211. Crisis Coverage w/ David Horowitz – How Will Corporate VC Respond?

211. Crisis Coverage w/ David Horowitz - How Will Corporate VC Respond?
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David Horowitz of Touchdown Ventures joins Nick on a special Crisis Coverage installment to discuss How Corporate VC Will Respond. In this episode, we cover:

  • What is your current view of the venture market given the current crisis?
  • Corporates have a history of pulling back in economic downturns, what will happen now?
  • This is your 3rd economic downturn, What is different about this economic period vs. prior recessions?
  • Are there advantages to new corporate funds vs. existing corporate funds?
  • Committed capital vs. not committed
  • You told me you believe corporations are more important in this environment than startups why?
  • What advice do you have for start-up companies on dealing with corporations?
  • Fair that those discussions or partnerships slow down?
  • What is your prediction when things return to normalcy?

Guest Links:

Transcribed with AI:

0:03
welcome to the podcast about investing in startups, where existing investors can learn how to get the best deal possible. And those that have never before invested in startups can learn the keys to success from the venture experts. Your host is Nick Moran, and this is the full ratchet.

0:23
David Horowitz is back for a special crisis edition podcast to talk corporate VC. David is the founder and CEO at touchdown ventures, which manages venture funds for a range of large corporations, having both established and managed the most corporate venture funds to date. David, welcome back.

0:42
Hey, Nick, thanks again for having me. I appreciate it. First of all, I hope you and your family and everyone else listening here is safe and healthy. I think in this really unusual time health should be our top priority.

0:54
Agreed? Agreed? Well, I appreciate you making some time. So corporate VC, of course, it’s a topic a lot of people are talking about, I think they’ve monitored what has happened with you know, traditional VC, corporate VC, as well as a number of the other players in the asset class over over previous crises. You know, we’d love to go deep on that. But maybe just high level. First off, can you give us a view of, you know, the venture market and your current thoughts given the crisis?

1:28
Yeah, and first of all, I really never seen anything like this in my lifetime. I don’t think anyone has it feels more like a movie script than than real life. But it’s happening. And I think this crisis is especially bad, because it’s a double whammy. It’s both a health crisis, and increasingly, so an economic crisis. You know, in terms of my thoughts, I think, from what I’ve seen from other similar economic cycles, you know, the public markets first get, you know, get beaten up and have a downswing, which has obviously happened, and maybe still happening. But there’s always some lag between the public and private markets, you know, in the past, it’s been, you know, as up to three, six or 12 months for private market valuations, to adjust. So I think we’ll have to see how that how that plays out. In terms of venture capital, I mean, we’re seeing everything, some firms are completely shutting down your deals, others are still doing deals just being more selective. And there are a number that are, you know, still operating in business as usual. We’re still seeing big rounds of financing getting announced every day. And I think that, you know, that we’ll probably continue to, obviously, some of those deals were done before, the past couple of weeks where this crisis has got worse, but I think universally every venture fund is focused on their portfolio, which really should be the always the top priority, but certainly even in this environment. And, you know, I think we’re seeing some good perspective around thinking about cash, cash runway, managing burn rates, you know, all that is extremely imperative. And clearly, companies. There’s a survival mentality right now. Right,

3:00
right. So, you know, corporates do have this history of pulling back in economic downturns. What do you think happens now?

3:08
Yeah, I mean, this is just such an unprecedented time, as we talked about. So I think just because of that, I mean, there are some companies who are firing off, you know, laying off there people are there, you know, we have hospitality and travel companies that might generate $0 in revenue, literally zero in second quarter. Yeah. So I think we’ll definitely see pullback, but I think it’s going to be industry specific. I don’t think we’ll see that mass exodus, that we’ve seen in other downturns. And I think, you know, certainly from corporates that are thinking about venture capital more just more than just the financial returns, I think those will stay in because those strategic and innovation imperatives I know, we talked about this when I was on the podcast last time, I think those are just as important. And in good times as they are in bad times. And I would argue if you’ve got further on the financial opportunity, I think we all would probably agree that those opportunities tend to be greater meaning, you know, valuations may compress, there likely will be less venture capital investment to have and that in itself could drive some corporates to stay in the game. But reputation is important. I think a lot of big companies care about the reputation and that may be a driving factor here. So those are the reasons why I think that yes, there will be a pullback, but I think it will be different than it’s been previously.

4:25
So last time you were on I think you get you touchdown was actively managing 10 or more large venture funds on behalf of large corporates. I know that you can’t talk about names specifically and what’s going on with specific strategies. But of those 10 plus companies you work with, you know, how many are significantly pulling back? How many are pulling back in a slight way are some neutral and maybe you know, are there even some that are conceivably getting more aggressive? Do Due to this crisis?

