The magic formula. David Horowitz of To...

How David’s experiences through multiple market cycles informs Touchdown’s approach to accelerating the venture capital efforts of many of the world’s leading companies.

“Business as usual” is probably not going to work in most industries.

David Horowitz is Co-Founder and CEO of Touchdown Ventures, a manager of professional corporate venture capital investment programs for partners like Kellogg, Allegion, and Avery Dennison, amongst many others. David has been a corporate venture capitalist since he joined Comcast Ventures in 2000, starting his corporate venture capital career during the 2000/2001 dot com implosion. David unique experiences should inform how you think about managing startup investments through and out of a recession.

Given David’s experiences both at Comcast Ventures and in partnering with many of the world’s leading companies, he has strong perspectives on how to create a winning corporate venture capital group.

In the following conversation we discuss:

the kind of company for which corporate venture makes the most sense
how to get big companies comfortable with the return profile of venture capital
setting short and long term goals for your corporate venture effort
different sources of strategic value corporate venture capital can provide
best practices for capturing non-financial value
how to maximize the quality of your deal flow
Touchdown's unique approach
and much more

We also touch on what a recession may mean for corporate venture. David and I spoke in early March when the impact of the covid-19 pandemic was beginning to be felt in the US. We decided that this topic was important enough to warrant space for a larger discussion and are hosting a webinar on ‘Corporate Venture Capital in an Uncertain Environment’ with David and his co-founder Scott Lenet on Thursday, 4/9 at 2pm ET. Register here: https://cvc-webinar.radicleinsights.com/

Can you introduce yourself and tell me a bit about Touchdown Ventures?

Thanks for having me, Stu. I'm excited to have this conversation. I'm David Horowitz, the Founder and CEO of Touchdown Ventures. Touchdown was founded a bit over five years ago, and it’s a fairly unique firm – we work primarily with large corporations, specifically Fortune 500 companies, and we manage their venture capital investment funds.

And why did you start Touchdown?

At a very early point in my career, I helped start Comcast's venture capital group. Over the course of my 14 years there, I saw Comcast emerge as one of the first non-technology companies to get into corporate venture. Julian Brodsky, one of the founders of Comcast and a long-time CFO there, deserves a lot of the credit for this, since he pioneered Comcast’s undertaking in venture capital investments. He argued that the best way to familiarize ourselves with emerging technology ecosystems such as Silicon Valley was through venture capital and investment.

During my time at Comcast, I witnessed the kind of impact that venture capital can have on a large corporation. At the same time, I was realizing that there were so many other companies like Comcast that possessed this untapped capacity to move towards digital transformation and externalization – most of these corporations had never completed a venture capital investment, and they had no idea how to set up or how to manage a venture capital group. This context gave way to an opportunity, and ultimately inspired Touchdown Ventures, which was built to fill that gap and satisfy that need in the market.

What would you say was the biggest lesson from your time at Comcast?

Over the course of my time at Comcast, it became clear that Venture Capital is really one of the best, if not the best, ways to bring innovation into an organization. And when I say innovation, I’m referring to a wide array of projects, from insights and intelligence on where the market is going, to new business creation. Comcast started a number of businesses while I was there, and often, the venture capital group proved to be a vital asset. Usually, Comcast would start a commercial partnership with one of the companies that we had already invested in, and that would provide the technology required to start a new business in a given area. Using this model, Comcast founded a telephone business, a home security company, and an advertising business.

I also learned a lot from the way we operated – entrepreneurs always liked working with us, because we looked and functioned like a traditional venture investor. We were, of course, interested in the big financial returns that could come out of investments, but we also brought so much more than capital to the table through these commercial relationships. And this, I think, was the magic formula – striking a balance between the financial objectives and the strategic objectives. That balance, and how to achieve it, was another important takeaway from my time at Comcast.

You talked a bit about venture capital being the best way to bring innovation into a big company. Can you build on that? Why should a big company think about corporate venture in 2020?

We've entered an era in which technology is becoming more vital with each passing day – if you look at the S&P 500, for instance, technology’s share of the market has reliably increased. And I think this is because businesses are realizing that, in order to survive, they have no choice but to invest in technology. Big companies like Amazon and Google are diversifying their businesses and encroaching on big companies that have been established for many years. With this in mind, big companies have no choice but to start recognizing that “business as usual” is probably not going to work in most industries. So venture capital helps to explore and identify forward-facing strategies and business models, which in some cases will give companies what they need to survive, and in others, what they need to grow.

