Four Key Criteria for Medical Innovation Companies to Secure Funding in 2026: Insights from Convoy Capital

Looking back at 2023, the gradual return to rationality in healthcare investment has become an industry consensus.

Data from the VCBeat database shows that in 2023, a total of 1,300 primary market financing deals were completed in China’s healthcare industry, with a total financing amount of $10.9 billion. The overall transaction scale has returned to the levels seen in 2017–2018, while both the frequency and volume of investments by VC/PE firms have declined significantly. Under these circumstances, investment institutions are increasingly favoring mature projects with greater stability.

Meanwhile, as the industry undergoes a long-cycle adjustment, the market valuation system is being reshaped. Healthcare innovation companies embedded in this landscape are doubling down on technology, products, and market development, steadily accumulating the momentum needed to break through.

At this critical juncture in the industry's development, which trends are worth seizing? How should we respond to current challenges? And how can innovative enterprises ride the wave of growth? In response to these questions,VCBeat held a dialogue with Dr. Zou Guowen, founder of Kaicheng Capital, on the eve of the Lunar New Year, let us look back on the past year and look forward to the Year of the Dragon.

VCBeat：How Does Kaicheng Capital View the Healthcare Venture Capital Industry in 2023? What Are the Key Takeaways?

Zou Guowen:I believeThe keyword for 2023 is “sailing against the current: if you do not advance, you will fall behind.”This is specifically reflected in two characters: one is "reduction," and the other is "endurance."

On one hand, the secondary market continued to decline, breaking through key thresholds, while adverse policy developments emerged periodically and anti-corruption enforcement in the healthcare sector remained under high pressure. Compared with 2022, which was already a harsh winter for the industry, the annual number of healthcare venture capital transactions further decreased in 2023. More importantly, the contraction in transaction value and newly raised fund capital was even more pronounced.

It must be acknowledged that Kaicheng Capital closed nearly 40 deals in 2023, advancing under considerable pressure. This year, we have clearly observed a lengthening of the deal-closing cycle, a multifold increase in communication meetings with investors, and a surge in the costs associated with driving projects forward; this has also been our busiest year to date.

VCBeat:Which healthcare subsectors does Kaisheng Capital expect to focus on in the current environment? From an industry-wide perspective, how is investment logic evolving?

Zou Guowen:We consistently monitor all sectors related to the broader health and wellness industry, ensuring no potential opportunity is overlooked. In our strategic positioning, Kaicheng Capital adheres to the principle of “upholding integrity while pursuing innovative strategies,” focusing on both explosive opportunities in emerging fields and value-driven opportunities in traditional sectors. Areas such as cell and gene therapy (CGT), synthetic biology, innovative pharmaceuticals, medical devices and diagnostics, and frontier brain science technologies remain high-priority tracks within our internal focus.

However, as market conditions evolve, we have observed that investors are placing less emphasis on the concept of “sector tracks” and are instead gradually adopting a new investment framework.Just as in answering subjective questions in the humanities section of the Gaokao, there are several “key scoring points” for project financing this year:

First, there is revenue and profit.The core logic here is that, given the prevailing pessimism regarding the financing environment, investors are deeply concerned that portfolio companies—particularly early-stage ventures—may fail to secure follow-on funding for an extended period. Relying solely on cash burn to sustain operations under such circumstances would pose significant risks. For late-stage companies, the financial thresholds for IPOs have become increasingly stringent. With numerous firms in the pipeline boasting substantial revenue and profits, competition has intensified. Except for special projects aligned with major national strategic needs, other contenders face a scenario akin to the gaokao (China’s national college entrance examination), where success hinges primarily on achieving high—and consistently growing—revenue and profit figures.

Second, the concept of "chokehold" technologies.For instance, many upstream core components and materials, as well as scientific research instruments. Policy considerations still play a significant role here, as many fund investors are state-guided funds aimed at breaking through upstream technological bottlenecks. Moreover, these enterprises indeed address critical pain points and rigid demands within the industrial chain.

