Jay:  This week’s show guest is Duncan Turner. Duncan is the general partner at SOSV and the managing director of the HAX accelerator and HAX China Programs in Shenzhen, China. You probably recognize Duncan from his feature in the Wired Magazine’s documentary called Shenzhen: The Silicon Valley of Hardware. Duncan, welcome to the show.

Duncan:  Thanks, Jay. How you doing?

Jay:  I’m doing great. We’re sitting here in Hong Kong, separately, recording. I believe there’s a pretty big typhoon coming, but I think it’s actually going to miss us. So that might also be affecting some of this internet connectivity. But anyhow… It’s good to have you on. I’m very, very honored to have you on the show because you’ve done a lot of good things for the ecosystem here, particularly in China. For our audience that’s listening in, maybe you could give a little quick background. You have quite a diverse one — a designer, entrepreneur, startup founder, and now running a VC and an accelerator. So maybe you could give us a little run down of your background.

Duncan:  Yeah. Sure. Like you say, I originally studied industrial design and engineering in London and kind of stumbled on China by chance for like a two-week project, basically helping out. I was consulting for another company. And that turned into two months and then nine months and then…that was about 16 years ago. I’ve spent most of my time here, so… I founded a business. We raised money. And then, a lot of the challenges that we have here in China, so I ended up moving myself and our R&D team out to China just because we found it’s much quicker to develop on the hardware we were working on at the time.

I built that business up, and it got rather large. Had a few catastrophes along the way. That made me reassess things. I actually went to work for a company I’d always admired called IDEO. It’s a global consulting firm, and so I was helping them with a lot of the consumer engagement projects for either Chinese companies, like big large factories that were trying to build their own brands, or Western brands that were looking to enter into the China market.

Through my experiences there, I met SOSV, which is the fund which funds all of the operation for HAX — China Accelerator in Shanghai, IndieBio in San Francisco, RebelBio in London and Food-X in New York. I was incredibly inspired by what they were doing. Initially, I was like, there’s no way you could do that. There’s no possible way this could work. I must say, I was a mentor for the first ever HAX Accelerator. At that time, it was HAXccelerator. I was completely wrong. Man. When I first went there, I met these guys that were working on this project called Makeblock. It’s basically like, if any of the listeners have ever used something called Meccano…Back in the day, it was kind of like Lego robotics. This was a high-tolerance connected version of that. And a couple of others. One called Nomiku and a couple of others that stood out.

I stayed in contact with them because I thought it was interesting. I was really kind of obsessed with startups and felt like I’d kind of left where my passion was, going to IDEO, which was really in hardware startups. And then, Makeblock just did this Series C financing, and they’re on an absolute rocket ship. Nomiku is still going. I’m not exactly sure where the fundraising is. They just did a Series A and looking to expand out, going well. A bunch of the other companies from then — you know, HAX 2, 3… By the time they got to 4, I was completely hooked and then come on HAX 5.

Jay:  It’s pretty incredible. So maybe you could share with us a little bit about how did you actually get linked into… Actually, let’s take a step back. Let’s talk about SOSV and maybe you can explain the model there. Because it’s not a pure VC model because you have the accelerators underneath it, so maybe you can explain that. And then you can explain how you got introduced to that world.

Duncan:  Right. Yeah. SOSV, the acronym is Sean O’Sullivan Ventures, originally. So Sean is still the managing partner, very active. He had an early IPO, so he was age 27 at the time with a company called MapInfo, which was basically kind of the workings of what became Google Maps, so it was a location- based by search engine. He did a lot of personal investments, pretty much, I guess you’d call it family office, investing in all sorts of sectors, was very successful in that, turned around $7 million into almost half a billion dollars through investments. Did some charitable donations, paid some tax.

Jay:  He did alright.

Duncan:  He did good. Yeah, he did good. He definitely knows what he’s doing. And then it was kind of his observations that the best time to get involved with a company within venture capital, with investments, is at the very earliest stage when they need to most help, and that’s where the most value is. Or, obviously, the very latest stage is a huge amount value, pre-IPO world.

