Traditional Chinese corporates are gradually increasing their investment in tech startups, hoping to be ahead of the game.
As China’s largest insurer by market value, Ping An Insurance Group has technology development as its core focus. And it wants to use capital to achieve this goal.
In an exclusive interview with FinanceAsia, Donald Lacey, chief operating officer and managing director at Ping An Global Voyager, explains how the Chinese conglomerate intends to invest in tech startups to help strengthen its business.
The fund has just completed an investment in Better.com. On Tuesday, the New York-based online mortgage website raised $160 million in its Series C fundraising led by Activant Capital. Ping An Voyager joined the round together with Ally Financial, Citi, AGNC, Healthcare of Ontario Pension Plan, and American Express Ventures.
The $1 billion corporate venture capital fund, which launched in 2017, has been helping Ping An to build up its expertise in fintech and healthcare-related areas.
Fintech and health tech are the two sectors on which Voyager Fund is focusing as both can have wide applications in Ping An’s own business.
At the interim press conference last week, Ping An said that it intends to invest Rmb10 billion ($1.4 billion) to develop its technology business, even as the operating profit of its tech units is decreasing.
Voyager Fund often looks at investment opportunities outside China that could develop with Ping An's help. Its aim is future growth rather than a controlling stake or a cheaper price.
The following extracts of our conversation with Lacey have been edited for brevity and clarity.
Q What is your investment strategy?
A We try to invest in areas of relevance. We want to give foreign companies, such as ones in Israel, a distribution platform in China to which they wouldn't eitherwise have access. Ping An is a pretty big company. Also, we want to use something meaningful to help smaller companies grow faster by using some of our own home-grown technology. These are the two kinds of situations we are looking for in areas across tech and health tech.
Q How do you define fintech and health tech?
A We've got a pretty broad definition in fintech and health tech. We will look seriously at things like IoT data platforms and machine learning as a service platform that maybe you wouldn't think would fit within a narrow definition of fintech, but nonetheless, we think of as part of our investment logic.
We have a flexible approach when we consider timing and the size of the startup into which we are going to invest.
But Ping An is big organisation to deal with. It has always seemed to us that the companies into which we have invested need to have a certain amount of institutional heft before they can add value to what we're doing, and we can add value to what they're doing. We are much more likely to invest in scalable companies with some products to hand.
Q What problems do you see with fintech companies?
A A problem with a lot of fintech companies is that they often have either a fairly antagonistic attitude toward incumbents or you run into fintech companies that don't have a lot of regulatory or relevant industry expertise.
There are probably parts of the economy where that is an entirely valid attitude to take when building your business. But fintech is definitely not a part of that economy and fintech businesses can get shut down very quickly and permanently if you don't pay attention to the relevant regulations and legal framework.
There is a difference between operating in a fundamentally unregulated space and ignoring all existing banking regulations. We’ve seen a lot of those around the world.
A lot of the oxygen in the room has been absorbed by consumer-facing fintech companies. We are sceptical about these because of the high customer acquisition cost and some bad business models. We don’t believe that they are going to get better as the company grows. That is viewed as a fundamental problem.
Q Are you downbeat about the future of B2C fintech companies?
A I’m sure there will be examples to prove me wrong. But for most B2C fintech companies, it is going to be a very, very hard road. Such a model can be ruined by customer acquisition costs and it will be hard to achieve the revenues that they expect.
Q Into what kinds of health tech companies are you going to invest?
A Ping An’s value is to bring in our analytical capabilities. And China still has a huge demographic challenge. It feels like the way forward for China – I say China, but I think it's really a global issue – is to use technology for diagnosis at a distance and to able to serve patients at a distance.
And we are pushing towards telemedicine. One of the things we always look for is a way to improve the efficacy of that system. In 2019, we see a lot of companies developing tools to collect bits of information on you and then provide accurate diagnosis methods for telemedicine.
Q Can you give me a recent example?
A Airdoc is a recent investment. What it does is take a picture of your retina and it can check all of the different blood vessels. A pathologist can look at that photo and diagnose a tremendous number of diseases. With a high degree of accuracy, you can diagnose whether you have diabetes, whether you have arteriosclerosis or whether you are HIV positive.
Airdoc has systematised is own collection of algorithms to take that photo and then very quickly to diagnose all of the different things that might be wrong with you.
Q How do you value companies like Airdoc?
A The approach you have to take varies dramatically by industry. And in the case of business-to-consumer businesses, it often gets a little hazier. For health tech companies, it's almost a step function in terms of the way the economics work.
Health tech is much more technical. One interesting takeaway is how much money goes into health tech without a lot of technical rigour and diligence. I've been astonished to see how much money sometimes goes into health tech companies where anyone with a scientific mindset will look at it and say: "Hey, this doesn't actually add up".
When faced with companies like Airdoc, for example, Ping An can add a lot of value. We have a big group and we can bring you more customers.
Q What is Ping An Voyager Fund’s investment style?
A A lot of investors will come to struggling startups and promise them the world. But you had better make sure that you actually deliver on that implicit commitment. We are not aggressive like that.
Our capital is probably viewed as better than other sources of capital and we do get treated a little better on deal terms. There are often a lot of bells and whistles, and budget structures, particularly with later rounds. We don't think it's particularly clever to hamstring a company with conditions and terms. That feels very penny-wise, pound foolish. We'd rather have a little of something that is worth a lot than a very clever structure that bankrupts the company. I don't think we're overly aggressive .
Our investments are typically in the $20 million range and with a minority share. We are not in the business of taking control.
What we are evaluating often is not whether you have come up with an idea that nobody else has ever had, it is your execution capability. There are not that many new strategies. The last thing we would want to do would be to take control of the company and compromise the very thing that attracted us in the first place.
Q What kind of industries are you looking into right now?
A We are looking at some opportunities in the US. What we do is not often the focus of the trade war. Our investments are rarely for ground-breaking technologies.
We're much more likely to put $30 million into the company that's worth $300 million. Areas we are looking at in the US include business-to-business process improvements. We are looking at machine learning as service platforms. We are also looking at companies that are engaged in improving the effectiveness of supply chains.
Q Do startups in different parts of the world have different characteristics?
A Yes. In the US and China, a lot of startups are not necessarily built for international exports. But there's no denying that China is far ahead of the rest of the world on fintech capabilities.
One thing that is interesting about Israel is that it has precisely no domestic market. Anything that is built in Israel is meant for export. And we see some of that in UK startups as well. A lot there have a more international mindset from the ground up.
That, in particular, can be an issue for fintech and health tech companies, as they are meant to be global. But sometimes the regulations for these startups are quite local. It changes on a case-by-case basis.
We're increasingly looking at India. Given the demographics, it's going to be a very hard market for anyone to ignore over the next two decades.
Q What do companies need to adjust when they expand from one region to another?
A People have started to discuss data safety and data breaches. A lot of European and American financial institutions want to come to China to learn about what we're doing in fintech. The Chinese have a different attitude toward privacy than those of us in Germany.
Generally speaking, banks and insurance companies in the West have lots of data without a lot of privacy constraints and they've been terrible at making use of that data. And the reason that they've been terrible at making use of it has nothing to do with concerns about privacy. It has everything to do with how that data is stored, how that data is architected, and how the companies themselves are organised. A lot of the lessons from Chinese fintech companies are applicable to rest of the world.