Medical-related investment has remained the hottest sector for the past five quarters, with over 900 investments. For venture capitalists, it is important to choose the right team and one which is on the right track.
William Hu, managing partner of Qiming Venture Partners, talked to FinanceAsia about how he chooses the right medical-related investment.
Founded in 2006, Qiming is a China venture capital firm with offices in China, Hong Kong and the US. It currently manages seven USD funds and five RMB funds with $4 billion assets under management.
The group has some listed company investments such as Shanghai-listed Hangzhou Tigermed and Hong Kong-listed CanSino Bio-B. But from Hu’s point of view, the right team is crucial at the venture stage. And implementation is needed to evaluate the team. Sometimes startups become too radical and lose their operational edge, even if they are proceeding along the right track.
Medical investments don't necessarily have to be long-term, Hu says. Some of Qiming’s invested projects can break even within three to five years. Certainly, he is confident about the growth of the medical services sector and expects it to have a high growth rate in the near future.
Hu also calls for more attention from regulators on what investors really want. Entrepreneurs have their own preferences (from liquidity to valuation), and it is important that regulators, especially stock exchanges, understand their needs.
Shanghai's new technology innovation board offers another way for funds to exit from research-driven pharmaceutical companies. In fact, Hu is optimistic about exiting strategies in China in the next decade.
The following conversation with William Hu has been edited for brevity and clarity.
Q Do you think that medical-related investments are overheating right now?
A The pace is just right. Biotech investment was a little overheated in 2018, but the market soon adjusted. The stock prices of drug companies that listed in Hong Kong early last year have not performed so well – previous valuations might have been too high. But after that adjustment, venture capitalists have calmed down and invested in some real innovations. Currently investments are on the right path.
Q Where will we see the fastest growth?
A I’m confident about the medical services sector. People are prepared to pay a little extra to enjoy better medical services, especially in first tier cities like Beijing and Shanghai. Millions want that, and there is currently no such service there. I think it has great potential.
We recently invested in a company called SinoUnited Health which provides medical services for commercial health insurance policy holders. This is a startup, only about two to three years old, but it is tripling in size year-on-year. Such services have a huge demand in China.
A good doctor is the one with excellent skills and a sense of service, who also has a good mindset. A lot of private medical institutions have started to hire good doctors with a service mindset. This sector will grow big in the future.
Q Does the medical sector require long term investment?
A Medical-related investment doesn’t have to be very long term and many of our investees don’t need further investment after ours. The medical industry does not generally burn cash, although a small part of it, such as biotech, does need a lot of money for research.
As long as our investment is on the right track and is doing well, there will always be more funds that join in. Most of our invested projects can break even within three to five years, not in 10 or 20 years. Some are medical device manufacturers; some are diagnostics companies.
Q Does your focus change at different stages of investment?
A The focus will be a little different. At an early stage and when there is not much information, you will bet on two things: the direction and the team. For direction, we consider whether a drug is in huge demand. And for the team, we make a judgement call on its background, experience, character and the faith that they have shown. At a later stage, there is more of a track record for you to make a judgement.
As a venture capitalist, we focus on early stage investment and we take a big risk. But we hold one core value – be a good person. A good person can attract other good ones to be with you; like attracts like.
Right now, we have invested in about 80 companies within the medical-related sector, and 99% of them are still growing. Our failure rate is low. Some of our invested projects have already performed well in the market. We invested in Hangzhou Tigermed when it was valued at $29 million; now it is valued at $5.1 billion. We also invested in recently listed vaccine manufacturer CanSino Bio-B; now it is valued at $1.2 billion. We are lucky that many of our investees generate returns like that.
Q What obstacles have you seen in previous investments?
A Sometimes the management of the company was not right, in that it wasn’t entirely focused on its clients. Sometimes it did radical things to attract more investment and didn’t obey operating rules. And some entrepreneurs have just been opportunists.
A good entrepreneur will put himself or herself under high pressure.
Q What do most entrepreneurs want when they consider going public?
A The first concern for most companies is valuation. The second is the predictability of listing. For a long time, IPOs on the Chinese mainboards took too long for a fast-growing company. They can’t wait two to three years going back and forth with all kinds of questions. This is an aspect that needs improvement.
Q Are your investees looking at the technology innovation board to list?
A There are all kinds of choices as different exchange boards have different rules. Everyone chooses what they prefer. Some focus on valuation and will compare which markets offer a higher price. Some think about flexibility, especially with regard to drug development, as they may need more funding in the future. Those would probably choose to list in Hong Kong or the US. And the choice also relates to the background of the entrepreneurs.
Q How will government policy impact medical services in the future?
A We trust the government’s plan for the medical and healthcare industry. A lot of companies want to be included in the national health insurance scheme, that is a definite trend. But it also requires real innovation. Because the government will reduce the selling price for medical products that are included in the health insurance, a company cannot survive without a real innovation.
For us, the judgement is simple – whether this innovation can make patient live longer. And we also hope our investees can all reach a valuation of $1 billion some day.