What Happened to VCs Who Frenziedly Bet on Scientists?

Amid the volatility of the Hong Kong stock market, a rare scene has unfolded in the venture capital community—VCs Scour Universities for Professors and Early-Stage Projects. According to statistics from VCBeat's Orange Bureau, a total of in China's healthcare sector in 202159 casesEarly-stage investment and financing events reached a total of RMB 2.5 billion, setting a new historical record.

The vibrant scene of 2021 still seems fresh in our minds. Back then, the rush to universities to scout for sci-tech innovators and early-stage projects was in full swing, attracting a massive influx of capital; some investment firms even staked out university gates to approach professors. However, faced with the high risks inherent in translating scientific achievements into commercial applications, that earlier frenzy appears to be gradually fading.

On the other side of the coin, many investors are still seeking gold-mining opportunities within the ivory tower. This is a contradictory yet harmonious scene,Is the spring season for the commercialization of scientific research achievements merely a brief pause? Do early-stage university projects still hold investment value?

ForHong Kong Stocks DisappointEven though most investors had long sensed it, they could not prevent the stock prices of Hong Kong-listed internet tech giants from undergoing a “winter” trial. An investor told Chengguo Bureau: “Due to the sharp plunge in the Hong Kong stock market, it has become increasingly difficult to invest in mid- to late-stage projects, forcing many investors to turn their attention to early-stage ventures.”

This “time-for-space” expansion strategy requires investors to diversify their investments over time, thereby reducing the risks associated with lump-sum investing and achieving the effect of “accumulating more units during market downturns and realizing gains during upturns.” If previously “betting heavily” on late-stage projects was about seeking certainty, then casting a wide net to “seek out” early-stage projects in hopes of hitting future unicorns is about pursuing possibility.

In addition to reducing the original investment risk, VCsFollowing the trend of innovation is a deeper factorIn recent years, as China has increasingly emphasized the leading role of advanced science and technology in industrial development and sought to build a “Sci-Tech Innovation China,” a growing number of investors have shifted their focus from traditional internet companies to hard-tech enterprises. Particularly since the establishment of the STAR Market in 2019, sci-tech firms have gone public under the registration-based IPO system, making investment in the hard-tech sector an ever-growing trend.

According to data from Zero2IPO Research, investment in the hard-tech sector continued to grow from 2018 to 2020, with a year-on-year increase of over 50% in 2020. Investment capital was primarily concentrated in three key areas: biomedicine, semiconductors and electronic equipment, and intelligent manufacturing.

At the core of “hard tech” is technological innovation. If Chinese venture capital (VC) firms aim to source genuine innovation at its origin, they must go where the talent resides. Consequently, a large number of VCs have flocked to universities and research institutes, vying to approach professors and eagerly presenting term sheets for angel-round investments with valuations in the hundreds of millions.

Indeed, as the source of technological innovation, university professors are often able to break through frontier technological challenges. Especially in the current environment that encourages entrepreneurship in specialized, refined, distinctive, and innovative hard-tech sectors, professors have long been deeply engaged in scientific research. They possess profound and cutting-edge expertise in specific niche fields, enabling them to establish technical barriers and identify breakthroughs.

Meanwhile, over the years,Chinese universities are also vigorously promoting the translation of scientific research achievements.Top Chinese universities, including Tsinghua University, Peking University, Shanghai Jiao Tong University, Fudan University, Zhejiang University, and ShanghaiTech University, have begun establishing technology transfer systems to assist faculty members in commercializing their research achievements. According to data from the “2021 Annual Report on the Transformation of Scientific and Technological Achievements in China,” Tsinghua University ranked first among all Chinese universities in terms of total revenue generated from the commercialization of research outputs. Between 2015 and 2020, Tsinghua University transferred 2,889 patents, executed 516 licensing agreements, achieved a total commercialization value of RMB 2.998 billion, and spawned 218 spin-off companies.

Both in policy and capital markets, the slogan of “hard technology and independent innovation” has been growing louder since the second half of 2021.For a time, professors at universities who held a large number of early-stage hard-tech projects became the last resort for venture capitalists.

This is a self-rescue campaign by VCBeat, as well as a hunting operation, with the “wolf pack” participating in the hunt coming from two “tribes.”

