Describe your role at Denso.
My role is twofold. I lead a group that does direct investments in startup companies. I am also involved in Denso’s strategic M&A discussions. The startups 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 cannot do what we do in a one or two-year window. And we are investing for strategic rather than financial returns.
How is your venturing structured?
We invest off the balance sheet. This means that we are 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 is distinctive about your approach?
In my previous work in venturing, I observed that corporate venturing is not 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 a limited partner 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.
What is distinctive about venturing in the automotive sector compared with other sectors?
It is an industry that is extremely focused on safety. Rigorous testing from tier-1 suppliers like us, and from the original equipment manufacturers, is paramount. Nothing happens quickly. New components, parts or systems have to be safe and that does not change as we move to semi-autonomy or full autonomy. 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 do not have an automotive background, they sometimes do not 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?
As a tier-1 supplier to the automotive industry, Denso feels the disruptive impacts differently from, for example, BMW, General Motors and Toyota. Their business model is fundamentally challenged by companies like Tesla, Uber and Lyft. But at the tier-1 level, we are less focused on the business model changes and 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 fully-autonomous and semi-autonomous 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.
Does this inform your areas of investment interest?
Absolutely. We are 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 does not touch us as much. The same is true of the apps that go in the infotainment systems. They might be very interesting to the original equipment manufacturer (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 standalone supercomputers or electronic control units 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 sub-sectors, technologies and business models are hyped right now?
The M&A activity is more interesting in this regard than the venturing. We have 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 cyberprotection. But I do not see this necessarily as a negative. It demonstrates that there are returns to be made, which brings more venture capital to the table. There has always been a question mark about returns in the automotive area. It has typically been a long road to an exit, but now we are seeing a much greater appetite for acquisition from the industry. In some cases, we are seeing big companies buy smaller ones to get access to their teams as much as their technology.
There is a rise in venturing activity in automotive from outside the traditional automotive sector, not just software, but also 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 are 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 do not think it means technology will necessarily be commercialised faster. The industry is not going to rush to deploy stuff that is not ready.
How fast are we going towards autonomous vehicles? What blockages do you foresee?
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 fully autonomous vehicles.
In terms of the technologies themselves, what work still needs to be done and what is 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 autonomous vehicles.
Some parts of the jigsaw are coming along more quickly than others. Computer vision is moving along nicely. Tier-1 suppliers and OEMs are working to get to a reasonably-priced lidar (light detection and ranging) 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 autonomous vehicle. There is some interesting progress from cybersecurity startups, though we will not face real challenges until hackers turn their attention to vehicles. When we have a few million connected vehicles on the road that are semi-autonomous and that claim to be safe from hackers, that is 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-autonomous vehicles on the road to fully autonomous, I believe that personalisation 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 of automotive is so fierce?
Collaboration among the OEMs might be difficult. But tier-1 suppliers can collaborate with the OEMs. For example, we co-invested with Volvo in the Peloton deal. We typically do not try to get more than one OEM involved in a deal. And another tier-1 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 QX60.