EUVC #221 Sean O'Sullivan, SOSV on building a 1.5 bn behemoth to back planetary & human health with a global studio model

0:01Hello, everybody, and welcome to the European VC podcast. I am David, and I am joined, as usual, by my dear co-founder, Andreas. Today, we have Sean with us. Sean is a managing general partner at SOSV, a global multi-stage venture capital firm that operates early-stage startup development programs, notably HACS, IndieBio, and Orbit Startups. They are the first check in deep tech starting at pre-heat stage. SOSV has$1.5 billion USD in AUM and an established portfolio of 1 ,000-plus companies, including the names of Upside Foods, Perfect Day, OpenTron, Formlabs, etc. Sean is also on the board of Khan Academy, the Tyndall Institute, the Autism Impact Alliance, the Brain Foundation, and a number of private companies.

0:44If you're listening in and love our show, drop us a review, follow the pod, and subscribe at eu.vc.

1:02United and determined we can serve as a model for other regions of the world. The nature of a problem requires a European response. Europe is a story of new beginnings. Let's start acting. This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. All right, Sean, I saw you really enjoying our very European jingle there. Yeah, and got to love the dance throb music there. There's nothing better than marrying Merkel and dance throb for sure. But Sean, let's kick this thing off with your path into venture. Would you give us your story? Tell us who's Sean?

1:50How did you get here? How did I get into venture? So my journey into venture started when I was graduating from university. Rensselaer Polytechnic Institute. I started a company called Map Info. If you've ever typed an address into a computer or onto your smartphone and seen a street map, like to get around or whatever, that's what we invented. It became a very successful company. It became a big public company. It went public in 1993 before both of you guys were born. And I was... We were born. We were born, I must say. I was very, very young. I was one year old. Okay, okay, okay. But I don't think we saw that as a user, though.

2:33Yeah, well, it was more for the commercial users and putting data on street maps and whatnot. We had thousands of people who built our technology into their products. And so, you know, the first million people ever to do this sort of technology, 98 % of them did it on MapInfo. And then others obviously came off later. The Google Maps and whatnot is a great derivative product that we really love and think has added a lot of value to the world. But I grew to a couple hundred million dollars in revenue. I left the company after it went public and actually went into the field of music. I made some music.

3:16But some friends of mine pulled me back into the tech industry, got me to start another startup, Netcentric, where we had the idea for software inside the internet, or as we coined the term, cloud computing there. It was a big idea. idea. But when the dot bomb era hit in 2001, we had, I think,$8 million in revenue and$10 million in expenses. And that just didn't cut it in a world where you needed to be having more revenue than expenses. So we went out of business, sold for pennies on a dollar. And you learn as much from failing as you do from succeeding. It still hurt a lot, but that was my start into venture.

4:03I guess throughout all that time, after my first company went public, I was investing. I was a super angel investing at the sort of quarter million or half million dollar level into pre-seed startups. And several of the investments did really well, including companies that got acquired by public companies, a company that went public, other companies that sold for hundreds of millions of dollars. And so after the amount of money that I was managing through all of that grew to the low hundreds of millions of dollars, I decided to make it formal and say, I am now a VC. And that is how SOSV came into being.

4:41I hired a back office and brought on other partners. And now we deploy the capital and tend the flock.

4:54I feel like I can risk and say that you have a really diverse, unexpected background. And just to shed some light on that, and we will share some links to the listeners that want to hear more about these stories. But you have a background going from janitor to entrepreneur, rock star, filmmaker. You were in Iraq. You ran a humanitarian organization. organization, I know there's this weird story about you also having your eye eaten by a steroid-induced viral infection, and to more recently even being a TV star in Ireland, right? And I feel like I could go on if I listed all the interesting things in your background.

5:30So I'm very excited to ask you this question, which is, would you share with us a pivotal moment in your life and how it has shaped you as an investor today? Well, I'd say the first pivotal moment in my life, and let's just stick with that one, It was how I went from being a janitor at my high school to being a programmer when I was 14. So I grew up really poor. And so we were on welfare. My mom had, we had a deadbeat dad. There were nine kids. And so we, for six years, were on the welfare system in the United States. So they had a program for the poorest of the poor, which was called the Civilian Employment Training Act.

6:13and you could get a job theoretically on something that was hopefully helping you develop a career. So they gave me a job as a janitor and I worked in my high school. And I figured out that you can't wait for something to be handed to you. You have to go and seize it. So I found another job where I thought I could actually do something which would actually advance me. I knew that there was a there was a government agency in town that had a computer and I said I want to go be a programmer so I asked the person who was running that just knocked on the door asked for a meeting he was open I stepped into his office and I asked him hey can I just do something here you know can I change the tapes on the on the machines can I do punch cards or whatever it is that you do here.