So the strategy, I guess, ramped up towards us identifying that there were some growth areas which were underserved by the more generalist accelerators, and those growth areas were hardware. It was software for the Asia market with a particular focus into China and out of China and life sciences and also food.

And so rather than being a typical VC that would come in at seed stage, our model is to have these programs which are very specialist. So we have a brand, which is HAX, and everybody knows about HAX for hardware but doesn’t necessarily know that actually HAX and IndieBio and China Accelerator are all under one umbrella, which is SOSV. So the idea is to get deep domain knowledge, build a really good network within those areas, and then any company that is looking to grow their business within those exponential growth areas we’ve identified, would look to us as the first point of call.

Now, how we differ from other accelerators, though, is actually we really don’t call ourselves that much of an accelerator anymore. We call ourselves program-based venture capital. What we mean by that is oftentimes, accelerator, whereas the word describes exactly what it does, often can mean more like an incubator with a couple of staff, free desk space… HAX is very, very different from that. We don’t do cohorts. We have a monthly intake. We have 25 full-time staff, full-stack engineering support. We put a huge amount of emphasis on actually plug and playing our specialists, skilled engineers, designers, and marketers into the teams to help you grow as and when they need.

And then the other difference with us is that around two-thirds of our fund is deployed post accelerator. So we don’t just put money in and then kind of throw them all at the wall and see what sticks. We double down, triple down, quadruple down into the companies that we believe in because we’ve worked with them for a long time, through the course of the program.

Jay:  Okay. And so there’s HAX, IndieBio, China Accelerator. Are those the… I want to say there’s another one or two other verticals that you mentioned.

Duncan:  There’s three more actually, yes. Within life sciences, there’s also RebelBio, which is in London. Within the China Accelerator [inaudible 0:08:41], there’s also another one called MOX, which is mobile-only accelerator and based in Taiwan. And then there is Food-X, which is in New York looking at the future of food.               

Jay:  That’s fantastic. So SOSV, sort of like the umbrella, underneath them, there are these very specialized programs. Outside of these six verticals, does SOSV invest elsewhere as well? Or is it purely into these six programs?

Duncan:  We have done, and it’s definitely something that we will look at doing again in the future. But we’ve, over the past four years, really concentrated on what’s been working super well for us, which has been the programs. Some other investments that we’ve made on the side — one just acquired recently by Uber, called Jump. And that was actually outside of an accelerator because we invested in them just before HAX has started. That would have been a great candidate to go through HAX.

Jay:  Okay. So naturally, I guess because your focus is on your HAX, and it’s on hardware… You said that basically it’s like rolling classes every month. Tell us a little bit about the HAX program, just broad strokes. How does one apply? How do get… What happens once you get accepted and enrolled? What does that all look like for the aspiring hardware entrepreneur?

Duncan:  Sure. We’ve got these four areas that we talk about quite a lot. But honestly, those areas are really meant to kind of cover every single possible hardware startup. If a company doesn’t fall into those, then we’ve probably done a bad job of promoting those four areas. But a company comes to us, they’re either in the consumer technology space — which is really tough, but we do have some great successes there — they’re in the healthcare space, of which there’s a lot of competition, or they’re in the enterprise and industrial areas. So enterprise, industrial, to us, are B2B investments. We partition those into two areas. Enterprises are about sensing systems and are software-based investments. Industrial is more about robotics and advanced manufacturing technology. That’s where there’s a lot of room for companies to have a successful entry into HAX.

Typically, a company will apply to us online, however, we get a huge number of applications online. We get a lot of bad applications online as well. So definitely we notice that the companies that really stand out are the ones that somehow use their network to get to us through other means as well. I don’t want to give away those. Use your imagination. An angel investor we’ve invested with, a VC fund that’s later stage that regularly invests in our companies that might think they’re too early and refer us to them, somebody that I’m personally connected with or that I’ve done business with, etc.

