Current VC trends in China and the World. Interview with Sean O’Sullivan, SOSV’s Managing General Partner
--
written by Bruno Smith & Henri Delahaye
SOSV : THE ACCELERATOR VC
SOSV is a Venture Capital Firm that caters to the needs of early stage startups. Through their multiple accelerator programs, SOSV helps these startups “go further, faster” thanks to physical and financial resources coupled with on house staff which makes its value proposition rather interesting.
SOSV runs 6 industry specific accelerators. HAX (Shenzhen and San Francisco) is an accelerator that hosts startups specialized in hardware, robotics, and connected devices. Located in San Francisco, INDIE.BIO focuses on life sciences. FOODx’s, centre of attention is food innovation. REBEL BIO, SOSV’s only accelerator located in Europe (London) helps out startups in the Biotech industry. Furthermore, SOSV has one accelerator in Shanghai “for entrepreneurs innovating at the cutting edge of information technology, either entering China, expanding across SE Asia, and ultimately dominating globally.” . Lastly, SOSV has an accelerator for mobile apps startups. MOX is located in Taipei, Taiwan. The initial investments that come along with the acceptance in these accelerators can be followed by future investments. This is the reason why SOSV characterizes itself as a “multi-stage venture capital investor”. They currently fund 150 companies per year and have funded roughly 700 startups to date.
The fact that SOSV specializes in these early stage startups and that their core strategy relies on the effectiveness of their accelerator programs sparked our interest. It’s also unusual to have a VC with a roughly equal distribution of employees across the US and China.
Interview with Sean O’Sullivan
We were extremely fortunate to speak with Sean O’Sullivan, SOSV’s Founder and managing general partner. Sean founded SOSV in 1995. His experience spans across multiple industries. He ran a company specialized in street mapping in the late 1980’s. Later on, he created NetCentric that provided internet fax services. More recently, he ran Carma a global provider of media intelligence solutions. Lastly, he appeared as a panelist on Dragon’s den.
1/ Some of your accelerator programs are located in Shanghai and Shenzhen, but you still have programs in San Francisco. Do you have a Chinese city in mind that has already overtook or could overtake San Francisco as the most important/ the best city for venture capital and startups in general?
Well not really, I would say that China certainly has a phenomenal run ahead of it. It’s going be a great country for you know, the millennia to come. (laughs) But, one of the issues with China as being you called it : “the best place for VC or entrepreneurship”, is that China will have to be a lot more open than what they currently are to be the greatest place for entrepreneurship. The advantage that a place like the United States has historically had is a more of an open society, where people can become citizens from any place in the world. Therefore, that mix of diverse cultures and diverse ideas has led to a long and continuous success. China, you may have noticed is a little bit more insular and a little bit more focused on one particular set of ethnic people, the Han people. That’s a little limited, you’re not going to get the world’s greatest ideas necessarily from one group. There are a many places like Europe that are more open or even Hong-Kong . I would say that there are many other places around the world that are even more open than the United States like Canada that is a more diverse place in terms of welcoming new ideas and new immigration. Those things I think will help countries in reaching long term success. If China became a bit or even a lot more open, I think you could say with surety that they could definitely have greater chances of having one Chinese city become the “best” in the world. We know that the Chinese people wants that kind of political reform. The Chinese government sometimes encourages this. However, they are doing things on their own time scale in terms of when they want to make changes like that.
2/ We saw in 2017 a decrease in the amount of deals made and an increase in the amount raised because of all these mega deals organized by SoftBank for example. Is this something you see as a long term trend or do you believe it’s rather something cyclical?
I think it’s a reframing of what venture capital is. I don’t think that’s actually venture capital anymore. It’s just a changing of the terminology. I don’t think these reports are actually referring to venture capital (laughs). I think these firms have in many cases turned into Private equity firms, they are no longer venture capital firms. The models are going to keep shifting, but I think somewhere along the way, the people that are doing the analysis lost the plot. The venture capital industry is not what they are reporting on, they are reporting on late stage private equity. So, if you were to say “okay where is the cutoff?” well some of the investments that are being made that are even more than 100 million dollars you could still kind of quasi-call those venture capital transactions, even if in many cases it isn’t. I would probably cut it off at 100 million dollars is no longer Venture Capital but in many cases it’s really 50 million dollars. Why would I say that? Probably because you know those are kind of the sums where you could be going public in the previous world. I think the only reason why they are still calling it VC is because some of same names that used to be doing venture capital are participating in these trends. If you asked me what the trends were for venture capital, its been down several years. The real VC industry has been declining in activity for about the last 6 or 7 years. It is becoming harder for entrepreneurs from the biggest boom period which probably was the 2013-2015 period where there was just a ton of what is now called seed venture capital, a lot of angels involved and a tremendous number of startups. Since then if you look at the reports, venture capital has been declining. That’s true and yet I still think this is one of the best times to launch a startup. It’s just becoming harder and harder for startups to find not the initial couple hundred thousand but the next stage beyond that, the million dollars or 2 million or 3 million dollars that is needed to scale an idea.
3/ Kickstarter has managed to raise colossal amounts of money for these early stage startups. Do you see this kind of fundraising taking an even more important part in this environment or not really?
Well I do think that Kickstarter is a great shortcut for many companies to be able to bypass traditional rounds of venture capital, or at least to provide greater proof and to de-risk venture capital and to therefore sometimes skip straight to series A round for companies that have validated their market demand through their Kickstarter campaigns. I do think Kickstarter is a great democratizer of opportunities in particular for hardware and gaming companies. As you may know, SOSV is probably the primary beneficiary in the world in terms of VC firms. 8% of the most successful companies on Kickstarter are actually backed by SOSV in our HAX program. (https://www.kickstarter.com/pages/hax?lang=fr) On Kickstarter, The average campaign raises about 4000$. Around 1 out of every 100 I think raises more than a 100000$, and it’s 1 out of maybe 100 0000 or 300 000 raises more than a million dollars. Our average company that comes out of HAX does around 400 000$ on Kickstarter, which is a great outcome for these companies, that allows them to go further and faster.
4/ You talked about your HAX accelerator and you also have one based in San Francisco specialized in synthetic biology. We are seeing lots of regulatory issues with CRIPR and stem-cells and you’re backing companies specialised in stem-cells. In your opinion are these regulatory hurdles slowing down the pace of innovation?
No, I think it’s necessary for some regulation especially in areas linked to Medecine, it’s mostly a healthy thing. We work directly with the FDA, NIH and other leaders to try to help shape the future, in terms of trying to help them understand how it can help peoples’ lives and the outcomes of these technologies to really transform lives. We have at least a dozen companies we have backed in the stem cell areas with different technologies and different use cases that can really help peoples’ outcomes.
5/ In 2017, out of the roughly 60 new unicorns 18 were from China. In the future do you think China will end up producing more unicorns than the US?
Well that’s a good question, we actually have one unicorn that came out of China from our own portfolio and 2 or 3 that are well on their way that have originated in China. But, I would say that unicorns is sort of a vanity metric. In order to be recognized as a unicorn you just need to be raising large sums of money. In fact, the healthier statistic is how quickly are companies getting to meaningful revenue and sometimes it’s completely uncorrelated with the actual amounts raised or the hypothetical valuation on those companies. I would say that yes China will continue to have a golden age in entrepreneurship, I would hope for many years to come. That is why we are so present there with half of our staff there globally, 50 people are based in China. The government certainly is very involved in helping Chinese startups to do well so I do think there is a long run ahead of it.