7:03And he said yes. And then I then became a programmer. And, you know, that helped shape my life.

7:15I think one of the most important things for an entrepreneur is that moment where we realize that you have to seize what you want to get it. No one is going to hand it to you. I'd love to ask you a question about your investment into Netflix because that's something that I think that most people would think, that must have been a pretty wild ride. Well, actually, I originally invested into Netflix through a VC fund that I was an LP in. And so I really liked the company. They had the red envelopes back then. So this is like pre-digital distribution, pre-streaming. And so then they went public, and then they just crashed.

8:00You know, the stock went to a very, very low valuation. And I actually bought most of my position at the IPO or not post IPO, I would say. So it went down at very, very low valuation. I bought like 2 % of the company. If I'd held on to all of that, it would be worth several billion dollars. I sold it over the years and made plenty of good returns on that. But just the same, that's how I got into Netflix. I asked the VC if I could meet with the founders. And so they introduced me to Reed Hastings. And I stayed with that company for many, many years through the transition to streaming and through all of that.

8:45And a big believer in their huge success. And always kind of shocked as well as how much capital they had access to and sort of the stratosphere of valuations. So I sort of diversified and went into other sort of more value-based stocks, you know, later on, like Apple, when Apple was, you know, a very low value company. So that those things were sort of my lessons in getting into Netflix and actually how you can actually ride a wave for a very, very, very long time. you know Netflix has been around for you know way more than 20 years 25 years and you know it it keeps increasing in value you know pretty substantially and so has Apple you know when I bought into Apple I don't know it was a couple hundred million dollar valuation for the whole company right and and so you know maybe it was a billion dollar valuation and now it's a trillion dollar valuation right so a couple trillion three trillion so you know those are those are you can right away for a really, really long time.

9:51If you get a winner, stick on the back of that course. Yeah. And I think that this ties and we've got a lot of conversation around SOSV and your investment strategy and so on. But now you saying this, I cannot help but want to just scratch a little bit deeper and say, you are a multi-stage investor. And of course, you're that because of the philosophy of you want to double down on your winners. But I'm curious to just hear you tie what you just said with those two experiences with Netflix and Apple to the reason behind you also being a multi-stage investor? And to what extent would you even go in and buy up after a crash after an IPO?

10:32Yeah, well, actually, we don't have that mandate in the fund. I actually invested in a VC that does have that mandate, Technology Crossover Ventures, when I was getting going. And I actually really appreciate that approach because those runs can be really long runs. I would like to have that approach, but on the other hand, that tends to tie up capital in a different way than people like to when they're investing in VC funds. So we stick to the knitting and we just really work with the startups. at the pre-seed stage where we start investing. And we do go to, you know, Series B, Series C. So we are a multi-stage investor.

11:17But our focus is really from, you know, from a couple of million valuation to sort of a couple hundred million valuation where we're buying up. And then beyond that, we tend to sit on the sidelines. Let's go into the take a stand section.

11:46All right, Sean, let's get to this quote from Sabina that we want to hear your take on. It is VCs add way less value than they think. Yeah, I mean, we try to do a lot more than most VCs to add value. you know, we have these physical facilities, we have a huge staff, you know, we have over 120 people globally that are working with our startups. So, and 75 % of those are working at the at the pre-seed stage. So it's really a tremendous amount at the foundation. And we know that the startups appreciate the work that we do and they're happy to work with us. But fundamentally, it's always the founder's company, right?

12:29And at the time we first get involved in the companies, that founders own the majority, the vast majority of the equity of the company. They're the ones doing the 80 to 100 hour work weeks. It's really all about founders. I think VCs appear a lot of times to want to take the credit. It's very true that VCs can do and should be essential for getting the startup to go further, go faster, skirt unnecessary problems and all that. But ultimately, really, if it was all about the VC, why do only one in 10 investments in a VC's fund actually produce these disproportionate success stories? The thing about VC is, they say about VC is, it's the only job where you can be right one time out of 10 and be called a genius.