Third, the concept of global expansion.For instance, many medical devices can be sold overseas. Currently, for nearly all device projects that have obtained regulatory approval and begun commercialization, investors are urging companies to expand globally to break free from the intense domestic competition. Against the broader backdrop of widespread volume-based procurement, healthcare cost containment, and downgraded consumption, mere innovation is no longer sufficient to overcome the constraints imposed by these “two major obstacles.” In the pharmaceutical sector, securing deals with large multinational corporations is also a significant advantage, and recent high-profile news has further heightened investor expectations in this area.

Fourth, the pan-health concept in the out-of-hospital market.This encompasses a broad scope. From a pharmaceutical perspective, it includes upstream active pharmaceutical ingredients (APIs) as well as various services and supporting infrastructure in the upstream pharmaceutical industry. It also covers the spillover of biotechnology into non-medical fields, such as raw materials for agrochemicals, food, and health supplements.

From the perspective of medical devices, this often corresponds to products and related industries in consumer healthcare, such as rehabilitation and wellness, ENT (ear, nose, and throat), and home-use medical equipment. The reason is that policy pressures, including healthcare cost containment and anti-corruption campaigns in the medical sector, have become unavoidable hurdles on investors’ decision-making committees. Projects immune to these adverse policy impacts naturally stand out.

Of course, we also recognize the value and development potential of each sector; however, the focus of capital attention is constantly shifting. At this current juncture, we believe such information is highly valuable to enterprises.Entrepreneurs also need to know what aspects to emphasize during fundraising, or how to adjust their strategies in the short term.

VCBeat:From your perspective, which healthcare sub-sector surprised you the most in 2023? For instance, did it experience counter-trend growth, an explosion in demand, or major breakthroughs?

Zou Guowen:Surprisingly, the drugs and medical devices with consumer-oriented attributes.

The GLP-1 class, with its surging popularity, is at the forefront. Across both primary and secondary markets, the GLP-1 concept has virtually become the pharmaceutical industry’s sole consensus and the leading driver of market trends.We have successively closed three projects related to the GLP-1 concept, including HuiSheng Bio, Yinuo Medicine, and ZhiTai Bio. Meanwhile, we completed multiple rounds of financing for Junhemeng Bio, a leading enterprise in consumer-oriented growth hormone and botulinum toxin products.

In the consumer medical device sector, projects such as 3N Technology, Yaoshi Medical, and Dishì Medical have been successively completed; these are ophthalmic device targets with strong consumer-oriented attributes.

Additionally,"Upstream concepts are also a key focus for investors.", such as CGT upstream service providers, research instruments and equipment subject to supply chain bottlenecks, and a broad category of projects involving upstream core components and materials.

VCBeat:Following up on the previous question, which medical sub-sector surprised you the most in 2023?

Zou Guowen:This market correction has hit traditional innovative drugs and medical devices the hardest, particularly innovative biotech companies. Affected by U.S. interest rate hikes, the market capitalization and valuations of comparable companies have plummeted, severely disrupting the fundraising pace for such enterprises. Jokingly speaking, for some projects, the valuation of comparable companies was at one level during the initial roadshow, changed by the time the term sheet (TS) was issued, and had fallen so sharply by the time agreement negotiations began that a valuation inversion occurred.

Fortunately, despite the challenging market conditions last year, we successfully closed over ten innovative drug projects, including leading radiopharmaceutical company Xiantong Medicine and top-tier deuterated drug developer Tongyuankang.

In the traditional sector of high-value medical consumables, the valuation framework is being reshaped as virtually all products are subject to centralized procurement. In the diagnostics sector, investors are generally exercising caution due to the excessive capital influx during the pandemic years.

Having worked at Pfizer and Bayer for nearly a decade, many members of the Kaicheng team also hail from pharmaceutical and medical device industry giants. Given this industrial background, we genuinely recognize and value high-quality products that deliver clinical benefits to patients and help them regain their health. Therefore, despite widespread claims that the significantly raised listing thresholds on the STAR Market have made innovative drugs and medical devices uninvestable, we remain firmly convinced in the value of superior products. As such, Kaicheng continues to maintain a robust team specializing in innovative pharmaceuticals and medical devices. This team boasts not only strong academic and industrial expertise as well as capabilities in handling complex transactions, but also enjoys extensive and deep investor stickiness along with an excellent reputation. Recently, with the disclosure of numerous major deals by multinational corporations (MNCs), investor sentiment has improved. We will continue to identify pharmaceutical and medical device products with distinctive global innovation and competitive advantages.

