Annual review 2017

Investing in disruption

A growing number of businesses are setting up corporate venture funds to invest in start-up companies in an effort to get a unique view of where key technologies are going and gain market differentiation.

Defend and attack

As a ‘serial entrepreneur’ with extensive experience working in both start-ups and more conventional corporate settings, Jim Adler now heads Toyota AI Ventures, the carmaker’s new venture capital fund. Here he sheds light on Toyota’s approach and what can and should happen when a giant company invests in a nimble start-up.

Jim Adler

Managing Director, Toyota AI Ventures

Jim Adler, managing director of Toyota AI Ventures, the carmaker’s newly formed corporate venture capital fund, describes the disruption currently sweeping not just auto manufacturing, but industries across sectors: “As Marc Andreessen famously said, ‘Software is eating the world.’ I would argue that the auto industry is now on the menu. Furthermore, data is now also eating software. So, there are several disruptive forces at work.”

And it is not, Adler says, all about technology. “Many of the forces changing our industry are often about ways of doing business,” he explained. “Small, fast, agile cultures are so different from the deliberate, predictable, waterfall-design cultures that industries, like automotive, have relied upon for years.”

An engineer by background – he began his career as a rocket engineer at Lockheed Martin – Adler became a ‘serial entrepreneur’ leading a range of start-ups through creation, funding and sale – intermittently moving back into more conventional corporate settings. One of the companies he led, the cryptographic secure voting business VoteHere, was launched in the midst of the controversial ‘hanging chads’ U.S. Presidential election in 2000, and attracted investment from Cisco and HP, eventually raising more than USD25m.

That background offers a unique vantage point from which to judge the opportunities and the pitfalls that lie in the way of the corporate venture capitalist and, now, how disruption is impinging on the car industry.

We don’t have all the answersRead more

“Toyota is at the top of the market and doing amazingly well, but that won’t always necessarily be the case. So how do we prepare for and thrive in this rapidly changing environment?” he asks.

The answer, he says, lies in the fact that, for all its size and success, Toyota remains a ‘humble’ organisation, comfortable to admit it doesn’t have all the answers. And it has become increasingly convinced that the best way to confront disruption is to invest in it.

That is the rationale behind Toyota AI Ventures, a subsidiary of the Toyota Research Institute, which has raised a USD100m fund to invest in robotics, AI, autonomous mobility, data and cloud technology. Usually targeting companies at the Seed and Series A stages of fundraising, it has announced three investments to date – SLAMcore, a UK maker of visual tracking and mapping systems, Intuition Robotics, an Israeli company working on social companion technology for older adults, and Nauto, a U.S. company working on collision prevention technology.

Toyota’s President, Akio Toyoda, gave the best explanation of the company’s strategic approach to disruption in a recent speech that particularly resonated with Adler. “He said that Toyota had to defend and attack at the same time. We had to defend our market position by continuing to make the best cars in the world, and we had to attack new technologies, bring them to market, and integrate them into Toyota.”

Strategic and financial returnsRead more

The fund has both a clear financial and strategic focus. First, any investment it makes must deliver benefits to the start-up. The start-up’s success will translate into the fund’s financial success and, ultimately, to Toyota’s strategic success.

Beyond much-needed capital, Toyota can tap into its own technology or expert partners. With Toyota’s help, Intuition Robotics quickly integrated new motor technology into its robots and quickly got a better, quieter system out to market – a lesson for Toyota in the speed at which a start-up can move. Through its global network of partners and dealers, Toyota can offer invaluable ‘real market validation’ for the start-up’s products or services.

In return, Toyota learns how these highly entrepreneurial companies work, what their culture is like, and what matters to them. Potentially, it also gets access to technologies that could prove vital to it in key fields such as self-driving cars and robotic systems.

Strategic fit is not enough in itself, however. “The universities are full of great ideas, but great ideas that translate into market successes are relatively rare,” says Adler.

“The most successful institutional and corporate venture capital funds have identified ideas that survive and thrive in the marketplace – putting financial return on the same footing as strategic focus. It’s the mechanism that best aligns the investor with the portfolio company because both sides want to create a market success.”

“It’s what I call attacking from the balance sheet,” he says and it’s an approach that others – Cisco, Intel, Google, Apple and Amazon – have made hugely successful by disrupting themselves. Now Toyota is following suit – not only learning about the culture and drivers of the start-up world, but connecting to these start-ups through the world of venture capital.

RespectRead more

Toyota’s readiness to learn was a key reason for Adler accepting the role. “The company realised that it had to understand what a start-up company is – its ethos and how it defines success. Having done this a few times myself, I know what’s involved and why entrepreneurs deserve so much respect.”

To a big corporation, a start-up can feel like ‘alien DNA’; the world of a company employing 350,000 people is so different from one employing just 35. Most have an academic idea of what starting and running a business from scratch is like, but few really understand the ‘emotional toll’ it can take.

“Sean Parker said that ‘running a start-up is like chewing glass and learning to enjoy the taste of your own blood.’ It’s a visceral visual but accurately describes the tough emotional roller coaster these innovators are on,” Adler explained.

That understanding is informing the terms on which Toyota AI Ventures intends to invest. Unsuccessful investors, he notes, often demand onerous terms that get in the way of the start-up’s success. “We’ve been consistent that our terms should not impede the company’s progress, either in the marketplace or with other investors. We should help grow the company, thereby growing the pie for all shareholders.”

Product, market, and stage of growth are key in selecting the right company for investment, but ultimately it is about the team, he insists. “Quite frankly, if the product and the market are right, but the team is not, I’m not interested.”

The team qualities he looks for include creativity, integrity, resilience, and tenacity.

“Entrepreneurs are transparent, creative, and possess the resilience to pivot when the business is constantly challenged. As boxer Mike Tyson said of his approach to a big fight: ‘Everyone has a fight plan, until they get punched in the mouth.’”

Optimism is key to this resilience. “It’s part of the entrepreneurial life – a cycle of euphoria and despair that must be successfully managed to be successful.”

“The most successful institutional and corporate venture capital funds have identified ideas that survive and thrive in the marketplace – putting financial return on the same footing as strategic focus.”