5:02
Yeah, well, since the last time we talked, we’ve actually grown a lot. And even this week during this crisis, we, we haven’t publicly announced it. But we recently entered in a relationship with another corporate. So I think that those are all all good signs. I think, again, it really depends, I think, generally across the board, regardless of who, which corporation working with, you know, this, this idea of being selective right now is really important. That’s our personal perspective, we’re not shutting down new investments. We’re not, we’re not aggressive. But we’re being selective, especially doing the financial due diligence around the cash runway, which again, we’ve always thought is important, but it’s certainly more important, you know, thinking about who our CO investors are, because we think that’s important in this particular environment. So I would say there might be, you know, some, some examples where we’re being more aggressive, but I would say across the board selectivities, the key, the key variable right now, got it. Yeah,

5:59
and well, just for the listening off audience. This isn’t related to corporates, but our own portfolio, new stack, we have 18 companies in our fund one portfolio, I’ve connected with each of them over the past couple of weeks, and done kind of a deep dive and battle plan on the future. And just so that you guys are all aware, in full transparency, we have three companies on our list that this crisis will impact positively, we have another seven or eight, where it’s neutral. And then we have a good eight, where the effect will be either negative or significantly negative. So there are winners and losers in this, but at least for us, clearly, you know, there’s, there’s more losers than winners. But I think, you know, we were very thankful at new stack that the cash position of our portfolio companies is very healthy. You know, I think, on average, we’re over 1718 months of cash across the portfolio, across the company. So anyway, just trying to, you know, be transparent, and give the listeners a sense for, you know, how each of us are looking at this. But back on the corporate side, David, you know, you’ve been an investor for quite some time, I think this is likely your third economic downturn. So I’d like to get your sense for, you know, what’s different about this particular downturn versus prior recessions?

7:34
Yeah, I mean, I think the a couple points I’d make on this thing. One, you know, this might be the worst, and probably the worst, because because of the point I made earlier, that it’s both both economy and health related, and especially the health point, which I think, you know, effects affect a lot of people personally, you know, I think the big issue here is just uncertainty. We just don’t know how long this is gonna last. And I think you can look at a lot of different predictions and models, but it’s, you know, it’s, it’s, you know, I think that that’s going to change on it’s very fluid. The one thing that I think is, is really different about this is probably the key point here is that, you know, we have a thesis that says technology has really never been more important. And I think we’re seeing that play out with how people are working through this particular you know, at a particular time right now. And so if you remember back in the 2000 2001 period, you know, you had all those new dot coms, that was when ecommerce was really starting to blossom. And a lot of them went out of business. And really, innovation was was effectively killed at that point. And you know, I think in this in this particular environment, especially right now, which could be short term could be long term with this shelter in place world that we’re living in, you know, everything is technology, ecommerce, video, communications, zoom, Slack, everything’s running on the cloud, cybersecurity is extremely important. All trend, business transactions and communications are happening digitally. that just didn’t happen before. Yeah, really big difference. And I think that there are a lot of both consumers and businesses that didn’t adopt these previously, and now that they’re using it will continue that. So, you know, over the last 10 years, technology has been a very significant growth driver overall, the s&p 500. And the one thing that I think everyone will agree with is that that’s going to continue to grow even through the cycle. And I think for those of us who are investing in technology and innovation, we will benefit from that, you know, visa vie, you know, certainly what’s happening, you know, around this. So, I would say that’s something that gives me some optimism about, you know, investing, overall investing in technology and this in this environment. And as relates to the corporations, a lot of the companies that we work with are not necessarily technology focused, but technology has become, you know, critical and essential. And that’s where, you know, this venture capital, you know, initiatives that we work on with these corporations really fit in so that’s that that is a big, big diff Since between the previous downturns that I’ve experienced, it’s

10:03
a great point, you know, trading notes recently with Nicole Quinet at lightspeed, and we were talking about the impact that this crisis is having on future consumer behavior. But just generally, the, the impact it’s gonna have on human behavior is substantial. Right? Like, the immediate adoption of the slacks, and the Zooms are obvious. But it’s, I think it’s reasonable to assume that this will accelerate, you know, people’s willingness to embrace new tech, in more digital forms of communication and interaction, it will break people out of these inertia cycles of, you know, sticking with old legacy shelfwear type systems, that I think, you know, the impacts on human behavior will be broad and sweeping, you know, not just consumers, not just large enterprise, but the way we all kind of interact with technology.

