How Internet Healthcare Entrepreneurs and Investors Break Through Amid Cooling Medical Investment

From the second half of 2018 to early 2019, investment in China’s healthcare industry became increasingly cautious.

Let’s first examine the capital supply side. Since 2014, although more diversified funding channels have emerged—with government guidance funds, TMT funds, and real estate funds all pouring into the healthcare industry—these institutions became highly cautious in their project investments by the second half of 2018.

In early 2019, an investment manager in Beijing told VCBeat that, based on the projects she had encountered, even leading projects had seen a decline in investor interest since late 2018, with investors becoming more price-sensitive.

On the corporate front, many companies have also reported news of layoffs and financing difficulties. So, what has been the specific situation with investment and financing in recent years, and how can companies break through? VCBeat (WeChat: vcbeat) interviewed these investors and entrepreneurs for their perspectives.

Wang Xiaocen, Partner at CEC Health Industry Fund, reviewed a brief history of investment figures in the healthcare industry over the past five years:

Silicon Valley Bank once published statistics showing that the amount of capital raised by venture capital firms in the healthcare sector was increasing year by year, reflecting the growing supply of industry funding. In 2017, this figure reached $9.1 billion. In China, in addition to traditional investment institutions deeply rooted in the healthcare field, sources of capital have gradually diversified. Government guidance funds, real estate developers, and TMT (Technology, Media, and Telecom) investors and platforms have all increasingly positioned healthcare as a key component of their investment portfolios.

Investment Data from 2014 to 2018: Over the five-year period from 2014 to 2018 (January–November), total financing in the healthcare industry climbed steadily year by year, surging significantly from RMB 16.36 billion to RMB 65.9 billion, with a compound annual growth rate (CAGR) of 41.7%, indicating very rapid growth.

We have ranked investments over the past five years, revealing that established leading firms such as Matrix Partners China, Legend Capital, and Sequoia Capital have maintained continuous investment activity. Meanwhile, many emerging “dark horse” funds have come to the fore, including Fenxiang Investment, Puhua Capital, and CEHealth Industrial Fund. Corporate venture capital has been even more aggressive, with Tencent, Eli Lilly, and Tonghe Capital each completing dozens of investments.

Specifically, 2014 marked the inaugural year of investment, with 388 deals across the industry and a total financing amount of RMB 16.33 billion. Seventy percent of the projects were at the angel or Series A stage, making that year memorable for several key themes.The first factor is social networking, which stemmed from the prevailing “copy to China” investment trend at the time. Many U.S.-based counterparts were identified as benchmarks, and social interaction served as a key entry point, giving rise to various projects with social components—though this segment has since declined significantly. The second factor is e-commerce. Third, it was in that same year that the BAT companies (Baidu, Alibaba, and Tencent) diverged in their strategic paths, each making distinct moves in the healthcare sector.

Let’s first examine the “social factors” category, including oncology social networking, departmental social networking, women’s social networking, patient social networking, and physician social networking.Since 2014 marked the nascent stage of internet healthcare, entrepreneurs and investors were uncertain about the industry’s future trajectory. Consequently, they looked to the United States for numerous case studies, among which the social component emerged as a particularly significant factor. As a result, many projects launched in 2014 incorporated this attribute.

Next is “e-commerce.” The initial expectation was to open up the online prescription drug market, but as of today, this has yet to be realized.

2015 was a year of boundary expansion and flourishing diversity. There was an explosive surge of 764 investment deals, with total financing reaching RMB 33.45 billion. The influx of cross-industry participants brought new technologies, fresh concepts, and capital. However, this also laid the groundwork for the bubble burst and subsequent winter in 2016 and 2017. That year saw an abundance of key trends, including the “Hundred Glucose Meters War,” physician groups, big data, and B2B models. Numerous business models and enterprises emerged during that period.

2016 was a year dedicated to falsifying business models in pursuit of authenticity. The number of investment deals saw a slight decline, totaling 749, while the total financing amount reached a new high of RMB 39.1 billion. Traditional investors began to venture into innovative investments but remained hesitant to enter high-risk areas of business model innovation. Instead, they chose the gene sequencing sector, which has relatively strong technical components, thereby creating a bubble.

2017 was a year of intensified winter, where the strong grew stronger. While total financing reached a new high of RMB 52.5 billion, the number of funded projects stood at only 536. Capital increasingly concentrated on leading enterprises, driving up average deal sizes. With a saturated pool of market participants and homogeneous product models in the existing market, the likelihood of new startups securing funding has diminished significantly, while the sector for service innovation has entered a mature phase.

Over the past five years, total investments have reached the hundred-billion-yuan level. Where exactly has this capital been allocated? There are seven specific cost channels: customer acquisition costs, market education costs, government relations costs, infrastructure costs, policy forecasting costs, industry consolidation costs, and costs associated with model falsification.

There are three commonalities in the falsification of business models. First, obscure and novel concepts are prone to failure. Second, intermediate-stage products struggle to survive. Third, insufficient anticipation of policy changes leads to demise due to regulatory constraints.

