A “Death-Defying Time” for Start-ups

May 26, 2020

By Alison Buckholtz

Sean O’Sullivan’s global venture capital firm, SOSV, has helped more than 1,000 portfolio companies with multi-stage investment to develop and scale “big ideas for positive change.” Each year, 150 new start-ups benefit from SOSV’s accelerator programs, which provide start-ups with seed capital, product development staff, mentors, and access to infrastructure outfitted with laboratories and maker spaces in New York, San Francisco, Shanghai, Shenzhen, Taipei, and Tokyo. As COVID-19 tightens its grip on the globe, O’Sullivan’s firm—an IFC investee—has been working more closely with entrepreneurs pursuing solutions to pandemic-related problems. In this edited interview, O’Sullivan shares his thoughts on the most promising of those solutions, describes how the post-COVID-19 economy will affect investment in start-ups, and explains why this moment is his “call to serve.”

Q: How is your firm faring during the pandemic, and how are your portfolio companies doing?

A: The pandemic is a real hit for our portfolio companies and for our organization—a challenge for all of us. I’d say that about 10 percent of our companies are doing phenomenally well and that the pandemic has actually sort of unleashed their businesses to new potential. Maybe 20 or 30 percent are doing really poorly, because they were manufacturing companies and due to the lockdown, they can't make their products temporarily. The rest are sort of muddling through.

Q: As someone who identifies and cultivates big ideas, do you feel a sense of responsibility to help develop technology that can help society combat COVID-19?

A: Yes. This is a moment like nothing that humanity has seen in 100 years. I think those that can do, must do, in a situation like this. Around three dozen of our portfolio companies are providing solutions and offering ways of responding to the coronavirus that give people hope and give us the means to get out of the situation. The two largest sectors where we invest are in life sciences and in hardware. And in both of those areas, we have companies that are playing big roles in providing solutions around the coronavirus.

Q: What are some COVID-19-specific, SOSV-funded solutions that you‘re most excited about?

A: We think some of the longest lasting developments are in the life sciences area, like a CRISPR- based diagnostic test called CASPR. CASPR will enable very, very inexpensive testing for COVID-19 at the workplace and at home. It's like a pregnancy test: For a couple of bucks, you can find out if you have this condition or any one of various other conditions. The company originally worked on Zika virus and other genetic testing.

One of our portfolio companies, Verdex, has developed a nanofiber material that makes better masks for caregivers. Nanofibers enable better filtration and are much more breathable than N95 masks, but cost no more than N95 masks. The company is making samples now and is looking to scale up machines to produce masks in greater quantity. They can partner with American or European manufacturers to make masks locally, and are already working with Chinese maskmakers. The product’s inventor was the original inventor of Tyvek, and was a Fellow at Dupont.

Q: Do SOSV’s day-to-day operations look different than before the pandemic? From a corporate point of view, how has this period changed how SOSV does business?

A: SOSV runs accelerators globally. We have co-working centers in Shenzhen, Shanghai, Taipei, Tokyo, San Francisco, and New York. These co-working centers have for the most part become virtual centers. In an ideal world, you still have all those teams, intermingling and learning from each other, and mentors coming in teaching a group of start-ups lessons like how to better pitch your company, how to sell stock, all the other things that early stage start-up founders learn. But we have shifted to a virtual environment. That's been a challenge for many of our companies, especially hardware and life science companies, which create physical products, and where actually having wet labs and manufacturing capabilities is a requirement.

Q: What shifts do you predict happening among investors during and after this crisis?

A: My feeling is that you're going to see a tremendous decrease in the engagement of angel investors, who are normally important at the earliest stage of a start-up’s growth. I think this slowing down will come with a revaluation of the valuations start-ups are being sold for. It will take a year or two for us to work our way through that. That said, we're not worried about short periods of a year or two in the span of a fund, because we invest for 10- and 12- year periods. We see this as a blip that we can take the companies through—it’s a tough time right now, but it'll lead to much better times. And, as you know, probably the best investments have historically come in times of depression and recession, like the time we're entering into now. Down markets have historically been a good tonic for start-ups and for investors. Valuations get a little more conservative, and a little more realistic. This is generally good for investors like us.

Q: If professional investors are going to have more influence than angel investors in determining which start-ups get funded, how will this change the makeup of accelerators and how they're managed?

A: A lot of accelerators are almost entirely dependent on angel investors. Angel investors—say, a “super angel,” at the highest level—might write a $100,000 check. We already see that angels are leaving their hands in their pockets in this time of uncertainty. They are cutting back in a huge way. That means that accelerators that are almost entirely dependent on angels are going to see a really dry level of follow-through investment. Among companies that are only funded by angel investors, the death rate is going to go up this year and next year.

For other accelerators, like ours, most of the capital comes in via professional investors. Professional investors have a pot of money that they've already allocated. They have raised their funds, those funds are there to be drawn down over the next several years, and so they're sort of set on their path. They might slow their pace of investing because of uncertainty; they may change deal terms because of uncertainty. Valuations may come down somewhat because of uncertainty. But they will continue investing. Overall, I do think we will see a lot of accelerators being knocked out of the game for a few years at a minimum. It’s a death-defying time for start-ups.

Q: What investment opportunities do you see coming out of the pandemic?

A: Well, there are opportunities arising from the pandemic—exploding opportunities. We funded companies that are a couple of months old and they're already in revenue. We have one three-month-old company already at an annual run-rate of many millions of dollars of revenue. These are businesses that are necessary for society to advance; they need to be scaling, and we're helping them scale.

Other examples: We have a food accelerator, and food is one of the industries that is doing well in this time. We've got robotics companies offering robots that clean bathrooms, and robots to provide UV decontamination. We’re funding those types of robots specifically because of the needs du jour. We recognize that COVID-19 is going to be with us for a long time, and it's likely that we'll see more pandemics in the future.

Published in May 2020