Early stage venture capital firm SOSV closed its fourth successive fund, dubbed SOSV IV, at $277 million last week. The Princeton, New Jersey headquartered ‘accelerator venture capital’ investor has made 20 investments in India over the last three years, 15 of which were last one year alone. The firm has aggressive plans for India, sees huge opportunities here, and is looking to close at least 15 deals in the next 12 months.
William Bao Bean, General Partner at SOSV, is no stranger to Indian startups. He is one of the first international investors to invest in India’s internet companies. During his time as vice president at Deutsche Bank, Bao Bean worked with some of India’s early internet successes such as Rediff, OnMobile and Naukri. Later, he switched over to venture capital and as a partner with Softbank China & India Holdings (between 2007-2010), he focused on early stage investments in technology, media, and telecom companies in Asia, though the primary focus market was China. Fast forward to 2015, Bao Bean was back scouting Indian startups at SOSV. He is also the managing director of two SOSV accelerator programs - Mobile Only Accelerator (MOX) and Chinaccelerator.
SOSV operates seven global accelerator programmes such as HAX (Shenzhen and San Francisco) for hardware; IndieBio (San Francisco) and RebelBio (Cork, London) for life sciences; Chinaccelerator (Shanghai) and MOX (Taipei) for cross-border internet; and dLab and FOOD-X for blockchain and food-tech (New York) respectively.
In an exclusive interview with TechCircle, Bao Bean elaborated on SOSV’s India plans and more.
You have watched the Indian market from close quarters for over a decade. What are the primary changes you observed in the country’s internet startup ecosystem?
Mobile internet became a lot cheaper in India and it became a lot easier to pay for things, on the digital side – these are the two big changes that happened over the years. These changes have really opened up the market. Those were the main drivers that pushed us to invest quite aggressively here in India.
What is SOSV’s focus in this evolving landscape in India?
I think everyone in the last decade or so focused on India first. There’s a huge opportunity around mobile internet. Our tagline for MOX is the next 4 billion, so we are looking at people whose first or only experience with internet is on the smartphone. We are going for people who are not necessarily rich, the middle-to-lower income groups. Their monthly income can be as low as $200-$250 and it’s a much larger market. Most of our users are Android users. We are not iPhone-led.
SOSV started investing in India about three years ago. We started slow, but now we are doing a lot more investments here. We have now done 20 investments in India, mostly into B2B startups through MOX and Chinaccelerator. We are closing in on another five currently. We have closed four follow-on rounds this year in India.
How important is India for SOSV?
India is our number one market. We help all our companies expand to India. We currently have 56 million monthly active smartphone users on our MOX portfolio companies alone. The location of the accelerator is not important for us because we are global. Seven of the 10 companies in the last batch of MOX were Indian. We will have many more in the next batch as well.
What’s the one major challenge you promise to address for your portfolio startups?
Internet startups struggle to scale and monetize due to high customer acquisition costs. We invest in every single company we work with. We try to help them, bring down their customer acquisition costs to increase the revenue they can make and improve their life time value.
There are a lot of amazing entrepreneurs in India who unless they manage to lower their customer acquisition costs, are not viable businesses, and they can’t raise funding. So we come in, we help them lower their customer acquisition costs, help them get their unit economics better, scale up a bit with our money and then they can raise a proper round and take it to the next level. We believe we have a good opportunity here.
What is the thesis behind your various accelerator programmes?
We are quite different than most VCs. We are global, we have multiple verticals in one fund, and the way we add value to the company we invest in is through the accelerators. Because we are early stage, living together side-by-side for six months is a great way to deliver that value. We partner with 120 other accelerators across the globe. They get the companies to product market fit. The problem is that the markets around the world are too small to make a large size company.
We are a scale accelerator, a later stage accelerator and a VC. We invest, we help them scale up in their home market, and go to other markets.
We are a global company. Every accelerator invests in companies all over the world. We are not geographically focused. We help companies from all over the world expand to Asia and go cross-border within Asia. MOX and Chinaaccelerator are geographically focused where we help companies expand and scale in Asia.
What is the cash component offered to startups as part of the accelerator programmes?
We invest in every single company we work with. It’s a little bit different for a reach programme. We invest about $120,000 to $150,000 depending on which programme they are part of. Our ownership in the company depends on the location and the stage of the company. We usually end up with about 5-7% stake, although there are some with 8%, depending on the stage of the company. It’s for the accelerator programme and the cash. We automatically follow-on with a minimum of $25,000 in any company that raises another round. It’s in the contract, but we usually invest a lot more than that. If a company raises money, we will take part in the round.
Can you give us an overview of SOSV’s VC funds so far?
The first fund was an evergreen fund which went on from 1996 to 2014. The second fund was a smaller one, $11 million sidecar fund for the Irish government. We don’t do that anymore. The $150 million third fund was in operation between 2015-18. $100 million of that round was our money. We had big skin in the game, especially Sean O'Sullivan (managing partner of SOSV).
We were oversubscribed for our fourth fund which we closed at $277. For the new fund, only $40 million is from Sean, which means that we went from $50 million of outside capital to all the way to $230 million. We have achieved more than 4X in the amount of outside capital. The money from this fund goes to all our verticals.
We have over $650 million of assets under management.
What’s your overall investment philosophy? What kind of businesses, people do you like to back?
What we look for are companies that solve a problem for people in more than one market. If you look at sectors such as fintech, media, ecommerce and social commerce, healthtech, and education, people across markets tend to have similar type problems, especially when they are on $50-$200 Android, getting access to digital for the first time and there is leapfrog effect.
I lived in China for 20 years, came to India in 2005 – we have seen this play out market by market. Every market is not the same, you have to change, localize, optimise for each market. But the challenges that consumers and businesses have and the problems that need to be solved are somewhat similar. So, we have the experience and we are looking for amazing talent.
Most of our founders are serial entrepreneurs. In our last batch, entrepreneurs had seven exits, one team was part of the founding team of a unicorn. Most of the entrepreneurs we work with are not kids. We have some that are young, but usually they have been around the block.
When you want to scale up, it is usually better to have a product market fit then scale, not scale and find product market fit. We are looking at companies that are at product market fit or almost there.
And your exit strategy?
We are with the founders from the beginning, with our accelerator programs and cash infusion. We might bring our stakes down when the startups raise subsequent rounds from external investors, but we are there for the long haul. We would like to be with the company until an IPO or an acquisition. We are not unicorn hunting. We are alongside the founders.
Sometimes raising tons of money and going all the way to unicorn is not actually as good as taking a slightly early trade sell. It’s up to the entrepreneur, not up to us, but we are more than happy for our founders to have a life-changing event.
Tell us about your investment outlook for India in 2020?
In India, it’s no longer a two-dimensional chess game where you can see all the different players. In 2020, everyone is going to have to learn 3D chess. There are startups coming from below and then there’s big guys coming from the top. So if you switch the wrong way, they are going to crush you. We need to understand and be aware of the increasing complexity of the market.
From an investment perspective, the easiest thing to do is to look at what worked in China. There’s a decent chance it will work in India.
We are really focused on social commerce. Learning about buying something, not just from an ad or from search, but from a recommendation from a person. Social commerce can be a physical product or can also be a services. In education, we would like to see startups that tech-enable teachers, transforming them from being a YouTuber to a small and medium business person. From making $200 a month to making $3000 a month. We are also pretty focussed on fintech.
One area that is kind of new in India is monetizing with games. I don’t think people have really cracked the code here in games. We are going to watch out the game space. We just have to open games up for audience in a way they can accept it at a price point they can accept and afford.