Jay:  I feel like the world is very small and is getting smaller now, especially with the internet. So if you don’t use a little bit of creativity, then it’s almost shame on you.

Duncan:  It’s a red flag. Right? Seriously.

Jay:  The art of the pitch has gotten much easier for anyone on a very base level. So if you can’t even get that right… I feel like someone in your network, you should be able to be one or two degrees of separation away from knowing someone that is connected someone to HAX. So listeners, please be resourceful.

Duncan:  But respectful of the people that you’re asking for introductions of as well. It’s a fine line to tread.

Jay:  Absolutely. So the application goes through. Let’s just walk through the user experience. We have a creative resourceful, opportunistic candidate that somehow gets an in and gets your attention, so they get enrolled into the program. What does that look like? Does it cost money to enroll? How long is the program there? I know that there’s an element of it that is — I don’t know if you guys still do this — but there was an element that was part time in the Bay Area is well. Right?

Duncan:  Yeah.  once you’ve gone through due diligence processes, and there’s a couple of red flags within those — we should talk about that later — then you’re into the program. You basically get given our deal. It’s $150,000 in cash plus $100,000 in services that we actually put on for you. So that’s one-for-one what it costs us to put the program on. It’s a two-stage program. You spend four to eight months on co-development technology with us in Shenzhen to a point at which you’ve basically got something which comes in, working proof of principle, benchtop prototype, comes out productized, so it’s gone through industrial design first reps. It’s been co-developed in the manufacturing capital of the world. It’s got all of the bill of materials at production grade sorted out and, feasibility-wise, we know that it’s 90% going to be able to be manufactured the way it is. There’s always room for error, but 90% there.

That then gives us… Once we’ve seen a company go through that and providing you’ve gone through the series of milestones that we put for the founders, then we feel confident in introducing them to other investors. So we take them to San Francisco if they are not a Chinese company, and we basically embed them into the ecosystem there. We’ve got an office there we’ve been operating for years. We’re predominantly looking to help them with marketing and with traction and then start conversations with some of the angels and the VCs in the Silicon Valley area.

Jay:  Right. Is that sort of the graduation of the program and then they kind of move on off on their own, I suppose?

Duncan:  Well, from then own, they’re part of the family. So we’ll typically then invest in… Around a third of the companies we’ll invest significantly into. And then another half, we’ll invest a reasonable amount too. We don’t take board seats generally. There a couple of exceptions there, but what we do want to do is make sure that we’re continuing to support the startups in the best way that we can. A lot of that is in either help with product development and manufacturing within China. So the teams are always welcome back to the office. They always have access to resources. They don’t have the full-scale engineering time, but they have enough by that time that they can figure things out on their own. We’ll help them hire Chinese staff and generally just set up a presence in Shenzhen.

Then also, we’ve kind of become a magnet for people looking for innovation, sourcing innovation. So we quite often find that either through our LP’s or through our network, we’re actually creating opportunities for our startups, for continued sales growth.

Jay:  Right. I mean, it’s a natural progression when you cultivate this type of… You’re sprouting all these startups, so naturally there’s going to be…in both directions, there’s going to be good knowledge flow and reverse inquiries for innovation as well. So it makes perfect sense. And also, from the sounds of it, Duncan, your program is — like you said, what was it? — 25 full-time employees that really… You’re basically walking into a full-service, almost like a campus where you basically can go in and productize your idea, so to speak.

Duncan:  Totally.

Jay:  When you mentioned about investing into these hardware startups — and I think that a lot of investors who haven’t actually rolled up their sleeves — and I know I haven’t personally. I’ve never worked at a startup, let alone hardware. But the easier place of the two, I think, to start is usually software tech when you’re investing because, conceptually, it’s quite easy understand. And also I feel like with hardware, you can’t just pivot an idea. Once you start, the upfront investment and CapEx required just to get that to the “MVP” I feel like is a lot higher of a dollar cost than coding together a software tech startup. So I think it’s crucial, critical, like you said, that the investment and the actual hands-on mentoring and guidance comes as early as possible to get that proof of concept and that MVP up.