And there are a number of ways that a venture capital effort can provide that kind of momentum. For most of these non-technology companies, it’s unlikely that innovation – especially related to hardware and software outside of their core competencies – is going to come from the inside, which means that they need to seek out and participate in external innovation. I wrote a blog post about this, titled Why Corporations Are Turning to Venture Capital to Drive Innovation, in which I delineated four crucial incentives:

venture capital helps source opportunities
it fosters a sense of diligence
it gives way to new investments in companies, and finally,
it manages those investments

Now, in my opinion, those are the four most essential pillars of good external innovation at any company – if you do each of those well, you’ve set yourself up for success. A venture capital group creates a process to ensure you fulfill each of them. I’ve come to believe in this through my many years of work at Comcast and, more recently, at Touchdown.

Can you elaborate more on your distinction between external and internal innovation?

I don't think the two are mutually exclusive. Companies should be doing both, which is why a portfolio approach is so important – it’s just as short-sighted to put all of your eggs in external as it is to put all of your eggs in internal. When it comes to building software, or even hardware, I believe that non-technology companies trying to work outside of their core competencies need to turn to external partners that already have the relevant software or hardware as part of their DNA. That’s what makes external innovation is so important, but it doesn't mean that companies shouldn't continue working on internal innovation. Like I said, companies need both to succeed, but so many companies have no external innovation, and even more have no corporate venture arm – instead, they choose to rely exclusively on internal innovation. One of corporate venture capital’s founding theses is that part of any company’s portfolio has to be external in order to ensure consistent growth and innovation.

Can you talk about the kind of company for which corporate venture makes the most sense? Would a media company stand to gain more from looking into corporate venture than an industrial company, or should companies in all industries be considering corporate venture as a viable means of generating external innovation?

I think the effectiveness of corporate venture applies in almost any industry – as long as innovation and technology are in that field, then corporate venture capital could be a tremendous resource. In almost every industry, from health care to financial services to industrial manufacturing and the food space, innovation plays a central role. Of course, there are some industries that are innovating faster because entrepreneurs are more focused on new technology, but from my experience, there isn't a single industry where innovation is not important right now.

If I'm setting up a corporate venture fund, how do I think about short-term versus long-term goals?

I'm glad you asked that. As the question implies, it should go without saying that corporate venture capital groups ought to identify goals and objectives for themselves before doing anything else. Unfortunately, though, we’ve found that most corporate venture capital groups tend to skip that process.

This process is so vital because it helps a company determine how much they want to prioritize financial returns versus strategic returns. In the short term, a company can expect to gain market intelligence through their venture capital endeavors, but to achieve real financial returns, they’ll have to build a pipeline of companies that they can work with commercially.

This means that the first one or two years of a new corporate venture fund will be focused on accumulating deal opportunities and sorting through that pipeline, not on financial returns.

Then, once you start getting into the medium- and long-term outlook, that company can reasonably start to expect value creation through commercial relationships, whether in the form of new revenue, new products, or cost savings. It's just short-sighted to expect that that's going to happen immediately, because financial investments in venture capital tend to take a long time to mature. Obviously, all of this depends on the stage of the company – a seed- or early-stage investment will take more time to exit than a company that’s already in a later stage – but the average holding period in venture capital tends to be five years or more. This means that in venture capital, financial return has to be considered a long-term objective. If a company decides to take their time and fully assess a market before making investments, then obviously they’re making a conscious decision to stretch the timeline on value creation.

How do you make a big company comfortable with the fact that corporate venture isn’t focused on low-risk, immediate-return opportunities?

I think big companies have to understand that most of the short-term value that comes out of venture capital will take the form of strategic returns, whether it’s through market intelligence or commercial relationships. I think you have to set the expectation that in the short term, the value you’ll gain is primarily strategic, but over a longer period of time, any great venture capital investor – corporate or not – should be driving for financial returns. And if the program or the venture fund ends up making money over a long period of time, then all of these strategic inroads can be effectively considered free, since they’re now byproducts of the venture fund. But to reach that point, you have to take that leap and make the investment just like any investor at a traditional venture capital fund.

What forms of strategic return or value can corporate venture capital provide?

As I mentioned, there are so many forms of strategic return that can come out of corporate VC:

market intelligence, for instance, usually gives way to a pipeline of potential acquisition targets
commercial relationships could focus on new business, new products, or existing products.

These sorts of strategic returns can really benefit from strong collaborative relationships between internal and external R&D departments – maybe, for instance, there's an internal R&D product that's missing a software component, and the venture fund identifies the right solution externally, allowing the corporation to license that software for their own product. We've seen some great examples of that over the course of the past few years. Some corporations might also want an infusion of culture change in their organization, while others use venture capital to seek out marketing opportunities that will demonstrate to stockholders or constituents that the corporation is innovative and nimble. Those are the main strategic benefits that we typically see from corporate venture capital.