Turning to the previously hot field of synthetic biology, the pace of financing has also slowed significantly this year. The reasons behind this are twofold: on one hand, capital entered the sector too rapidly in previous years, and this year’s market sentiment has been dampened by sluggish stock prices of comparable companies and the fact that many firms’ progress has fallen short of expectations. On the other hand, for companies that have already commercialized their products, the overall downturn in consumer markets this year has led to contraction across many industries, thereby significantly hindering revenue growth for synthetic biology companies. Meanwhile, substantial increases in upstream costs—such as raw materials and energy—over the past two years have created a severe “scissors gap,” heavily impacting corporate profits.

We believe that project teams must promptly recognize shifts in market dynamics. Investors in the synthetic biology sector have generally moved beyond the phase of hyping concepts, now prioritizing product selection, implementation, and commercialization, while valuation frameworks are maturing. Meanwhile, investors should avoid being overly influenced by market sentiment; instead, they should confidently invest in companies capable of delivering long-term value at this juncture.

VCBeat:We have observed that, unlike most financial advisory (FA) firms, Kaicheng Capital’s deal portfolio frequently features transactions co-invested by various state-owned capital entities leading the round, alongside industrial capital and market-oriented institutions, in addition to backing from US dollar funds. What are the underlying reasons for this? Will it become a trend for high-quality assets in the future healthcare industry to attract bets from a more diversified pool of capital?

Zou Guowen:Many people take a downstream perspective, analyzing how different funds have their own investment styles and aesthetic preferences. Having worked in industry, as both an LP and a GP, and later as a FA, Kaicheng Capital’s core approach to transactions is to move upstream.It is essential to understand where the source of living water originates, as this determines where it will flow.By thoroughly understanding the attributes of high-quality deal flow, capital naturally flows to the most suitable projects, which is why our transaction efficiency has consistently remained very high.

The previous wave of healthcare investment was driven primarily by USD-denominated funds. However, as USD capital has fully receded and market-oriented funding has suffered significant setbacks, the prominence of state-owned capital has become increasingly evident. A key term that cannot be overlooked in 2023 financing is “reinvestment requirements.” Indeed, it is now rare to find funds in the market that do not impose such requirements, as the majority of limited partners (LPs) for general partners (GPs) in the primary market are currently local government entities.

Meanwhile, the majority of the Kaicheng team comes from the industry sector, and we have consistently emphasized the pivotal role of Corporate Venture Capital (CVC) in the investment and financing market. On one hand, endorsement by industrial players reinforces other investors’ confidence in their own judgments; on the other hand, corporate investors bring additional resources to portfolio companies, significantly accelerating their growth or expanding their industrial boundaries and breaking through existing ceilings.

But to be honest, the current market liquidity is still far from sufficient for the countless enterprises eagerly seeking funding. The industry needs not only diversified capital but also abundant capital. To return to a healthy and vibrant state, it is necessary for the US dollar to enter an interest rate-cutting cycle, leading to some capital repatriation. Before that happens, there is an urgent need for substantial state capital injection to support enterprise development.

VCBeat:How do you assess the investment, financing, and M&A trends in the healthcare industry in 2024? For instance, was it more active compared to 2023?

Zou Guowen:From our frontline perspective, the relationship between investors and enterprises in 2023 was marked by considerable tension and ambivalence.

From an investor’s perspective, companies across all sectors in the secondary market are generally in a downward trend, with no clear indication of when it will bottom out. It is akin to catching a falling knife: investors are uncertain which stocks to pick, hesitant to act, and unable to time the market effectively. Consequently, most investors are adopting a wait-and-see approach.

We have observed that the internal strategic direction of some institutions undergoes near-monthly reviews and adjustments, covering issues such as exit expectations: whether target companies can strive for listing on the STAR Market, whether to pursue a Hong Kong stock exchange listing, what stance to take toward the Beijing Stock Exchange, and how to establish valuation frameworks. Under such circumstances, making investment decisions becomes exceedingly difficult.