Duncan:  Yeah. We hope so. We think so too, for sure.

Jay:  Out of curiosity, have there been any that have come through that have just been…halfway through the first couple of months, you’re just like, I don’t know what to do with this company. It’s just not working out the way it’s supposed to be. It just kind of fizzled out. How do you deal with that situation where something basically, when you accepted them into the program — obviously, you have a very stringent screening process — but some, obviously, might slip through the cracks. Maybe once they get in, either the team isn’t performing or maybe just the way that the development of the product doesn’t work out according to what you envisioned. How do you deal with those types of situations?

Duncan:  That’s a good question. Honestly, there’s a spectrum of different answers there, depending on the reasons for things not working out. The process that we have is basically you come in, and then after 30 days, we’ve got to know you. And so together, we figure out what are your milestones for the next 30 days. And so that’s kind of like a social contract between us. It’s really kind of showing this is what we think. The way it works is me and Ji, who is the program director, and a couple of the other core staff will sit down and be like “This is what we think this company should do.” And then we put it on the table in front of the company, and then your say, “Yes, I accept. That’s what we think we should do, and we think we can do that.” Or they say, “No, we don’t really want to quite do that, but here’s our vision.” We come to an agreement.

And then that agreement is in place so that we can give the right engineering resources or design — whatever it is to help them get there. Because we kind of like Groupon-buy engineering and design manufacturing resources. And then we have to allocate them in different ways. So we allocate all those resources, and then we get to the 60-day mark, and then there’s a big presentation. We’ll quite often and invite some investors within our community just to come and in sit in. More just to give feedback than anything else.

For the companies that haven’t given us a good reason why they haven’t got to their milestones, we give them another 30 days. If they still haven’t gotten there, we basically tell them, look we’re just not really passionate about investing in this company. You guys will come to an arrangement about how much equity we’re going to leave you with. We’ll not be making any extra payments to you until you do X, Y, and Z.

And then I’ve seen… What’s very interesting is a lot of the companies, they just fizzle out. Some of them, though, have this incredible transformative process where they do actually come around. I’ve been particularly been impressed recently by one team. They just kind of have a coming-to-Jesus moment, and then they realize that we were actually serious. Because I think a lot of people think, “Well, they’ve already put money in, so they’re just going to keep it going.” No. Because we’re going to be introducing you to trusted investors. Actually, the relationship between us and other investors is incredibly important. More important than investing in the startup. Because if we give investors bad teams, they’re not going to invest in any of our companies anymore.

And so that’s kind of the driving force behind that. And obviously we get things wrong sometimes, but we genuinely try.

Jay:  Yeah. That’s the reputational issue at that point. It’s good to hear that some startups get the fire lit underneath them and are able to turn it around.

I’m curious — and I know that running an accelerator… Just ballpark, how many companies would you say, on average, a year, go through your program?

Duncan:  36.

Jay:  Wow.

Duncan:  It was 39 last year, I think. Yeah, it will be around 36 this year, I’m thinking.

Jay:  That’s a lot of companies.

Duncan:  It’s a lot of companies.

Jay:  Yeah. I suppose it’s a bit like having 36 children every year and trying to allocate your time accordingly, evenly, and fairly amongst all of them. I can’t really ask this question, but are there any…

Duncan:  Favorites?

Jay:  Let’s say not favorites, but let’s say themes of some of your companies that have gone through that are particularly exciting that maybe are a bit unusual or not the usual thing that people hear when they think about hardware startups?

Duncan:  I actually can say this. It’s really bad, and people often turn of the conversation when I say this. I really like the really boring, dull stuff. I’m absolutely obsessed at the moment with the construction industry. If you do want to get my attention, show me that you’re doing something in the construction industry to solve the massive problems they have in productivity, and I’ll get really excited about it because there’s just so much value there. You don’t need to be doing something really glamorous. When you’re in a startup that’s doing well, everything is so exciting, and everybody around you is excited, and the growth in seeing all these challenges and how you get over them… The potential impact on the industry is so… That’s been a good one for us.