What are some best practices that can be implemented to capture that non-financial value?

That's a great question. There are two crucial elements: first of all, there’s how a company uses the market intelligence they possess, but more important are the commercial relationships that a company establishes through corporate venture. In my opinion, the best corporate venture funds have really close relationships with both internal and external employees – this way, whenever they're working with a startup, they know exactly who to call on and how to work with that company in order to tap into its commercial value.

Towards this end, a lot of traditional venture funds have established platforms for helping their portfolio companies. There’s also an increasing number of corporate venture groups, some of which we’re working with, that have specialists who are specifically devoted to business development or commercial partnership opportunities with current and prospective portfolio investments.

Do you think that every corporate venture investment should have a partnership component?

I don't think so, especially because that guideline could limit the number of opportunities that a corporation identifies. Some of the most successful partnerships I’ve seen emerged long after an initial investment was made, because two companies had plenty of time to work together and figure out precisely where their interests aligned.

There's also, quite frankly, a timing issue. On average, a venture capital deal moves a lot faster than a commercial deal, which means you're not going to complete many financial investments if you're caught up in trying to set the organization up for a commercial relationship. That isn’t to say, though, that you can’t start with a commercial relationship and then make an investment – in some circumstances, that might be the right approach.

With all of this in mind, we value flexibility and nimbleness in the corporate venture funds that we're managing, because we can only make the right decision based on what each particular company has to offer – this includes considerations such as the potential investment’s stage and how near-term a commercial relationship might be.

Before we get into Touchdown, what are some ways that big company or corporate venture outfits can maximize the quality of their deal flow?

That's also a great question. In order to generate deal flow, you can be either reactive or proactive: a reactive investor waits for people to come to them, whereas a proactive investor is going out and identifying opportunities. At Touchdown Ventures, we believe it’s important to adopt both strategies, at least to an extent. If you do nothing and just wait for opportunities to show up at your doorstep, you'll be reactive by default – the problem with this strategy, obviously, is its dependence on marketing and name recognition. We tend to favor a proactive approach, but it’s important to recognize that this strategy is predicated on having the right resources – from team to research to databases like Pitchbook – prepared in advance. If you’re a proactive investor, as we are, you have to create a strategy before approaching the companies you’re interested in, because cold calling is rarely going to get you very far. This kind of preparation is a vital component of any successful corporate venture program.

Relationships with other venture capital firms constitute another key piece of any successful VC operation. Throughout my career, both historically and now at Touchdown, I’ve found that corporate venture and traditional venture are extremely complementary. We're not necessarily competing with other VC firms – if anything, we may look at investing in companies that some of them have already invested in. And generally most venture capital firms like to bring in corporates as follow-on investors because they want firms that bring more than capital to the table.

So my advice would be to build those relationships with other VC firms, because those could quickly turn into your best source of deal flow. A very experienced venture capitalist who has already put their money into a company presents not only a great opportunity, since it means that the company already has capital backing from another VC, but also a sign that that company is worth investing in. With their investment, that VC is essentially placing their stamp of approval on that company and publicly proclaiming that, after vetting the business and doing their due diligence, they’ve decided that it’s worth investing in. If that’s not a promising sign, I don’t know what is.

Let's talk about Touchdown Ventures. Could you discuss the Touchdown approach? What makes your company unique and valuable to your partners?

I'll start off by explaining our approach, which we pioneered, because it’s very different from any other VC firm’s. Touchdown Ventures works on a partnership model, which means that we work closely with a group of folks from within a corporation to manage their venture capital activities. Now, a lot of people will consider Touchdown to be outsourced, and technically we are outside the corporation, but we view this as a partnership – we're working with the corporation to achieve their goals.

So what does Touchdown bring to the table? First of all, we bring a lot of experience. If you’re going to excel in corporate venture capital, there's a best practice and a specific process that you have to adhere to. That includes everything from setting up the corporate venture fund, to setting those goals and objectives that we talked about, to building a model portfolio, to how you invest capital. There’s so much groundwork that we always have to complete to ensure that we’re adopting the right strategy and investment charter.

And then there's the execution, which relies on deal sourcing, due diligence and the level of pattern recognition that our team has achieved by doing this for a long time. Of course, we also make and manage the investments, but we're always working on that with our corporate partners. In every category of our work, we know exactly how to leverage different elements of the corporation – whether it’s deal sourcing, deals that the corporation has been considering, or the business unit lens – into an investment opportunity.