From the corporate perspective, investment institutions were the first to feel the chill in 2022. However, many companies believed their development was proceeding well; some even secured financing in 2022. As a result, they underestimated the challenges of 2023, often choosing to hold on in the hope that certain investors might accept their current narratives and high valuations. With sufficient cash reserves, there was no immediate urgency. Particularly in the first half of 2023, there was a widespread belief that conditions would improve following the easing of pandemic controls, fueling strong enthusiasm and expectations for a minor upswing. Little did they know that greater challenges were only just beginning.

However, after a year of turbulence, both institutions and enterprises have gained clarity. With most negative factors now fully priced in and valuations having largely bottomed out, investors and companies have aligned their expectations for the medium to long term. Companies are adjusting their strategies and valuations, while investor sentiment has stabilized, making investment logic increasingly clear. Under the new normal, a renewed equilibrium has been established between investment institutions and enterprises.

Therefore, we believe thatAs buyers and sellers rebalance their expectations and bargaining power, answers to many questions are becoming clearer. M&A activity will intensify in 2024, valuations will become more rational, and demand for acquisitions will rise.

VCBeat:Based on the above assessment, what recommendations do you have for entrepreneurs?

Zou Guowen:Three Key Recommendations.

1. Strengthen internal capabilities and adjust corporate development strategies.An IPO may remain highly challenging; therefore, it is essential to solidify business maturity in the primary market. Focus on generating revenue and profits, achieving high-quality growth, and reevaluating product strategy and business models. Prioritize sales and cash flow.

The prevailing expectation is that IPO approvals will remain tightly constrained for a considerable period, with profitability thresholds serving as stringent, non-negotiable criteria for those that do list. Consequently, investors’ expectations regarding corporate cash reserves have shifted from merely supporting short- to medium-term operations to ensuring long-term operational sustainability. Companies should seize favorable conditions to strengthen their financial foundations—repairing the roof while the sun shines—and engage in prudent, long-term capital planning.

Second, adopt a rational approach and recalibrate valuation expectations.The logic is straightforward: since comparable companies in the secondary market have experienced severe declines, and liquidity in the primary market is even poorer, primary-market companies are forced to make painful sacrifices.

Third, demonstrate high stress tolerance, resilience, and an optimistic mindset in the face of adversity.In such extreme market conditions, it is inevitable for those involved to feel anxious. This year, we have received far more rejections from investors than in previous years. On one hand, we need to provide psychological support to founders, reassuring them that “there is always a way out when things seem dire.” On the other hand, we also need to offer psychological comfort to investors, encouraging them to have faith in the nation’s destiny and the wisdom of its 1.4 billion people.

As an entrepreneur myself, I inevitably feel anxious in the face of such market conditions. Nevertheless, I persist in exercising, working up a sweat, taking a shower, and getting a good night’s sleep before setting out again.“Thirty percent is determined by fate, and seventy percent depends on hard work.” Many projects, when pursued to the very end, often seem to reach a dead end only to unexpectedly uncover new opportunities.

VCBeat:Final question: What are your expectations for the healthcare venture capital industry in 2024?

Zou Guowen:In the midst of drastic market changes, we moreNeed some firmly held, unchanging beliefs to serve as an "anchor"。

First, the public’s pursuit of health will remain unchanged.The trend of population aging is irreversible. This cohort of older adults, representing the largest baby boom generation, has benefited from China’s economic dividends. Their healthcare needs will undoubtedly translate into a vast market within the silver economy in the years to come.

Second, China has consistently maintained its factor advantages for entrepreneurship., including an abundant talent pool, a robust supply chain, a vast market, as well as an entrepreneurial spirit and the inherent resilience of the Chinese nation throughout history.

We look forward to the state placing greater emphasis on equity investment, channeling more capital into the market through various means to support companies, while providing policy incentives and a more relaxed regulatory environment. We believe that an increasing number of outstanding Chinese enterprises will emerge in the uncertain market, navigate challenges with resilience, and even expand globally.

Pessimists are always right; optimists always move forward. Even in challenging markets, remain optimistic, stay true to your original mission, and trust that spring will ultimately reward all those who carried firewood through the winter.