Lasseter pitched the concept for Tin Toy by storyboard to Pixar owner Steve Jobs, who agreed to finance the short despite the company's struggles, which he kept alive with annual investment. The film was officially a test of the PhotoRealistic RenderMan software, and proved new challenges to the animation team, namely the difficult task of realistically animating Billy. Tin Toy later gained attention from Disney, who sealed an agreement to create Toy Story starring Tom Hanks and Tim Allen, which was primarily inspired by elements from Tin Toy.
The short premiered in a partially completed edit at the SIGGRAPH convention in August 1988 to a standing ovation from scientists and engineers. Tin Toy went on to claim Pixar's first Oscar with the 1988 Academy Award for Best Animated Short Film, becoming the first CGI film to win an Oscar. With the award, Tin Toy went far to establish computer animation as a legitimate artistic medium outside SIGGRAPH and the animation-festival film circuit. Tin Toy was selected for preservation in the United States National Film Registry by the Library of Congress as being "culturally, historically, or aesthetically significant" in 2003.
The film takes place in one room and stars the toy of the title, a mechanical one-man band player named Tinny, and a baby named Billy. At first, Tinny is delighted at the prospect of being played with by Billy until he sees how destructive the baby can be. When Tinny tries to walk out of Billy's reach, the musical instruments on the toy's back play notes, attracting Billy's attention. Tinny begins to run, but is chased by Billy. Tinny soon finds cover under the couch, only to find that many other toys have also hidden themselves from Billy there since they are also afraid and have learned the same experience. While walking and trying to find Tinny and the other toys, Billy falls flat onto the floor and begins to cry. Tinny, feeling sorry for the baby, goes to the child to cheer him up. Billy stops crying upon seeing Tinny, cheers up, and grabs Tinny, but plays with him by shaking him, and finds the box Tinny was packaged in even more fun to play with. Mad, Tinny follows Billy around the room in an attempt to get his attention, but is still ignored, when the baby is instead happier playing with boxes and a shopping bag while some toys come out from the couch to play.
Pixar, purchased in 1986 by entrepreneur and former Apple Computer head Steve Jobs, received many accolades for films produced by its small animation division, headed by animator John Lasseter. Lasseter's primary role, as defended to Jobs by company founders Edwin Catmull and Alvy Ray Smith, was to produce short films to promote the company's own Pixar Image Computers. The department was never meant to generate any revenue as far as Jobs was concerned, but after the release of two shorts, Luxo Jr. (1986) and Red's Dream (1987), some of the engineers working on the company's products wondered whether it made sense to keep the animation group going at all. Pixar was losing money every year and Jobs was supporting the cash-strapped company through a line of credit with his personal guarantee.
The engineers felt they were working hard to make money for Pixar while Lasseter's group was only spending it. Their passion was for building computers and software, not entertainment. Eventually, they discerned, to their chagrin, the reason why the company was supporting the division: the real priority of Catmull and Smith was to make films. The engineers were not alone in wondering about the value of Lasseter's short films. On repeated occasions in the late 1980s, Catmull barely dissuaded Jobs from shutting down the animation division due to financial constraints. At this same time, Jobs was clashing with Alvy Ray Smith, which would eventually lead to his resignation from Pixar after a heated argument during a meeting. Things were by no means well at the company and Lasseter and his team of animators knew this, and were afraid to ask for money to finance another short, which they storyboarded as Tin Toy.
In the spring of 1988, cash was running so short that Jobs convened a meeting to decree deep spending cuts across the board. When it was over, Lasseter and his animation group were almost too afraid to ask Jobs about authorizing some extra money for another short. Finally, they broached the topic and Jobs sat silent, looking skeptical. The short would require close to $300,000 more out of his pocket. After a few minutes, he asked if there were any storyboards. Catmull took him down to the animation offices, and Lasseter started his show. With the storyboards pinned on his wall, Lasseter did the voices and acted out the shots—just as story men had done on the Disney lot for decades—and thereby showed his passion for the project. The stakes here were much higher than before, however. Ralph Guggenheim, manager of the animation unit, recalled, "We knew that he wasn't just pitching for the film, he was pitching for the survival of the group." Jobs warmed up to the project and agreed to provide the money. "I believed in what John was doing," Jobs later said. "It was art. He cared, and I cared. I always said yes." His only comment at the end of Lasseter’s presentation was, "All I ask of you, John, is to make it great."
That fall, after completion of Red's Dream, most members of the company gathered at Stillwater Cove, near Fort Ross, to design a new software that was designed completely for the work of an animator. From the meeting came Menv software ("modeling Environment"), the first program specifically designed to facilitate the workflow of an animator, separating the various phases of the animation (modeling, animation and lighting), later renamed Puppets. To show the application of the new program, it was approved the production of a short. Inspired by the birth of his daughter Julia, William Reeves proposed the idea to create a human baby. Lasseter had an inspiration for the new opera based on the observation of his nephew, intent to put any toy in the mouth on the way. Lasseter said "In terms of toys the child must have seemed a terrible monster!"