By Shaoyu Chang, MD, MPH, Senior Research Manager, LSN
This year’s JPM saw more than 1000 attendees from China. As the world’s second largest healthcare market continues to grow at a steady pace, Greater China-based investors have shown an expanding appetite for biomedical deals. Despite regional differences, we have observed a few common, interesting trends based on our interaction with investors from China, Hong Kong, and Taiwan.
New Players Enter the Arena
Against the backdrop of the recent market turmoil, Chinese regulators are laying the groundwork to attract capital for small innovative businesses, such as the Strategic Emerging Board to be launched in the second half of 2016. Investors are optimistic. Traditional healthcare VCs based in China have successfully raised new funds. The space is now crowded with new investors from other industries, ranging from information technology and manufacturing to textile and real estate. They all want to seize the opportunity of long-term growth in healthcare.
Increased Cross-border Activities
While biomedical innovation in Greater China has shown great momentum in recent years, partially fueled by the quantity and quality of foreign-trained returnees, many investors see Greater China as catching up in this game. ‘No research, development only’ has become a popular business model for many startups from this region. In addition, the generous supply of capital creates a fear of overvaluation of Chinese businesses. In search of good quality, fairly priced deals, an increasing number of Greater China investors are setting their eyes on technologies emerging from US and Europe.
China Angle Is a Big Deal
Regional collaborations between Japan, Korea, China, Taiwan, Singapore, and Australia are common. However, US-China or Europe-China deals remain challenging in multiple aspects from deal sourcing to due diligence to post-investment management. Some of the most active investors do not care where the investee is based because they are constantly on the fly. The majority of them, however, would like to see a ‘China angle’ so that they can leverage their local resources. A typical example may be a Chinese-led business in Europe or North America looking to expand to Beijing or Shanghai. In other cases, a US or EU-based company may build a relationship through a manufacturing site, joint R&D agreement, or distribution partnership.
Investors Test New Sourcing Methods
Traditional Greater China investors rely on their personal network for deal-sourcing. When it comes to cross-border deals, they tend to co-invest in rounds with presence of a strong local lead, typically one or several renowned VC funds. In recently years, creative investors are testing bolder approaches from sending scouts to setting up offshore funds to creating incubators in major biotech hubs. The idea is that the closer you can get to the source of innovation, the better chance you will spot a technology that no other investor has spotted before.
Mismatch between Health Innovation and Traditional VC Model
With a few exceptions, the majority of Greater China healthcare funds we spoke to operate on a traditional VC model within a 7-10 year horizon. Angel investments are few and scattered. This might be due to the fact that many investors enter the space without full appreciation of the biomedical R&D and life cycle management. The typical exit for early stage investments is primarily in the public market, while M&A is seldom the option, if ever. The VC-collaborative startup formation model that has gained traction in the US is essentially nonexistent in Greater China. The inflexibility in investment models can potentially clash with the long and risky development timeline of healthcare technologies.
Greater China investors are cautiously optimistic about healthcare venture investment domestically and globally. Many of them believe the recent market downturn is only a temporary correction or even a sign of market maturation. If you were a life science startup in Greater China and not blessed by one of the few wealthy angels, you might face years of painful bootstrapping. A roadmap to access early stage capital globally will be critical. For US- and EU-based startup entrepreneurs, it is essential to proactively develop a strategy for engaging Greater China investors at an early stage of your business. As an increasing number of investors are testing innovative approaches to collaborating and investing, we expect to see more creative deals in the future.