Energy, anything where you’re saving tiny little amounts of energy in lots of homes or lots of areas is generally a very good thing and a nice area to be investing in. My personal passion is in the healthcare space because I just feel like, even though it’s rightfully bogged down with regulation, compared to any other industry, the possibilities of impact are just phenomenal. You just saved one person’s life or helped them have a better life through the work you’ve done with a startup, then who cares about being successful and rich. That’s really one of the incredible things.

Within healthcare at the moment, there’s this very interesting trend enabled by hardware. It’s basically kind of distributed medical device technology into consumer-based products. So giving you the types of analytics and the types of diagnosis that you would get in a hospital in the home for less than $500. That world is just about the kick off. We’ve done a bunch of investments in the space. It’s something that is truly a great thing to leave on the world.

Jay:  Yeah, I think that’s… The healthcare thing is a tricky area. But I agree with you that we’re on the verge. One of these companies — or maybe a handful of them — when they hit that inflection point and are able to disrupt it, it’s just a huge… And particularly if you’re actually looking at Chinese startups that are doing that, that are able to tackle that market, talk about the macro tailwind.

To your other point on the boring stuff, it’s funny because it reminds me of the conversation we had on the way back from that dinner from Shenzhen. I’m not going to name the startup particularly. But I remember when you told me about this particular one that was going through your batch, that it was one of those “I can’t believe no one has come up with this thing before.”

Duncan:  Why hasn’t someone done that?

Jay:  Yeah. It’s such an easy simple concept, again, within the construction space. So that’s pretty cool. Duncan, just a few more questions, looking here to wrap up. And thanks again for the time. It’s been a real pleasure hearing and learning about HAX. I’m sure the audience listening in, anyone that’s in hardware is going to be pretty excited to hear this episode.

What are your goals, looking forward, for both the accelerator and on the venture, VC side through the end of the year and into next year. Obviously, you have your hands full there, but are there any particular milestones that you’re looking forward to?

Duncan:  Obviously, we’ve got internal KPIs which measure our performance on how the value of our startups is increasing over time. For me, though, there are a couple of things that we’re really, really excited about. We want to continue to grow. One of them is actually investing in Chinese startups. For me, as I mentioned at the start of the show, I came here a long time ago, and I was very much the guy who came out here to get things made and would battle with the engineers and couldn’t really understand why things weren’t going the way that I thought they should be going. For me, the experience of now investing in the — not the same people but the same people as young Chinese engineers but half a generation later, has been the most fascinating but also completely humbling experience of my life. It’s just incredible.

We invest in some robotics companies in the US that are great, and they’re providing some awesome impact in the States. And I see the growth of those companies. And then I look at the same company from China, looking at the Chinese market, and it’s just staggering — the speed at which they move, the potential market they have, and the openness to adoption of robotics in the service-based industries and the manufacturing-based industries, is literally, one of the most humbling things in the world.

For us, we just want to make sure that we’re continuing to grow that and to understand more and to play our little tiny part in what’s becoming the most exciting innovation country of the world, which is China.

Jay:  It’s kind of hard to explain it to people that actually aren’t living over here and watching this happen first hand. And at the same token, you and I have both been here for well over a decade, and oftentimes we’ve kind of gotten numb to it because they’re immune or it’s just kind of like life here. But a perfect example is that big investor group that we brought over. And a lot of these guys, it’s just mind-blowing. Their minds were literally blown as they were walking through your accelerator space there, seeing your companies present and this sort of thing. We’re sitting on the front-row seat of what could be and what will be the next great area of growth and revolutionary technology and innovation that will happen in China and in the world. So I think it’s just fascinating to be sitting there, having those front-row seats.

Duncan:  It’s incredible. You see the future walk through the door every door. It’s really incredible.