I think it should go without saying that diligence is the most critical component of our work. This is one of Touchdown’s most significant advantages, since we’re able to leverage subject matter expertise and business units to understand how important a particular company or space is. And obviously making investments is vital, but managing them is even more important, which is why we want to bring more than just capital to the table – there's only so much that a corporate venture capital fund, whether it's Touchdown or the people who work internally, can do with capital. The decisions that truly move a business forward are always going to be made at a business unit or a more senior level in the organization – a really good corporate venture capitalist, one who has done their research and knows exactly what’s going on, is able to inspire those decisions by establishing strong relationships with their partners. In our model, those decision-makers are an essential part of the venture capital team, which is one of the reasons that we've generated so much success.

What does a typical relationship look like between Touchdown Ventures and Company X?

It's a partnership that in a lot of ways may look like a joint venture, where the corporation is committing a certain amount of capital, resources and people to a company, while we provide the experience and resources of our team. We're working together to operate the corporate venture capital, and all of the money for the venture capital fund comes from the corporation – we provide a lot of the management of the venture capital, but again, we’re working closely with folks from the inside.

A typical venture firm has GPs and an investment committee to make investments; what is Touchdown’s model?

I would say it depends. In some cases, the core of the venture capital work is done by Touchdown. In other cases, though, there might be some folks from the corporation on the working team with us. And typically, the investment committee has a combination of folks from Touchdown and the corporation. So like I said, the joint venture model means that both groups are bringing value to the table to execute on a VC business.

I'm curious – how come no one else does this?

This idea came to fruition as a direct result of the experience my colleagues and I shared at Comcast. Over time, we gained the background and credibility necessary to successfully start a firm like ours – quite frankly, anyone who hasn’t already done this kind of work at a big corporation would have no idea where to begin.

So what are some pieces of advice you'd give someone looking to start a corporate venture effort?

I actually wrote a blog post about this, titled Five Prerequisites Before Starting a Corporate Venture Program. I’ll briefly summarize those prerequisites:

Number one is establishing clear objectives of what you're trying to accomplish.
Number two is understanding your organization's risk profile. The point here is that you have to go into VC with eyes wide open in regards to the fact that this is the riskiest form of investing.
Number three is giving yourself enough time, since the average investment could take up to eight years to show financial returns. You have to adopt a long-term mindset.
Number four is setting up a realistic budget. We didn't talk a lot about this today, but some companies work in VC on more of an ad hoc basis, which means that they have to treat their VC arm function as a program or a fund. For that model to be successful, a budget is absolutely essential.
The last one, which is probably the most obvious, is getting that executive and board-level support. To start a corporate VC in the first place, you’ll need some amount of high-level support, and any further innovation within the company is going to be predicated on the continued support of executives.

At the moment, the markets are volatile – right now, it looks like we are heading into recession. How do you think corporate venture fairs in a recession or an economic downturn?

It's a great question. Honestly, I believe that things are different now. If it does happen, this will be the third downturn I've been involved with – during the first two, technology and innovation were more disposable. When the dotcom burst happened, everybody pulled out and business as usual was fine for these non-technology companies. And I would argue the same thing happened in 2008-2009. But I think it's a different era now – internet penetration during the first dotcom burst was still very low; and the iPhone barely existed in 2008, not to mention mobile internet or 4G and 5G technologies. So I think technology is much more important than it was.

With this in mind, I personally believe that technology companies will do much better than non-technology companies in this cycle, which renders innovation even more imperative. There will be a lot of companies whose core businesses are struggling that don't believe in the value of innovation – those companies will end up dropping their VC arms. But I believe that the corporations that continue these programs, the ones that are patient with them and continue to invest in them, will be the ones to survive and succeed once this is all over. Innovation, I think, is necessary to survive in today’s economy.

Editors note: Radicle and Touchdown are hosting a webinar on 4/9/2020 at 2pm ET to discuss just this. Register here: https://cvc-webinar.radicleinsights.com/

Is there a prototype company that’s the right fit for Touchdown? What are the most essential criteria that lead to a successful partnership? Is it size? Industry?

Yeah, I think the right company is one that’s not already engaged in VC, but where the senior leadership has stated how important external innovation is, and that, given how risky venture capital is, they want it to be done professionally by experienced management. I think that's a great fit for us. This company could be based anywhere and work in any industry, so long as the leadership or the ownership of the company really believes in this. Any company that wants to prioritize VC, has the patience for these kinds of long-term investments, and would value the professional management of a firm like Touchdown would be an excellent fit.

How can people reach you?

We always like a warm referral, so checking LinkedIn is helpful. You can also find us on our website, but it's always ideal to be referred by someone in our network.

We're open for business across all industries right now.