conversation and love all the things you guys are doing in the world of corporate venture.

David Horowitz:                Yeah thank you so much, it was great participating with you. Thanks.

Dave Knox:                         Cool. Thank you.

Dave Knox:                         Thanks so much for listening. If you like the show, hit that rating and make sure to subscribe so you don't miss a single episode. And for more resources, head over to Predicting the Turn.com.