One is represented by Danlu Capital, Inno Angel Fund, Baidu Ventures, and others,Institutions Focused on Early-Stage Investment. As an early-stage VC firm,Danlu CapitalNot only does it collaborate with leading universities and research institutions such as Tsinghua University, Peking University, and the Chinese Academy of Sciences to identify early-stage projects and participate in seed, angel, and Series A investments, but it also engages in project incubation by helping expert professors build core founding teams. Furthermore, it dedicates greater effort and resources to post-investment value-added services, providing deep empowerment to portfolio companies, connecting them with market resources and capital, and accelerating the transfer and commercialization of scientific research achievements into industry.

Another isInstitutions Focused on Mid-to-Late-Stage Investments, 2018,Sequoia Capital ChinaEstablished a seed fund, with a strategic focus on technology, consumer goods, and healthcare. In 2021, Sequoia further increased the proportion of its early-stage investments to 80%, particularly ramping up its allocation to angel and seed-stage deals.

2022,HillhouseOfficially launched the “Aseed+” Seed Program, which plans to invest in approximately 100 seed-stage companies over a three-year period; furthermore,Source Code CapitalIt also announced the establishment of a seed-stage investment business, named “Source Code Yisu,” to more systematically increase its investments in seed-stage companies.

Lacking the momentum to invest in mid-to-late-stage projects, a wave of venture capital firms that previously “favored mid-to-late stages” have shifted their focus to early-stage ventures. For these VCs, the advantage of investing at an early stage lies in the relatively lower valuations. One investor noted that an investment of a few million yuan, up to a maximum of RMB 10 million, could secure a significantly high equity stake.

But if we compare the two “tribes,” we will find that,In the competition for early-stage projects, the former boasts greater experience, while the latter places more emphasis on capital backing.

Let’s first discuss the former’s extensive experience, for exampleInno Angel FundSince its establishment in April 2013, the investment management team has averaged over ten years of angel investment experience. Starting with Tsinghua University alumni, we have built a multi-dimensional startup service ecosystem, invested in more than 500 innovative projects, and accumulated extensive experience in cross-regional investment and entrepreneurship service networks.

Furthermore, due to differing focuses on investment stages,Xu Qian, Managing Partner at Danlu Capital, told VCBeat: “As a VC firm that has always focused on early-stage investments in healthcare and life sciences, our fund has a longer duration than typical funds, making it less susceptible to fluctuations in the secondary market. Our investments are proceeding at a normal pace.””

For the latter, which has been significantly impacted, most venture capital (VC) firms have expanded from their original focus on internet investments and do not have industrial backgrounds. This implies that many investment logics require a period of adaptation. Most notably, there is a marked difference in the return on investment (ROI) between technology and internet sectors. Industry insiders state that the average success rate for investing in technology companies is only 5%; if the technological path proves incorrect, returns may drop to zero. In contrast, internet companies can generate returns regardless of their scale.

Meanwhile, when navigating the less familiar early-stage investment landscape, late-stage VCs tend to focus on projects with mature products and services already in place, whereas early-stage investors prioritize future trends and innovative technologies. Due to a lack of keen insight into market trends, late-stage VCs may miss out on some high-potential early-stage opportunities.

In this scenario, industry insiders told VCBeat that they would leverage their existing capital base to first scan the landscape of early-stage projects, seizing opportunities for potential collaborations with university professors.Top-tier VCs swiftly deploy capital after identifying targets, deeply cultivating the early-stage investment sector; others may secure one or two investment opportunities; while the rest merely follow the crowd, echoing prevailing trends.

Compared to the past, when domestic investment industry media actively proclaimed that “Chinese VCs were queuing up to snap up professors,” the idea of “looking for entrepreneurs in universities” now seems to be cooling off a year and a half later.

A university professor who has supported students in incubating numerous startups believes that the so-called “translation of scientific and technological achievements” is a pseudo-proposition that disregards market considerations from the outset. Echoing this professor’s view, an investor focused on early-stage ventures also admitted that he has long been skeptical of startup projects led by professors.

Is it really true that professors are not suited for entrepreneurship?

This issue must be addressed by first examining a prevailing phenomenon. After extensive communication and statistical analysis, investors have found that 50% of professors are willing to engage in dialogue upon receiving outreach emails. However, only a very small fraction ultimately embark on entrepreneurial ventures, often citing practical considerations such as “family responsibilities” and “excessive risk.” Consequently, many investors have come to realize thatThe conversion rate of aggressively recruiting professors from universities is extremely low.。

Li Yingjie, Executive Director of Inno Angel Fund, stated that during the early-stage investment process, it is crucial for professors to commit to entrepreneurship on a full-time basis. If a professor’s role and commitment are not clearly defined, their equity stake in the company and the company’s valuation will also lack clarity.

