Please describe your role at Denso.
My role is twofold. I lead a group that does direct investments in start-up companies. I’m also involved in DENSO’s strategic M&A discussions. The start-ups are typically of strategic interest to Denso. We invest in the stages from Seed to Series B. Most of the opportunities we look at are mission critical to the automobile. Because of the importance of those systems, we tend to take a longer term perspective on when those technologies can be implemented in an automobile. You can’t do what we do in a one or two year window. And we’re investing for strategic rather than financial returns.
How is your venturing structured?
We invest off the balance sheet. This means that we’re not limited by the number of investments we can make annually, and it keeps everyone engaged at the R&D level and at the upper management level since they have to be informed and sign off on every investment.
What’s distinctive about your approach?
In my previous work in venturing, I observed that corporate venturing isn’t successful unless you really add value to the whole ecosystem. So, when I helped create the DENSO CVC Group in Silicon Valley several years ago, we made a conscious decision to support entrepreneurs at the earliest stages, to work with other venture funds as an LP and as a co-investor, as well as leading direct investments. So, as part of that investment strategy, we sponsor the incubators Prospect Silicon Valley in San Jose, Lemnos Labs in San Francisco and NextEnergy in Detroit. We were the anchor investor in Autotech Ventures and we have made five direct investments in startup companies.
And what’s distinctive about venturing in the automotive sector in comparison to other sectors?
It’s an industry that’s extremely focused on safety. Rigorous testing from Tier 1 suppliers like us, and from the OEMs, is paramount. Nothing happens quickly. New components, parts or systems have to be safe and that doesn’t change as we move to Semi AV or Full AV. Performance and safety are the key, critical factors within the industry, and that is one reason why the automotive industry still has a pyramid shaped supply chain. When entrepreneurs don’t have an automotive background, they sometimes don’t understand the importance of those factors to the industry.
The established automotive industry – the big name brands – are seen by many in the venture industry as losing a game of catch up with the likes of Uber and Tesla. How secure can Denso feel ahead of the disruption that lies ahead?
TC: As a Tier One supplier to the automotive industry, Denso feels the disruptive impacts differently from, for example, BMW, GM and Toyota. Their business model is fundamentally challenged by companies like Tesla, Uber and Lyft. But at the Tier One level, we’re less focused on the business model changes and still more focused on the actual product. We supply parts, components, modules, and discrete systems. Whatever business model dominates, there will still be a critical need for the guts of the vehicle, which we will meet.
But the product is also changing
Sure it is. Cars used to be almost entirely mechanical, but the technology required in the full AV and semi-AV vehicles will combine hardware with software. We need to get vehicles communicating with each other, with pedestrians, with infrastructure. Cybersecurity is going to be a real concern and that is not an area that anyone in the industry has had to consider before.
And this presumably informs your areas of investment interest?
Absolutely. We’re looking to invest in technologies in these three areas: connectivity, autonomous vehicles and cybersecurity.
What are the technologies and business models that excite you most from a venturing perspective? Which excite you least?
The deals that excite us the least are the business model changes because that doesn’t touch us as much. The same is true of the apps that go in the infotainment systems. They might be very interesting to the OEM that wants to build a portfolio of apps for the customer that buys their car, but not us. What excites us most are the mission critical aspects of the vehicle; the changing nature of the computing platform, the overall security of the vehicle, enabling the car to make its own driving decisions. Will stand-alone supercomputers or ECUs be controlling autonomous vehicles? As you add more and more functionality to the vehicle this needs to be processed. How do you take the data and make it actionable in real time, while also keeping the car secure? Technologies with compelling answers to these questions are what interest us the most.
Which, in your opinion, are the sub-sectors, technologies and business models which are hyped right now?
The M&A activity is more interesting in this regard than the venturing. We’ve already seen cybersecurity companies being bought before they have significant revenues and before we even have a significant installed base of connected cars that need cyber protection. But I don’t see this necessarily as a negative. It demonstrates that there are returns to be made, which brings more venture capital to the table. There’s always been a question mark about returns in the automotive area. It’s typically been a long road to an exit, but now we’re seeing a much greater appetite for acquisition from the industry. In some cases, we’re seeing big companies buy smaller ones to get access to their teams as much as their technology.
We’re seeing a rise in venturing activity in automotive from outside the traditional automotive sector, not just from software, but from logistics and insurance companies, and from investors looking for business model plays. How is this changing the industry? Is there a danger of too much venturing activity?
There are positive and negative aspects at play here. On the negative side, the more investors you have chasing a deal the more competitive it gets on valuation and on terms. And some investors want business model investments, but end up looking at deals they’re not qualified to look at because they think they have developed some sort of “expertise” in the area. They can often slow down the investment process as they struggle with due diligence. But the positives are that more money enables more technologies to win backing. I don’t think it means technology will necessarily be commercialised faster. The industry is not going to rush to deploy stuff that’s not ready.
How fast are we going towards autonomous vehicle? What are the blockages you foresee on the road?
In my opinion, regulation is a much bigger issue than technology development. In order to hit the 2021 target that a few companies have set themselves for the introduction of a fully autonomous vehicle, regulations at the federal level will have to catch up very fast. It is always important to remember that our industry is heavily regulated for safety considerations, and that is not going to change with the transition to full AV.
But with the technologies themselves, what is the work that still needs to be done and what’s your strategy here?
We support many OEMs, so we have to be very flexible about how we approach technology development and new technology deployment. We have to be able to help them put together the jigsaw puzzle of technologies that are needed for AV. Some parts of the jigsaw are coming along more quickly than others. Computer vision is moving along nicely. Tier One suppliers and OEMs are working to get to a reasonably priced LiDAR solution. This will help lock down the car’s ability to see in various different environmental situations, along with radar, better cameras and advanced mapping. The big question here is if this can all be done at a price the OEMs (and ultimately the end consumers) are willing to accept. I think we also have a good start on decision matrices for the AV. I think that there’s some interesting progress from cybersecurity start-ups, though we won’t face real challenges until hackers fully turn their attention to vehicles. When we have a few million connected vehicles on the road that are semi-AV and that claim to be safe from hackers, that’s when hackers will really target the auto industry and when the deployed cybersecurity technology will be really tested. One area where I question whether we can get there is in computing power and chip architecture. This is where some rapid advances are required. Also, for those OEMs that intend to move through Semi AVs on the road to Full AVs, I believe that personalization of the driver’s experience will be very important, and is not being directly addressed yet.
These advances are going to require collaboration from lots of different players. But how easy is that when ultimately the competition to dominate the future automotive is so fierce?
Collaboration among the OEMs might be difficult. But Tier One suppliers can collaborate with the OEMs. For example, we co-invested with Volvo in the Peloton deal. We typically don’t try to get more than one OEM involved in a deal. And another Tier One supplier, Magna, is also a shareholder in Peloton.
What do you drive?
As a family we have three cars. I drive a 2001 Yukon XL. As a rather big person, I like driving a big car that I easily fit in. It has just under 200,000 miles on the clock. We also own a 2006 Infinity M45, which my daughter drives and my wife has our newest car, a 2015 Infiniti QX 60.
On December 1st 2016, the world’s leading corporate VCs will gather in London for ‘Venturing and the future of mobility and automotive technology’ – www.gcvautomotive.com Then in January at the Global Corporate Venturing and Innovation Summit in California, transportation will be high on the agenda, in both the main programme and break-out sessions. To get involved, please contact me on tom.whitehouse@london-eif.com