11:02
No, absolutely. I mean, I think there’s probably a number of, especially from an older generation of humans who are now, you know, go, you know, going on Amazon for the first time, or using, you know, different food delivery or, you know, even telemedicine is obviously, very popular right now. So, these are all, you know, you know, different trends that have been developed, but I don’t think that, you know, maybe with the exception of Amazon have gone mass market, and now just instantly their mass market because of, you know, this particular environment that we’re operating in right now.

11:35
So, you mentioned that you’ve signed on a new corporate for a new fund, I’m curious how this all affects, you know, the existing base of corporate VC funds, and then, you know, prospective. So, you know, large corporations looking into looking to get into venture capital, I mean, is that going to slow down or, or significantly halts? You know, what’s your take on new folks getting into the corporate VC space?

12:06
Well, certainly, you know, we’re going out with a thesis, which, which right now, which we really do believe is a great time to start a new, a new a new fund, especially corporate fun. I think the some of the reasons might be obvious, some of them might not, but they’re not having to deal with a legacy portfolio and spending time with, you know, at previous companies, and worrying about the survival is envious position to be in. And, you know, I would say, you know, it’s certainly we think the financial, you know, any analysis that you see, would show that returns are better, you know, in in a down cycle than than necessarily, you know, in another time period. So, from the, from the vintage perspective. So, I think those are all good trends right now, I think, also, you know, you know, for a corporation, you know, generally, there’s a little less pressure to, you know, to get deals done, there’s, you know, typically, the fun life situation is different, you know, there isn’t the necessary need to deploy capital at the same time. And so there’s some patients here about, you know, weathering the storm, finding the right companies, supporting those companies. And those are some of the, you know, the key reasons why, you know, we think, you know, we think, you know, you know, corporations, it’s a great time to start a corporate venture fund.

13:28
And remind me, David, between committed capital versus not committed capital, so, you know, more of like a rolling evergreen process toward toward dollars, you know, is there a split with, you know, the, the corporations you work with, do some actually commit, you know, a set of capital that becomes like a u m, or are all the corporates kind of, you know, moving that amount that they’re allocating to venture up or down, depending on, you know, what’s happening in the business and what’s happening in the macro climate?

14:10
Yeah, I mean, I would say, there’s typically for most of the corporates at Target or commitment that that is a particular dollar amount, but I think the difference between that type of vehicle versus a traditional, you know, financial investment vehicle is because you’re dealing with effectively a single investor or single Corporation, there’s a lot more flexibility to you know, alter that commitment, alter the time period, increase that and so, the starting point tends to look the same, but there’s a lot more freedom to operate, you know, again, based on market conditions or other other factors and again, that might be an advantage of, especially Corporation this environment.

14:52
So said another way, is it not like a capital call structure is a completely different, you’re not calling down capital and and allocating it, it’s more of, you know, you, you make investment decisions. And then And then, you know, the capital gets invested on behalf of the corporate at that point.

15:12
Yeah, I mean, there’s different structures that we employ depending on which Corporation we’re working with. But your the way you described I think is, is, is a good way to think about it. But I think the macro point is that because in a traditional venture fund, if you have dozens of LPs to make changes to your limited partner agreement, you’re typically getting, you know, have to go to get a lot of different people to make those changes. So it’s not not impossible, but it’s, it’s harder. And in this particular case, because you have a single, a single Corporation and the model that we use, it’s, you know, it’s a single, single, single person or single corporations, or maybe even a single executive within a corporation. So it makes makes the, I think there’s some flexibility related to, you know, freedom to operate from that perspective. Got it. Got it.

16:02
So you’ve said that you believe corporations are more important in this environment than startups themselves? Why?

