From CCTV to Silicon Valley: How a Documentary Director Invested in 10 Unicorns

In a closed-door roundtable held in September, we had the privilege of inviting the legendary Chinese-American early-stage investor, Sophie Liao, from Silicon Valley. Sophie's impressive track record speaks volumes: as the founding partner of Republic Venture Fund and Oyster Ventures, she achieved a remarkable 3x DPI and an annualized IRR of 42%. Amid 90 investments, she successfully identified 10 unicorns, with two of them going public.

Sophie's journey is nothing short of dramatic. Born in Hunan, she lived with a foster family in the United States during her early years. Following a family upheaval, she returned to China for her education and took the national college entrance examination. After graduating from university, she first joined CCTV's team led by Cui Yongyuan to work on documentary production, and later entered James Cameron's visual effects company, gradually immersing herself in the tech industry. Subsequently, she founded her startup, which was acquired within six months, leading her to venture capital in Silicon Valley, where she bravely established her own fund amidst the "Bamboo Ceiling" phenomenon.

Key Questions Explored

1. How did Sophie transition from an employee at CCTV to an investor in Silicon Valley?
2. What magical sectors enable a 10% hit rate on unicorns?
3. In the current market environment, what are some key investment insights?

From Documentarian to Venture Capitalist: How She Made the Shift

One might ask, how did Sophie overcome the challenges of shifting from a documentary producer to a fund manager? She explains that it was a series of fortunate coincidences that led her into the investment space. After selling her startup, she was contemplating her next steps when a fund approached her, inviting her to serve as a technical consultant. Seizing the moment, she expressed her desire to learn about investing, thereby stepping officially into the investment world.

Once in this new arena, she realized that investing is fundamentally about information arbitrage—finding profit points from information disparities. This parallels her earlier work in television, where, whether as a host or documentary maker, she collected information broadly and then used her logic and understanding of the world to construct a complete narrative.

Seizing the "Financial Equality" Trend: New Investment Opportunities

Sophie has demonstrated exceptional returns over the past six years. When asked about her main investment sectors, she revealed that her focus lies in “Investment Democracy” and “Finance + AI.” The concept of "Investment Democracy" refers to empowering the public with rights to alternative investments, such as private equity, virtual currencies, and even fine wine—assets that traditionally come with high barriers to entry.

In the United States, potential investors typically have to meet specific financial thresholds, like being an accredited investor (with a net worth of $1 million or more or an annual income of at least $250,000 for the previous three years) to invest in certain classes. Yet, anyone can gamble at a casino in Las Vegas. Sophie's investment philosophy is designed to eliminate this disparity and allow more individuals to participate in alternative investments.

When we dig deeper into companies within the "Investment Democracy" realm, she highlights several companies tapping into both traditional and alternative asset allocations. As an example, she cites Republic, an early-stage investment platform where she invested in 2016 when it was valued at just $6 million. Today, its valuation exceeds $2 billion. Initially, many thought retail investors couldn't realistically participate in the primary market, yet over 300,000 non-accredited investors have registered on the platform, which manages assets exceeding $3.2 billion and is still growing.

Furthermore, she mentions other impactful ventures, such as the real estate investment platform Flat, private equity firm D/XYZ, and a platform concentrating on pension private asset investments, ALTO. Forging connections with family offices for secondary market transactions is another potential growth area for the “Financial Equality” movement.

Capitalizing on the AI Tools Layer to Uncover the Next Unicorn

During the discussion about investments in AI-related projects, Sophie noted several key challenges. Firstly, there's the issue of inflated valuations—consider Hugging Face, which had a valuation of $4.5 billion as of last August. However, she believes it hasn't yet created sufficient value. While the platform offers numerous model choices, users struggle to fine-tune these models effectively, which limits its application.

She considers Hugging Face somewhat analogous to Yelp—a company still functioning in the market, yet many perceive it as a "zombie company," with very few utilizing its services actively. Therefore, she refrains from investing in highly valued, well-known companies, opting instead to focus on lesser-known ventures with more potential.

