Riding Out the 'Professor Rush' Downturn: How Tech Commercialization Investment Navigates the 'Valley of Death'

2023 was a tumultuous year for the commercialization of scientific and technological achievements, marked by a shift from the “professor recruitment frenzy” of 2022 to a market cooldown by the end of 2023. These fluctuations in the investment landscape underscore the inherent challenges of early-stage incubation-style investing.

Hetang Ventures is the earliest and most leading investment institution to systematically lay out and promote the transformation of scientific and technological achievements. In 2023, Hetang Ventures invested in more than 15 medical companies. Many companies incubated through its early-stage investments still secured financing in 2023 despite the market downturn.

Technology transfer sits at the very front end of the investment chain and is inevitably influenced by market conditions. What market shifts have early-stage leading institutions detected? Below is a dialogue between VCBeat and Dai Chen and Qiu Qing, Managing Directors at Hetang Venture Capital.

VCBeat:In 2023, according to public data, Hetang Venture Capital made more than 15 external investments in the healthcare sector, marking one of its most active years for outbound investment in recent times. What are the sources of Hetang Venture Capital’s confidence in investing counter-cyclically in domestic medical innovation?

Dai Chen:In 2023, Hetang Venture Capital’s total external investment across all industry sectors amounted to approximately RMB 500 million, covering around 20 projects. The decision not to scale back investments was driven by two main factors. First, our available capital increased: we raised two new funds in 2023, while the new fund established in 2022 also successfully expanded its capital base. Second, many institutions curtailed their investment activities in 2023, primarily due to policy-related pressures. Tighter IPO regulations and anti-corruption campaigns in the healthcare sector significantly impacted later-stage projects, causing most funds focused on mid-to-late stage investments to enter a period of hesitation. However, for early-stage investing, the impact of these policies has been relatively limited. Core technologies and product value remain key pillars supporting early-stage ventures, and their longer growth cycles provide a certain buffer against downstream policy effects. Meanwhile, we perceive opportunities amid market challenges: 2023 saw significant deflation of valuation bubbles and a return to rational pricing, presenting favorable entry points for well-capitalized investors.

VCBeat:Huitang Ventures focuses on early-stage investments. In the face of macroeconomic changes, what adjustments and shifts has Huitang made to its investment strategy?

Dai Chen:Lotus Pond Ventures adheres to two core investment strategies:First, persist in investing in the commercialization of scientific and technological achievements; second, invest in pioneering technologies.In 2023, we continued to adhere to these two major strategies.

However, there were some changes in 2023 regarding the detailed criteria for project selection.. For instance, there is a tendency to accelerate project R&D cycles and the commercialization of product technologies. Given the overall pessimistic market environment, we anticipate that companies with very long R&D cycles and extended periods of technological exploration may face challenges in subsequent financing rounds; therefore, we will exercise greater caution when investing in such projects.

The second major change was the identification of more emerging technologies and new tracks in 2023.Taking the medical device sector as an example, in mature fields such as cardiovascular care, Hetang has identified new technologies and invested in coronary natural vessel stents and novel products for the treatment of aortic dissection. Meanwhile, it has systematically explored opportunities in emerging markets—including urology, ophthalmology, and brain science—and made in-depth strategic investments. In summary, the strategy focuses on leveraging new technologies within mature industries while simultaneously uncovering opportunities in emerging sectors.

VCBeat:In the healthcare sector, Hetang Venture Capital has invested in and incubated numerous enterprises focused on the commercialization of scientific and technological achievements. As China’s earliest and most leading investment institution to systematically deploy in the field of technology transfer, how does Hetang help improve the success rate of technology commercialization?

Dai Chen:This is the question we are asked most frequently. While it is easy to get involved in the commercialization of scientific and technological achievements, it is difficult to execute it effectively and generate high returns. Investing in such commercialization is arguably the most challenging segment within the entire investment landscape, placing substantial demands on investment institutions.

There are several key points to improving the success rate.First, whether it is tied to specific technological sources and whether it has access to high-quality projects for the commercialization of scientific and technological achievements.It is unlikely that the commercialization of scientific and technological achievements can be sourced directly from the market; therefore, partnering with the original technology-developing institutions forms the foundation for success.

The second key point is project selection,Selection criteria encompass technical assessment of the project, evaluation of its commercialization prospects, and judgment of the team. Regarding personnel assessment, scientists typically excel in technology and R&D but often lack operational expertise. Therefore, it is essential to pair them with a strong operations team and foster cohesion within the entire core team. In the healthcare sector, clinical resources within the core team are also critically important. Technology, clinical capabilities, and operations constitute the “three pillars” of a healthcare enterprise; all three are indispensable. A well-rounded team configuration often leads to faster growth and greater opportunities.

The third key point is to help them get on the horse and accompany them for a while.It assists in building the professor-founded company from scratch, including team development, establishing rules and regulations, setting up the three major corporate meetings and governance structure, and designing the equity structure. In essence, Hetang plays the role of an “external CEO” during the early stages of incubating technology transfer projects, providing comprehensive support to scientists in terms of industrial resources, strategic direction, and basic operations. Intensive post-investment management is another key factor for investment institutions to enhance the success rate of technology transfer.