16:12
Yeah. So, you know, I think, you know, I think, you know, we’ve always believed in the idea of the current corporate startup partnership, I think we talked about this when the last time I was on the podcast, and, you know, we’ve always thought that this marriage makes sense to startup, you know, again, these are all these are more stereotypes, but generally has, you know, a really innovative technology really made a product, and the corporate, again, depending on the corporation generally does not have that, but has a brand and sales and marketing distribution, if you can marry those together, if you can take the innovation from the startup, and the sales and marketing and distribution capabilities of the corporate, you know, that’s a great, a great partnership. And so, I think, in this environment, you know, when you’re a startup, you just need, you know, in your show, you’re fighting for survival, which I think a lot of companies aren’t, you just need all the help you can get the bar, especially, there’s gonna be less venture capital in the market, which we predict there will be less deals getting done, the bar is higher to get a financing. And so, you know, you know, it’s, it’s always been important, in my opinion, to find as a startup to find investors, that can bring no more than just a check to the table. And in this environment, I think that’s a must have, and if so, I think, startups, and we’re seeing that even in some, you know, we’ve had different startups, you know, you know, with with some of the corporations that we work with, where, you know, for whatever reason, there was just less interest or appetite. And we’re already seeing although this, you know, we’re still early in this new cycle, we’re starting to see that thesis play out that, okay, well, actually want to talk to you now. Maybe they’re, you know, that corporate that startup is going to be investing a little bit less in sales and marketing or have to decide, you know, where to make tough decisions. And so that’s that corporate partnership, you know, especially in sales and marketing, distribution can be really important. So, I think this has always been important, but in a world where, you know, a startup needs all the help they can get, we think, you know, the thesis and other thesis we have about this environment is, you know, more startups want corporates on their cap table than they had previously, even though we, we, we, we all think that startups, we would have wanted corporates on their cap table previously, if that makes sense.

18:26
And remind me, are you guys leading any deals now?

18:30
It depends on the phone. So we do both, I would say, majority we follow with another financial or other investor lead, but we know the bit depending on the fund, we have flexibility to do both.

18:44
Got it? Got it. David, what advice would you have for, you know, startups trying to work with corporations?

18:54
Yeah, I mean, one word that I would say that’s really important, especially right now in this crisis is empathy. And that’s really understanding. And I think empathy is two way I think, for the court, you know, for the corporation’s dealing with what the startups going through, but, you know, stay sane for the startup. And so, you know, you have to understand, you know, the environment that they, you know, the particular companies dealing with, under, you know, looking at their business understanding, you know, you know, if it’s a company that’s going, you know, the big corporation that’s going through, you know, you know, very hard times right now, you know, they may get a worse position in the startup is depending on again on the situation. So, I think that empathy is important. And I think what’s really going to work in this environment is thinking about kind of cutting to the chase and thinking about, you know, if there’s a startup corporate partnership, you know, how does this generate a more near term ROI? The business case is really important. And I think that’s usually going to be can this particular product, you know, help generate revenue, help reduce costs, maybe help my customer help my end user, but I think there’s going to be is a significant, you know, critical lens on the ROI piece. And that’s the advice I’d have for startups to really analyze that, before proposing a business relationship with a corporate, which, obviously, I think we’re gonna, again, we’re gonna see more of that in this environment.

20:16
I mean, is it reasonable to assume that these momentum is going to slow down, and speed up decision making is going to slow down, particularly if a startup is, you know, serving a large corporate customer in one of the, you know, affected verticals? Let’s say, you know, retail or hospitality or the services industry?

20:40
Yeah, I mean, I think if a corporation’s attention is distracted, because of significant core business issues, and absolutely, but I think the one thing that I do believe, and I think it will be case by case, you’re going back to the point at earlier about how technology is more important than ever, I do think you’ll see some cases of deals accelerating because, you know, corporate might not have access to that particular technology, they may need to operate its business in this particular environment. And that may actually accelerate deals. So I think it just depends on, again, depends on the industry depends on the corporate, but I do think we’re gonna see, and we are seeing some of that right now. There’s one company that we’re, you know, that that we’re in diligence on with one of the corporates that we’re working with. And there’s some technology around remote collaboration and rural workforce. And I think they did in in q1, and I think a lot of this is February and March, they have 10x revenue in q4. But obviously, that’s a solution that’s playing very well in this market. So and they’re working with some of the biggest companies in the world to, you know, to offer that. So I think that’s a good example of how decision making might speed up and budgets might shift to, you know, to particular technologies that are that are very focused on solving near term business problems. Got it?

21:59
You When do you think we’ll get back to normal here? Get out your crystal ball for us, David.

22:07
You Yeah, I mean, I hate I just so much uncertainty, I would hate to give a specific date and time. You know, I would say, you know, we need to solve the health crisis first. And that’s the, the tricky thing of, you know, winded and, you know, top thing on my mind, you know, when do we all go back outside and communicate, and socialize with other people? Just, you know, I think that’s still going to take some time, and probably probably still, you know, 30 or 60 days, if not longer out? You know, I think we’re bracing at least in our area for schools to be closed for the rest of the year, which, which is, you know, nobody expected. So. So I, you know, I think that, I think it will take a while but, you know, I think the my key prediction is, you know, I think what we talked about before, which is that, you know, you know, the behavior change, you know, everyone will appreciate the investments in technology more so than they did before this crisis. I think that’s the, for everyone in venture capital, as bad as it is, is that is the health implications, the economic implications, especially those of us investing in, in technology. I think that’s the, that’s what keeps me excited and going that that, you know, we are, you know, we always talk about technology being the future and that future and the future is now

23:27
crazy. I mean, to think that schools might be closed down for the rest of the year, who my wife and I certainly aren’t planning on that and I hope that that’s not the case.

