How Investors Can Identify High-Potential Early-Stage Opportunities Amid the 'Invest Early' Trend

Currently, a growing number of investment institutions are turning their attention to early-stage healthcare projects. According to statistics from VCBeat’s Orange Fruit Bureau, there were 59 early-stage financing and investment events in China’s healthcare sector in 2021, with the total amount of funding reaching RMB 2.5 billion.

In a sense, this is actually a “forced” change. In recent years, the trend toward younger listed companies in the healthcare sector has become increasingly pronounced. Taking 2020 as an example, among 71 newly listed companies, 27 had been established for less than 10 years, indicating a significant compression of the previously typical 15–20 year timeline for going public in the healthcare industry.

As going public becomes increasingly “easy,” the overall pace of investment and financing is accelerating accordingly, with many companies completing two or even three rounds of funding within a single year.

Yet this “fast-paced” approach, while enabling investors to secure rapid returns, is also subtly imposing new demands on them: as the IPO timeline becomes drastically compressed and investment boundaries grow increasingly blurred, how should investors identify and seize early-stage healthcare projects with genuine market potential?

To address this question, Zuo Lin, founding partner of Hongrun Health, delivered an in-depth presentation on the topic of “Dimensions of Risk Investment Value Analysis for Medical Devices” at CNIT Innovation Week Talk.

The following is a verbatim transcript of Professor Zuo Lin’s remarks. To facilitate reading, VCBeat Orange Bureau has made editorial adjustments to the text without altering its original meaning.

In recent years, innovative technologies have continued to emerge. When integrated with medical application scenarios, they readily give rise to revolutionary or breakthrough medical device products, rapidly establishing advanced therapeutic approaches within specific fields. This “effective convergence” of cutting-edge technologies and medical contexts has drawn significant attention to the medical device sector in recent years.

However, this is only one of the reasons; strong policy support has also acted as a “shot in the arm” for the medical device sector. Over the past decade, China has introduced a wide range of policies targeting the medical device industry, with deep involvement from relevant functional departments such as the National Health Commission, the National Medical Products Administration, the Ministry of Industry and Information Technology, and local commissions of economy and information technology. Furthermore, in national-level planning outlines such as the 14th Five-Year Plan and Healthy China 2030, “promoting the development of medical devices” has been listed as a key objective.

Beyond the technology itself and policy guidance, what has also propelled its rapid rise to prominence is the market potential. From an investor’s perspective, the medical device market exhibits a classic characteristic: “a long slope with thick snow.”

What Is a “Long Slope with Thick Snow”? The term “long slope with thick snow” generally refers to highly valuable investment targets or sectors characterized by large market size, substantial corporate profitability, and significant growth potential.

Medical devices represent a classic "long slope, heavy snow" investment track. First, China’s medical device market is still in its early stages, offering substantial room for future growth. Second, China’s pharmaceutical-to-medical-device ratio is significantly lower than that of developed countries worldwide, indicating that the medical device sector will sustain high-speed growth for an extended period, eventually reaching a market size comparable to that of the pharmaceutical industry. Furthermore, from a product perspective, the current Chinese medical device market is dominated by imported products, leaving considerable potential for domestic substitution.

Finally, there is the growth potential for enterprises. On the global medical device rankings, the highest-ranked Chinese companies are Mindray and Yuwell, both of which fall outside the top 30. However, as China’s medical device market continues to expand, the country will cultivate aircraft-carrier-sized medical device companies comparable to Medtronic and Johnson & Johnson. At this stage, however, Chinese medical device enterprises need to be given time to mature.

A confluence of factors dictates that the Chinese medical device market will remain in a phase of rapid growth over the next 10, or even 15 to 20 years. This represents a high-value niche sector worthy of close tracking by investors, both in China and globally.

After selecting the arena, the next step is to choose the track.

For investors, the immediate priority is undoubtedly to target large-scale markets, specifically those focus areas ranking at the forefront in terms of market size. From the perspective of the entire medical device sector, in vitro diagnostics (IVD), cardiovascular devices, diagnostic imaging, and consumables represent relatively larger segments.

However, within these four major sectors, there are numerous niche segments. Taking medical consumables as an example, these include orthopedics, ophthalmology, otology, and dentistry. Each niche segment operates under its own market logic; therefore, when selecting investment targets, investors should conduct separate analysis and assessment for each specific sub-sector.

In fact, medical devices are products at the downstream end of the industrial supply chain. Therefore, when conducting product analysis, primary attention should be focused on upstream technological breakthroughs, as they will inevitably lead and drive disruptive transformations in downstream products.