In fact, there have been two opposing views on whether professors should engage in full-time entrepreneurship. One side supports it, arguing that full-time entrepreneurship by professors is a growing trend; the other opposes it, contending that such moves hold limited value, as staying in academia not only preserves access to abundant research resources but also facilitates collaboration between companies and industry partners.

Of course, there are also those who take a middle-of-the-road approach; they believe that,Whether professors are full-time entrepreneurs is not the key issue; what matters is whether they are deeply tied to the company and actively involved in its development.

Beyond the “full-time versus part-time debate,” the process by which investors seek out professor-led startups is also one that continually exposes shortcomings.

The most important thing is the project, “If a high-quality original project cannot be identified, further communication will not be possible..” an investor told VCBeat. This claim can also be verified from the perspective of conversion rates. According to data released by the World Intellectual Property Organization (WIPO), China has topped the world in patent quantity for three consecutive years since 2019, yet the actual conversion rate remains below 10%. The reasons behind this phenomenon include an overemphasis on academic publications, inadequate integration between industry and research, and weak awareness of innovation...

Even though the aforementioned “drawbacks” have improved significantly in recent years, many research projects originating from universities remain in the stage of scientific validation. If projects at this stage seek financing through market-oriented mechanisms, coupled with the shorter cycles of China’s capital markets compared to those abroad, venture capital (VC) firms may set excessively high commercialization expectations for these companies. When such expectations are not met subsequently, confidence across the entire early-stage market may decline rapidly.

Next, in terms of the team, the technical approach of university professors is more suited to laboratory settings.They lack experience in running a company and have limited energy., making it difficult to balance both. If, after VC financing, only technical personnel are in place while other core team members remain unfilled for an extended period, resulting in poor team completeness, the VC will need to provide more post-investment support. However, unless the VC specializes in early-stage investments, few institutions are willing to patiently dedicate time to pave the way for the company’s development.

Coupled with the economic downturn in recent years and the fundraising difficulties faced by investment institutions, Li Yingjie also lamented: “While venture capital firms remain enthusiastic about investing in science, they are exercising greater caution; VCs typically require a complete professor-led team and comprehensive data before making investment decisions.。”

It is evident that, to this day, the bullets of scientific and technological achievement transformation are still in flight. What will their future trajectory be? This is a question worthy of our reflection and discussion.

To address this question, we may proceed from three perspectives.

First, at the national level, ““Investing in professors is actually a very difficult task,” said Liu Qiang, Vice President of Investment at Baidu Ventures.. As early-stage projects are highly cutting-edge and innovative, they also carry significant risks. Therefore, the state shouldImplement Substantive PoliciesFacilitate the commercialization of research findings, for instance, by introducing preferential policies, reducing the tax burden on science and technology innovation enterprises, and even establishing dedicated funds to support the translation of scientific achievements into practical applications.

Next, at the university level, Liu Qiang believes thatEquity, Patents, and Moonlighting: The Three Core Challenges Facing Professor-Led StartupsFirst, regarding equity ownership: whether professors can hold shares under their real names still requires policy adjustments by some universities. Additionally, how equity is allocated between the professor and the CEO is a major concern for investment institutions. In recent years, a widely accepted structure has been for the professor to hold a controlling stake, serve as the legal representative, or be the largest shareholder, while the CEO holds a few to over ten percentage points of equity. A separate equity pool is also established to hold shares for other stakeholders. Regardless of how equity is distributed between the professor and the CEO, the principle is to ensure that responsibilities align with benefits, or that contributions match rewards.Second, regarding patents: unclear patent ownership can lead to risks such as being classified as loss of state-owned assets or being labeled as service inventions, which may undermine the company’s independent R&D capabilities. If a drug has a potential value of billions of yuan, the university may assert its rights at any time. Therefore, many investment institutions strongly prefer to buy out patent rights in a single transaction.Third, regarding part-time employment: universities need to streamline the approval process for part-time work, enabling professors to balance their roles in both enterprises and academic institutions.

Finally, at the human level,Investors Need to Adopt a More Humble Stance, recognizing the long investment cycles and high risks inherent in technological innovation, stakeholders should set reasonable return expectations, expand their industrial networks and resources, and simultaneously assist scientists in incubating and growing their ventures; whereasProfessors should recognize their own shortcomings., do not overemphasize the importance of your own technical expertise; instead, integrate perspectives from the team, market, sales, and clinical sectors, maintain an inclusive mindset, and actively recruit talented individuals.

In fact, investing in early-stage projects and professors is a painstaking endeavor with a long cycle.If the wind has not yet subsided, all parties should continually adapt and evolve.