23:37
I think Virginia already made that decision and they were probably the first but I’m not you

23:42
know, for the duration of 2020 No, I

23:46
meant for the school year so the school year yeah, yeah, no, I don’t I don’t think you’ll hear about about the fall for a while. I think so sorry.

23:54
I was thinking No, it’s my fault. I was thinking calendar year but I actually

23:58
in my mind I had I had the school year at the school year in my head sorry about that.

24:02
My guy’s a toddler so I’m that I’m not in that frame quite yet. Well, I

24:06
was already I was already disappointed with March Madness being canceled. College football NFL canceled I think I’m not sure what to do with myself this fall.

24:14
So tell me about it. Well, I’m an Indiana and UVA fan so I I get to celebrate UVA is when for one more year so it sucks not not kidding to watch college basketball it’s my favorite time of year but it’s it’s so minor in comparison to everything I

24:32
think they made the right decision. So I have as much as I’m upsetting I’m glad they made that decision because it was clearly the right one so grid

24:39
grid. Well, before we finish up you know, how is how’s your team doing? And how are you guys adapting it at touchdown to you know, everything being virtual people working from home. I’d love to just hear your candid thoughts on you know what’s tough about that and what I don’t know if there’s a silver lining with all that as well.

24:59
Yeah, I mean I think that we’re very thankful that compared to a lot of other businesses, you can do this business remotely. And a lot of it is, you know, obviously conduct a lot of what we do is conducted over the phone or now video conferencing. Yeah, I think the hardest part is we like to get our team together. And obviously we’re doing that more virtual, we’re trying to do a lot of different creative ways to I’m sure a lot of you know, love to get love to hear ideas from from your audience. But you know, a lot of creative ways to engage our team. Fun fact about the some people know this, they know me, I love I absolutely love game shows, if I didn’t do venture capital, I would have wanted to be a game show host. So the fun part is I get to I do a weekly Game Show for our team. And it’s all done over a really cool platform called Kahoot. That a lot of schools use it under if you’ve heard of it before. So we’re doing Yeah, we’re doing everything we can to engage people and keep people connected with each other. But it’s, you know, it’s it’s definitely hard. Thankfully, everybody, as far as we could tell is healthy. And, you know, no one has had that, you know, impact. And we’ll continue to pray that that remains the same. And obviously, same for again, all of you personally, Nick, and your family and your colleagues and your and the rest of the audiences as well.

26:12
Appreciate that, David? Well, you you got to record one of those game shows sessions and publish it. Think, yeah, strip out the confidential stuff, but that would be awesome to watch. Yeah,

26:24
today, we had, like trivia questions from our portfolio. So I tried to customize it to to our firm, but love it. I will. You know, maybe we’ll work together on a more general trivia to to the whole audience. Or maybe we’ll do a venture capital based one and maybe, maybe full ratchet will be one of the answers in terms of what happens when you if the question is, what happens if you negotiate what type of Ratchet in this economy? If you have a down round? Do you really want? Oh, yeah, that would be the next podcast would be the correct answer. There

26:57
it is. There it is. All right. Well, hey, David, thank you for making the time. I know, it’s, you know, short notice, and everyone’s in crisis mode. But the effect with corporates and kind of that impact and in what’s going to happen there is, you know, super important to, to everyone. And, you know, really glad that we could get you on quick here and get your thoughts.

27:18
Yeah, well, thanks again, for having me. I’m really glad that I think you know, the content and programming related to just being direct and talking about this is really important. And so, you know, thank you, again, for taking such a leadership role in this industry, with your podcast and all the all you’re doing, you know, and, you know, I think everybody thanks you for the leadership role that you that you’ve taken in this industry.

27:40
Likewise. Thanks, David.

That we’ll wrap up today’s episode. Thanks for joining us here on the show. And if you’d like to get involved further, you can join our investment group for free on AngelList. Head over to angel.co and search for new stack ventures. There you can back the syndicate to see our deal flow. See how we choose startups to invest in and read our thesis on investment in each startup we choose. As always show notes and links for the interview are at full ratchet.net And until next time, remember to over prepare, choose carefully and invest competently. Thanks for joining us