13:21And that's the truth because five or six times out of 10, those investments are going to go to zero or go to just a partial valuation. You have two or three investments out of 10 that earn you out of the hole and then really one out of 10 investments that if you get it, you get to do the next fund. And if you don't get it, you're out of business because, you know, the odds are always for asymmetrical returns in VC. and so it's not the VC's fault. You know, I think VCs have a tough industry to be in. They have the faith and the courage to back companies. Most of the times the companies are going to lose money and they're going to back those companies for years of their lives, you know, spending time trying to help those companies.

14:11So I don't want to diss the VCs. This is a hard business for everyone to be in, but it is the founders ultimately that build the success And you have to underline that. We're a bit along for the ride here.

14:28So, Sean, we've been seeing, obviously, and we as an industry, of course, a rise in the emphasis of this topic of planetary and human health within VC, you know, whether that's existing firms doubling down on that space, increasing their allocations for those verticals, or just increasing fund size, but also many emerging GPs actually that may have calmed down a bit. I don't really have data, but I remember seeing a lot of new funds or new projects at least popping up here and there within that space. And your approach, as we kind of hinted to already, stands out from the traditional VC model in the sense that you could provide a lot of hands-on support, but you also provide like infrastructure, core infrastructure.

15:08And I'll let you kind of deep dive into that a bit more to startups. And that is intriguing. And I would love to ask you to elaborate a bit on the why behind that unique model, because it does take a different level of investment and not only capital. But also, why do you believe that positions you at the end of the day to just generate the outsized returns for your LPs, your investors? Well, so the first thing is that the accelerator model is well understood, and there's a couple of people that are playing at sort of the level that SOSB plays at. So there's Y Combinator, there's 500 startups, and there's Techstars that are at the sort of volume and the sort of success level.

15:51And then there's a bunch of, there's thousands, there's literally thousands of other accelerators scattered around the world. Could you just share some big numbers there just so people that might not know the exact numbers of FV, just to give an idea of the scale that you're now talking about? Yeah, I mean, we only invest in about 100 to 125 companies a year, but that generally puts us up in the top three investors globally for seed, pre-seed investors, et cetera. and we also invest in follow-on rounds. So we are also one of the most active Series A investors, one of the most active Series B investors.

16:32And when we, at the accelerator level, we came along, we sort of loved the Techstars model of these cohort-based models where people are physically located alongside each other. As a matter of fact, I was one of the first backers of Techstars back in 2008. And we also backed 500 startups in their first fund as well. So we were looking at what was going on and we were actually, we created our version of the accelerator. We're the first in Asia. We created China Accelerator. It was the first in all of Asia and the first in China to have that model. But what we liked is we liked taking a very different approach and having a unique approach to our accelerators.

17:17And that meant that instead of just trying to be one size fits all, do all kinds of software, do all kinds of whatever business models, we became very focused and very vertical in terms of what we were trying to do. So that's China Accelerator. The market in China, you know, there's the Great Firewall. There's all these other things. You know, it's completely different than the software market anywhere else in the world. So so we had this model, you know, of actually trying to create more vertical accelerators. And, you know, so, for example, creating an accelerator for China and for the Asian markets, creating an accelerator for hardware.

17:58Because, you know, when you think about it, hardware is completely different than software, right? So you need to do pick and place machines. You need to do mechanical engineering and electrical engineering and, you know, frequency and FCC approvals and things like that. So all of those different specialties, we said, okay, well, obviously it needs to be its own different program. It needs to be its own different accelerator with people who can advise and work and get real deep help to startups in those areas. And we did the same thing for life sciences. So we became the world's leading programs for the targeted areas that we do.

18:37So we're the world's most active life sciences investor. We're the world's most active hardware investor. And we do a lot in the Asia marketplaces and the developing markets with our Orbit program. But we're not the world's most active software investor, and we never will be. So we sort of abandoned the accelerator model, and we created this more deep founder-first studio model where we actually spent. And we spent tens of millions of dollars building out these facilities. so that people could actually build their prototypes, do vacuum form plastics and molding and injection machines and mechanical work with five and six access robots that we have on site, pick and place machines, removing the circuit boards around, et cetera.

19:31So we have all of this capability to allow the founder to go further faster. And that was something we did because that was before we were a regular VC. This was when I was doing it out of my own money. And I thought that this is the way it should be done. There is no way that any VC could have done that because it required too much of an investment. And you can't do that out of a management fee. Management fee is only 2 % of your fund size. So I was able to sort of spend the money, build up these facilities and these capabilities. And since then, since it's been proven, we've also gotten some state supports when, you know, New York State helped us build our wet lab and they gave us$25 million to help do that.