VCBeat:In 2023, there were numerous business development (BD) deals and acquisitions in the innovative drug sector. What impact do you think this has had on investment in innovative drugs? What new requirements does this pose for early-stage projects?

Qiu Qing:In recent years, business development (BD) transactions involving innovative drugs in China have become increasingly active. We believe this trend is generally favorable for the innovative drug sector. On one hand, it reflects that products from startup enterprises have gained recognition from domestic and international peers, who are willing to commit actual resources to support further product development; high-quality products are thus likely to secure greater resource allocation for R&D and commercialization. On the other hand, active BD transactions help improve product development efficiency, for instance, by enabling simultaneous R&D across multiple countries and regions, as well as facilitating the development of multiple indications or different therapeutic strategies.

For early-stage projects, securing business development (BD) deals is more challenging, primarily for the following reasons. First, these projects typically lack clinically validated data on safety and efficacy, making it difficult to clearly assess product risks and value. Second, some early-stage projects are highly innovative and may rely heavily on the original research team during the early development phase, making it difficult for partners to independently take over the project.

However, we also recognize that certain companies are indeed focused on early-stage projects and have needs for collaboration or acquisition. Such projects typically involve drugs with novel targets or mechanisms of action, and may also address potentially broad indications. Additionally, some projects pertain to emerging technological fields; if they are built on a solid research foundation and demonstrate significant potential based on available data, they may also warrant collaborative R&D efforts at an early stage.

VCBeat:Innovative Drug Investment: Which Subsectors Did Hetang Venture Capital Favor in 2024?

Qiu Qing:We continuously monitor emerging targets and mechanisms with scientific breakthroughs, as well as new technological advances in areas such as cell therapy, nucleic acid-based drugs, radiopharmaceuticals, and novel delivery technologies.

VCBeat:In 2023, the number of source innovations in China’s medical device industry increased. As an early-stage investor, what changes in the investment logic for medical devices has Hetang Venture Capital observed?

Dai Chen:Starting in 2023, investment institutions have become more sensitive to valuations, and we have observed a greater flow of capital toward early-stage investments. This trend is primarily driven by tighter IPO regulations. With IPO exits currently facing significant challenges, we anticipate that equity transfers and mergers and acquisitions (M&A) will become the primary exit channels in the future, while successful IPO exits will be exceedingly rare. Given the substantial disparity between valuation frameworks for M&A/equity transfers and those for IPOs, this dynamic has translated into lower valuation expectations for primary market investments.

Second, under diversified exit pathways, we also favor companies with “outstanding single products.”Unlike our previous investment preference for companies with the fundamental potential to evolve into large platform enterprises capable of independent IPOs, in 2023, influenced by industrial evolution and exit policy changes, we also select companies possessing “blockbuster products.” Such companies are characterized by core products with exceptionally high technical value, commercial value, and patent barriers. These core products underpin the company’s fundamental value and provide a safety margin, while offering reasonable valuations and future growth potential. This strategy establishes a downside exit option through M&A scenarios and an upside potential for independent development or even an IPO. We make early-stage investments in such companies, laying the foundation for strong synergy and integration across projects, leveraging individual successes to drive broader portfolio growth.

VCBeat:How Should One Respond to Market Changes in 2024? What Advice Does Hetang Venture Capital Offer to Early-Stage Healthcare Entrepreneurs?

Dai Chen:First, we must conserve capital and allocate it where it matters most, ensuring we are well-prepared to weather the downturn. Over the past year, we have advised all our portfolio companies that their raised funds should ideally provide a runway of at least two years.

Second, the pipeline strategy can also be adjusted accordingly.During the previous market upswing, valuations rose rapidly. Companies with higher technical barriers were more sought after, and the market readily embraced the logic of rapid cash burn coupled with parallel multi-product development. However, as institutional investors now prioritize cash flow, it is essential to make appropriate trade-offs in R&D pipelines.

Third, it is also recommended to have a combination of short-term and long-term pipelines.High-end, cutting-edge products can be paired with those capable of rapid monetization. In the medical device sector, companies historically driven by innovative technologies rarely ventured into Class I or Class II products, which feature low entry barriers and rapid volume growth. However, influenced by capital market preferences and IPO restrictions on non-profitable enterprises, companies must adapt their survival strategies to align with evolving regulatory frameworks. Therefore, it is advisable for enterprises to strategically incorporate products that offer quick commercialization and require modest investment. This approach not only facilitates fundraising but also supports corporate stability, strengthens team capabilities, and promotes sustainable development.

Fourth, prioritize the genuine commercial value and strong essential demand in pipeline layout.The value of a product lies not in the elegance of its concept or the advancement of its technology, but in its ability to address real-world clinical challenges. Regardless of policy shifts such as volume-based procurement, products that meet genuine clinical needs remain the cornerstone of corporate competitiveness.