By Minjia Wu and Eva Shi
If you have been tracking the macro trends in venture financing, you might have heard that even though more capital is being raised at each financing stage, the money is going into fewer companies.
Quite a number of people have approached SOSV about this issue, especially due to the nature and volume of how we invest.
At GMIC 2018’s Cross Border Venture Summit, we were fortunate to capture our Founding Partner Sean O’Sullivan’s fireside chat with Barrett Parkman, Partner of GWC Innovator Fund. Sean shared how he came to create the most active early stage investment fund in the world and why we chose to maintain our volume of invest.
Let us take a look at the story of SOSV below.
From Engineer to Investor
Barrett: Could you please introduce yourself? How did you start SOSV? How did you become the world’s most active investor?
I was born into a poor family in the 1960s and was raised by a single mother. In our family, we had nine children without a father. I think I am actually very similar to many entrepreneurs in China who strive for success for themselves.
My mother is an Irish woman who placed great emphasis on education. Out of all nine children, eight of us went to college. I, myself have an engineering background. After graduating from college, I established a technology company in my dorm room called MapInfo. Our company started in 1985, and had a few hundred million assets by 1994. By then, I had a few achievements in technology — for instance, I co-coined the term “cloud computing” and still hold the trademark for it.
When MapInfo went IPO, I was only 28 years old. From the proceeds, I started investing, and from there I became kind of like a super angel. Now, MapInfo was my first company at age 21, and at the time I had no idea how to run a company. I had a mentor that really guided me and had invested at the earliest stage of the company. This really motivated me to build up the first accelerator in China with mentors: Chinaccelerator. Part of the angel investing I did went through Chinaccelerator to help early stage companies. This is my background and the story of how our accelerator VC came to be.
Barrett: Why did you choose to continue doing investments through accelerators? This is a very unique standpoint. Many VCs don’t have this kind of structure.
The accelerator stage can get a better deal flow when concentrated on different verticals and various locales. Our global accelerators cooperate with each other and cover areas including San Francisco, London and Cork. We have tens of thousands of applications from first-time founders. Why are these people important?
Not all of these startups have succeeded, but take for example Bill Gates and Google’s Larry — they were the first-time founders behind many of the world’s best returns on investment. But for many other investment institutions, they need to see $5 to $10 million in revenue before deciding to invest. For founders without a track record, they will likely have to seek capital elsewhere. That gives us a bigger pool of choices at the accelerator stage. So in the end, we are in a position to be more selective despite having a smaller fund that can only be invested in small amounts across many companies.
But I always tie this back to my own experience. I know how difficult it is to start. So the goal for our accelerators is to congregate all our resources to help these companies in their initial stage and to accelerate their development.
Barrett: Accelerators always face criticism; for example, some think that if you are a successful entrepreneur, then you don’t need to go through accelerators. You can instead go for big capital or go public. So as accelerators, you can only get second-tier companies.
I think that having this mindset is like saying only the best people go to Harvard University. But actually, if you want to be one of the best engineers, you might not go to Harvard; you go to MIT. Following this analogy, if you want to enter the Chinese market, then you may go to Chinaccelerator. If you want to create the next successful social media software, then you may apply to YC (Y Combinator).
At SOSV, what we do is very vertical and deep. For example, we are like the MIT of hardware. We know how to make 3D models, and we are familiar with all the industrial and chemical applications. We have 50,000 square meters of storage space for production equipment in Shenzhen, and we provide entrepreneurs this space for sample production. We have these equivalents in our labs for biotechnology in our accelerators Indiebio and Rebelbio. It is very unlikely that other venture capitalists have these types of expertise in-house.
We remain very focused on just these three verticals- software, hardware, and wetware, and we choose very few companies among the annual application. For example, Chinaccelerator, which is located in Shanghai, accelerates only 10–15 companies in each batch and only has 2 batches a year.
Barrett: Can you describe your success record a little?
We have been in the investment industry for more than 20 years, but as early investors, it takes many years before we see the results. We have some listed companies and some recent acquisitions. At the time, they were relatively small acquisitions at $20–50 million.
But actually that’s the typical amount for the majority of acquisitions. So for our investment amounts of less than $1 million that average an acquisition of $30 million, we are actually making pretty good returns.
Our most recently acquired company is called Jump. We invested in them 5 years ago, and they have just been acquired by Uber. Jump actually championed dockless bike sharing, but they were not in China. They were established long before ofo and Mobike.
We now have more than 600 companies in our portfolio, and currently we have an IRR of over 30%. In this industry, the average internal rate of return for venture capital is about 5%, and 7%-12% is a good return.
I think there are some reasons why we can achieve such results. Thanks to the accelerator model, companies are brought up to share and learn from their experiences with one another and even work together.
Thank you very much GWC for inviting SOSV for a fireside chat! For more information on our portfolio and fund, please visit www.sosv.com
- Also seen at GMIC: Thanks for inviting Chinaccelerator Managing Director William Bao Bean on the panel “Will China Dethrone Silicon Valley As The Global Center Of Innovation,” Chinaccelerator mentor Richard Robinson as the moderator of the VC Summit panel “What Founders Want from Investors Beyond Capital” and Chinaccelerator EIR Melody He as the MC of the Global Blockchain Summit.
Sean O’Sullivan, SOSV Founding Partner was the first person to digitize maps in his college dorm room (NASDAQ:MAPS). Sean invented the word “Cloud Computing” and holds the trademark to it. He is a Dragon on the popular TV show Dragons Den.