Specifically, medical device products are always at the interdisciplinary frontier. Therefore, whenever there is a new technological breakthrough, new clinical application scenarios will inevitably emerge, leading to new diagnostic and therapeutic methods as well as new medical device products.

Therefore, when selecting investment sectors, investors should first focus on cutting-edge technological breakthroughs and then identify potential clinical application scenarios for these technologies. The intersection of these two elements will inevitably yield valuable medical device products, which represent the most attractive investment targets for investors.

Having chosen the right arena and the right track, the next step is to select the racers—that is, to choose the enterprises and teams.

So, how exactly should screening be conducted? From a broad perspective, it primarily involves three key dimensions: level of innovation, commercial prospects, and likelihood of success.

First is the level of innovation, which refers to the maturity of innovative technologies. Medical device products are invariably the result of applying innovative technologies in clinical settings; therefore, technological maturity is particularly critical in this process.

If certain technologies are introduced into clinical practice before they have fully matured, the continuous iteration of the technology itself may result in products that fail to adequately address emerging clinical needs—a situation akin to “pulling up seedlings to help them grow.”

In reality, technology maturity follows a curve. Taking AI as an example, when AI technology first emerged, everyone was developing related products and integrating them with various application scenarios. However, gradually up to the present day, from the perspective of investors at least, AI products are no longer as attractive as they once were.

This is because once products of the same category reach a certain market scale, attention shifts to their differentiators—specifically, what makes your product superior to competitors’. At this stage, investors need to evaluate whether the existing application scenarios are truly suitable.

In the early stages, technologies may be applied in clinical scenarios that are not entirely suitable. At this stage, investors should identify application scenarios that truly address clinical needs. As the technology matures, the corresponding application scenarios become more refined, thereby enhancing product value and expanding market potential.

Next is the commercial outlook, which mainly includes the status of clinical application scenarios, market size, competitive landscape, and business model.

The first point is the status of clinical application scenarios, namely whether this innovative product truly addresses clinical problems, whether it is the best solution currently available on the market, and whether it meets an essential clinical need.

The second point is market size, which requires data support. Such data include the total number of patients, the proportion of patients eligible for treatment with the product, post-treatment outcomes, whether patients receive care at large hospitals or small hospitals, the achievable market penetration rate of the product, and the presence of competitors, among other factors.

The third point is the competitive landscape, which primarily includes diagnostic and therapeutic approaches for innovative products, benchmarking of comparable measures, and product development progress.

The fourth point is the business model. The primary consideration is the product’s application scope—whether it is consumer-facing (ToC) or business-facing (ToB). Next, determine the paying party, such as hospitals, insurance companies, or individuals. Then, address clinical pricing, i.e., how the product should be priced. Finally, consider scalability costs, specifically whether the product can generate sustained and stable revenue.

Finally, the likelihood of success is evaluated primarily across three dimensions: product feasibility, team capabilities, and market potential.

The first factor is the feasibility of product realization. In short, this refers to whether an innovative product can successfully transition from the laboratory to the market, encompassing design outputs, prototyping, manufacturing, and compliance with regulatory requirements.

The second factor is team capability. First, can the team withstand pressure and ensure the company’s survival? Second, does the team possess innovation capabilities? Since no one is born knowing how to operate a business—entrepreneurs all start from scratch—innovation is crucial. Finally, does the team have efficient execution skills to rapidly implement initiatives?

Finally, whether the team can demonstrate tolerance and understanding is crucial. Challenges are inevitable during the entrepreneurial journey, and divergences in corporate strategic direction often arise. Conflicts are particularly prone to emerge during profit distribution. In such circumstances, a team equipped with inclusivity and empathy can effectively resolve these disputes, thereby propelling the enterprise toward greater long-term success.

The third is the market. Everyone feels that the process of creating a product is the most difficult, so when they get the registration certificate from the NMPA, many people breathe a sigh of relief. However, in reality, this only completes two-thirds of the journey; the remaining one-third is even more challenging, which involves how to commercialize the product.

One of the core competencies is marketing, which involves laying the groundwork for sales channels, establishing a nationwide sales network, and assessing whether the team possesses long-term vision and strategic foresight in market positioning.

Subsequently, the focus shifts to building a sales system with a growth trajectory—specifically, how to ensure stable, long-term profitability once the product is officially launched. This is critical not only for the sustained production of the product but also serves as a key factor determining whether a startup can achieve long-term success.