Jay:  It really is. Again, it’s hard to explain it because you can read about it. You can watch shows and documentaries and stuff. But to actually live it and see it every day, it’s pretty incredible.

Last couple of questions, Duncan… Thanks again for your time. I always like to leave with asking my show guests — particularly ones with entrepreneurial backgrounds or startup backgrounds, such as yourself — if there’s a piece of entrepreneurial advice that you could give, particularly to a hardware startup founder, in addition to applying to HAX, of course, and getting some help there. If they want to somehow try to make it and be successful, what’s one piece of advice that you could leave our audience with?

Duncan:  This is going to sound weird, but don’t think of yourself as a hardware startup. One of the biggest problems that we have in explaining what we do… I mean, we’re a hardware program. We do the hardware bit, but we do not invest in companies that try to make money from selling hardware. And this is one of the biggest challenges for a lot of inventor-type, very talented people that have this great idea, and then immediately think about monetizing it by selling it as a product, a standard product, to a customer they have. That can work, and we do do a few investments like that kind of thing. But 90% of our companies are selling a service, particularly if they’re a robot, sell a service by robot. They are enabling some software on that hardware, and the hardware is literally just trying to get their software out there. Hardware is difficult to development, as you were saying earlier, but it’s very easy to sell. And recurring revenue from software is fantastic. So if you can enable recurring revenue from software through a simple piece of hardware, that’s just a cost of acquisition cost, not a hardware cost.

Or go deep into science. Get a scientist on board. We’ve got a bunch of PhDs in the office — the CTO, the CSO of the company. The CEO is typically kind of this visionary who’s got a real problem with the world and wants to change something about it, and then they found this scientist who can actually unlock some of that problem and solve it with a particular revolutionary bit of research.

The best bit advice I give though, never ever, ever do it for the money. I know it’s a cliché, but it’s so true with hardware. If you go down that route, it’s not going to work out, you’re going to get incredibly upset with the situation you’re in because you’ll have to persist for years and years and years until you actually make the impact that you want to. It’s better to be driven by a passion for a change in the world in one particular way. It’s something Sean always said to me, and it’s 100% true. I’ve fallen into that trap myself.

Jay:  Yeah. I have too, and I think a lot of people do. It’s one those things that you hear. It’s a cliché, but it’s hard to follow because money is what makes the world go around, so to speak.

Duncan:  And there’s always someone who has made loads of money telling you that. I’m not one of those people because… It’s easy for you to say because you’ll got loads of money.

Jay:  I know. I love that. Don’t you love that? It’s always the people that are wildly successful that are saying this. Okay, cool. I’ll say that too when I’m on the other side. Right?

Duncan:  You know, if you live by that rule, it seems to work out quite well.

Jay:  I love it. I love it. But you do bring up a good point though. Again, in hardware, if you’re stuck in this process, it’s hard to pivot, and people have invested capital in you, and they’re expecting you to come through, and you might not see that money ever, but you better follow through on your word, I guess. All good advice. All great stuff. Thank you so much, Duncan. It’s been such a pleasure.

Duncan:  Thanks for having me.

Jay:  Last question is just where people can find you, follow you, connect with you, or maybe apply to the program.

Duncan:  So HAX.co. There’s an apply button. If you’ve got a working proof of principle prototype and you’ve got a reasonable team with a cap table that’s not all distorted, you will most likely get to speak to me on a 30 minute interview.

Jay:  Wow. There you go. So for all the listeners listening in, go over to… We’ll have all the show notes and links linked up. Maybe we’ll get some creative people that actually try to ping me to get in contact with you. Who knows?

Duncan:  That might happen. You’ve opened the floodgates.

Jay:  Exactly. Duncan, thanks so much for your time. It’s been such a pleasure. And we look forward to hearing from a lot more of the great startups and innovative companies that are coming out of your program. Thanks again.

Duncan:  Cheers, Jay. Thanks for having me.

Jay:  Take care.

Duncan:  Bye.