20:19New Jersey helped us build out our HACS facility in New Jersey. They gave us another$25 million to do that. So it sort of differentiates us from other investors and certainly at any stage, but certainly at the pre-seed stage, because we have these capabilities and these facilities and the technical staff. We have 11 PhDs on staff, et cetera, that help with mechanical engineering and, you know, biomechanical and whatever is needed. Could I ask you, Sean, because you are a global investor, you've got investments everywhere, but having wet labs means you've got physical places and you're taking founders to those physical places.

21:07Many would argue, or many, maybe as an excuse for not having their own wet lab, argue that you don't do that. The best founders won't necessarily move to China to be in your wet lab, blah, blah, blah. How do you position on that angle? Yeah, no, I mean, we don't require them to stay for years. We only actually think that founders who are very dedicated, they're going to be able to uproot themselves for three months, six months, or whatever, because the business is the most important thing that they need to do. The other benefit is that we have these facilities in New York City and, you know, in New Jersey, the outlining area of New York City and in San Francisco.

21:55So at the same time, if you have like a European startup or somebody from India or someone from South America or whatever, this gives them access to capital that they never had before. I mean, one of the reasons why YC was only in Silicon Valley is because it actually has the investors there. We also, New York is an up and coming. It's the number two area for venture capital in the world. So we have our facilities where they can not only run, but they can also prove. I mean, these are physical companies. They're doing physical things. They actually need to have investors come and see them and see what they do.

22:37And, you know, they're not going to fly even to Singapore or something like that to back these companies. You know, they have to see it with their own eyes. And we help de-risk that for the investment community because they know the quality of the output that we put out. But also, you know, for the startups that they get to work with the best founders from all around the world, right alongside them for months at a time. And that is a huge, huge benefit for the founders to be brought out of whatever sort of limited ecosystem they're in and to be brought to global centers of finance and technology.

23:15You mentioned some stakeholders there that help with the development of the infrastructures. I'm curious to ask, you know, what is the partnership that you have with these entities? Are there LPs in the fund? Are there shareholders in the management company? And maybe also use that as a segue to talk a bit about what's the profile of LP that SOSV has proven to be good at working with? Sure. No, actually, they're just state agencies looking at this as an economic development opportunity and their grants. We've just been given grants. They've seen what we've done for the ecosystems for other areas in the world.

23:50They've seen the hundreds of millions of dollars in investments. They only give us really a small amount of money relative to the economic leverage that they get. you know 25 million dollars over a five-year period was was what our grant was from new york state and they we've already achieved in the first two years you know 150 million dollars of investment into the companies um and and over the next three or four years it'll be over a billion dollars of investment so it's like it's for them it makes a lot of sense given our success ratio of turning startups into unicorns the other part of the question oh sorry you asked about the lp LPs.

24:27You asked about the LPs. Yeah. Okay. LPs. So, yeah. So, you know, they don't, we don't need them as LPs. We have financial investors and institutions and whatnot. Sometimes they will also invest capital and that's, that's also, you know, appreciated. but our primary LPs are those that really care about the work that we do, the impact areas that we work in, and also the companies that, you know, big corporations that are looking for ideas. There's a lot of corporate LPs that are from all over the world, family offices. We have about 200 LPs across our various different funds, SOSP 3, 4, and 5. And each fund has its own set of LPs.

25:20There's a huge amount of re-upping, obviously, from one fund to the next. But yeah, each fund has new LPs. The first fund was a$150 million fund. The second was$277 million. And the third fund is a$400 million fund. So yeah, we add LPs as we go along. And you've got thematic funds as well, right? So that also, I guess there you have a bit less cross-pollination because you often see someone committed to climate being less committed to corporate, I guess. We have a core fund which supports all of our programs. And we have a follow-on fund which supports the companies as they are sort of Series B and later investments.

26:04Okay, that's cool. So you run your programs as you run, and this is just for our audience as well. the programs are run as thematic, but the fund that then invests into the opportunities in each of the programs invests across the programs. Yeah. I mean, really, this is no different than how all VCs work or nearly all VCs work. Like you'll have one partner who is, you know, specialized in SaaS, another partner who's specialized, you know, and maybe for the fintech sector or whatever, another partner is on healthcare and another partner that's doing, you know yeah uh ai or something and and so gen ai so like you know then so so we cover multiple sectors and we're quite generalist when in those areas but we have the technical capability to help those companies deliver and in particular we really are focused in human and planetary health with planetary health being 65 of what we do um you know really changing the means of production of how we produce the products that we consume as a society and as a world.

27:10Okay, so now it's time for our shout out segment.