Another concern is the scale of funding. Many small AI companies claim incredible efficiency while raising significant seed round capital—upwards of $20 million for a team of about ten. Sophie ponders, if a technology is so effective, why would such substantial funding be necessary in the seed stage?

While there are some companies worthy of consideration, she prefers to take a wait-and-see approach, allowing market conditions to develop further before committing capital.

Identifying Promising AI Startups amidst Market Valuation Challenges

Sophie tends to invest in startups founded by individuals from teams such as Databricks, Meta, or AWS's machine learning divisions. Typically, these founders possess robust technical expertise but weaker storytelling abilities. The seed round for these firms tends to be under $10 million, with Series A generally coming in below $30 million.

Notably, there's a burgeoning wave of capable Chinese engineers who are beginning to make their mark. Historically, they remained behind the scenes but are now stepping into prominent roles. BentoML is a case in point—it was founded by an engineer who previously worked at Databricks at a senior level. Now, this company excels in application code design and aids enterprises in planning data and model interactions before deploying applications to the cloud.

In the expansive ecosystem of Silicon Valley, it can be challenging to identify these emerging teams. Hence, Sophie's mission is to "sweep the streets" of Silicon Valley to discover these talented groups.

Investment Philosophy: "Earn Solidly, Repay Honestly"

Reflecting on her decade-long investment journey, Sophie encapsulates her investment philosophy succinctly: "Earn solidly, repay honestly."

First, she emphasizes the importance of truly earning income; although she hasn't made an overwhelming amount thus far, every dollar she has earned is solid and well-founded.

Understanding how to navigate both upward and downward market movements—exercising caution when the market rises and being aggressive when it descends—requires a deep awareness of associated risks. Her unique quality lies in never missing out on potential founders and investment opportunities.

Sophie invests only in tool-based companies that provide genuine pathways for people. The performance of these firms can be tracked in real-time. For instance, with investment platforms, user sign-ups and transaction volumes validate her investment principles—these metrics create a robust framework for the entire investment process.

Second, she stresses the need to consider returns to investors. As an early-stage investor and fund manager, failing to deliver returns means failure in this space.

For example, when Sequoia invested in Airbnb, it took 12 years for the company to go public. While such an investment is undoubtedly good, the lack of returns within those ten years marks it as a failure from the perspective of the fund manager.

Thus, when considering investments, Sophie always evaluates DPI (Distributions to Paid-In Capital). Take OpenAI as an example; despite its stature as an excellent company, can it deliver returns as promised within a decade? She harbors doubts; while investors may view OpenAI favorably, she thinks it may not be the best choice from the fund manager's perspective.

Advice for Fellow Investors in This Moment

Finally, when asked for advice to fellow investors, Sophie reflects on exit strategy and risk management—insights gleaned from hard lessons learned over the last few years.

She recalls her experience of incubating a company that went public but failed to exit in time, resulting in an 80% loss when a Black Swan event struck. Looking back, she realizes that a gradual exit could have mitigated that risk and facilitated smoother fundraising efforts thereafter.

This revelation led her to understand that the best fund managers don't need to maximize profit from every investment but rather exit at appropriate times, effectively managing risk to return as much as possible to their investors.

Sophie notes that many emerging fund managers like herself emerge yearly in Silicon Valley. The percentage of these managers able to secure a second fund has dropped from 51% over the past decade to just 14% today. Meanwhile, sustaining a third fund is only around 9%, now possibly sinking below 2%. Despite her impressive 40% IRR—significantly surpassing market averages—she acknowledges that such success may be fleeting. True accomplishment lies in adeptly navigating risks and ensuring longevity in this competitive market.

Midjourney prompt for the cover image: A visionary Asian-American woman standing confidently in a vibrant Silicon Valley setting, with skyscrapers and innovative technology in the background. She is dressed in a chic, modern outfit, embodying both professionalism and creativity. In her hand, she holds a tablet displaying financial graphs and unicorn logos, representing her success in venture capital. The mood conveys ambition and positivity, showcasing the fusion of finance and technology. The style is a clean and colorful sketch cartoon, emphasizing modernity and innovation.