The first point to emphasize is the excessive obsession with "entry points," which is a typical manifestation of internet thinking. Although the traffic acquired through entry points is indeed crucial in all subsequent monetization models, it is not the decisive factor. This is particularly true in the pharmaceutical and diagnostic sectors, where entrenched interests are abundant; if one aims to create a unique profit model, the role of traffic factors is actually negligible. One should seek profit models within the medical services industry, but in reality, there are deficiencies in terms of market size, users' willingness to pay, and overall infrastructure development.

Secondly, social factors also played a role. Among the majority of cases brought back from the United States in 2014, many projects involved social components. At that time, there was a core logical chain: first cultivate user habits and build up a user base, then proceed with data collection and mining, and finally explore latent needs for monetization. However, in reality, most projects ceased to exist after completing only the first two steps.

Finally, there is the misjudgment of trading platforms. In the context of insufficient medical supply, many people misjudge where the value of scalability truly lies, even when transactions are aggregated. Not everything is suitable for online platforms, and numerous hidden offline factors must also be taken into account.

How do healthcare executives view the “capital winter” in the medical and health industry, and what measures have they prepared to “weather the winter”? Zhao Qiang, CEO of Zhibei Pediatrics, shares his perspectives below:

The capital winter is related to Zhubei’s strategic planning in 2019. In 2019, Zhubei achieved further breakthroughs in two tracks. The first track was outpatient services, primarily specialized outpatient care. Currently, public perception of private healthcare remains at the stage where it is seen as capable of treating only basic clinical conditions, similar to community hospitals. However, given the strength of Zhubei’s entire medical and nursing team, the company is fully capable of managing specialized diseases that require clinical intervention.

First, take the respiratory specialty as an example. In March 2018, ZhiBei will launch a respiratory specialty service specifically designed for asthma patients to provide chronic disease management. ZhiBei will also make significant efforts in the growth and development specialty this year, with related services expected to go live in April. Furthermore, ZhiBei plans to develop several other major specialties this year, including hematology and behavioral development.

Therefore, for Zhibei, 2019 marked a year of open-source initiatives amid the winter period. In the face of the capital winter, Zhibei began to develop more medical content suitable for its medical and nursing team to produce, provide specialized services to customers in a targeted manner, enhance the value Zhibei can create for its customers, and enrich its product line.

Meanwhile, Zhibei is also implementing cost-saving measures, including workforce optimization such as cultivating specialized nurses. Zhibei has already begun investing in this area to support nurses’ professional development and help them become outstanding specialized nurses. This serves as a cost-saving strategy for Zhibei, as it enhances individual labor productivity.

Zhibei’s private outpatient services, now operational, have received favorable market feedback. Zhao Qiang stated that during this challenging period, as long as Zhibei remains steadfast and diligently delivers high-quality diagnostic and treatment services, it is confident that the company will thrive in 2019.

Zhao Qiang believes that for a high-quality project, the concept of a “winter” does not exist. Even during a market downturn, many investors still have capital available. Therefore, as long as a company’s project is of high quality, operates with high efficiency, and follows the right direction, investors will be willing to invest even in a “winter” period.

In October 2018, Zhibei Pediatrics announced the completion of its RMB tens-of-millions Series A+ financing round, led by Y Capital. Zhao Qiang stated that, from a funding perspective, Zhibei remains relatively well-capitalized. Given that the “winter” has arrived, the company’s current focus is on how to maximize capital efficiency in 2019.

From patient acquisition for the clinic to the establishment of the entire diagnosis and treatment model, including the medical management system and online patient acquisition, if all these operations can run efficiently and achieve self-sufficiency, the economic downturn will have no impact on Zhibei. This is crucial. Zhao Qiang emphasized that although healthcare is an investment sector with high entry barriers, this does not negate the business logic that entrepreneurs should adhere to. Regardless of the industry, enterprises must strive to achieve self-sufficiency as soon as possible.

In the view of Gou Zhengmeng, founder of Elephant Doctor, the capital winter involves two aspects:
 
One factor is the downward pressure on the overall macroeconomy, coupled with China’s broader economic transition, which has led to certain challenges for the industry, including a decline in fixed-asset investment and tighter bank liquidity. These factors directly impact capital operations, as reflected in the recent financing and investment trends within the industry.
 
On another front, during a capital winter, startups can no longer secure financing easily merely by presenting an attractive concept. Nor will investors engage in indiscriminate liquidity injections, rushing to occupy any “track” as long as the project aligns with broad investment themes. Such scenarios are largely absent in a capital winter. This situation tests whether startup teams can promptly communicate with investors and effectively advance and validate their business models, including profitability and future growth potential.
 
The pressing reality is that investment institutions are increasingly consolidating fundraising efforts among top-tier firms. Small and mid-sized investment institutions without a proven track record of actual investments face significant difficulties in raising capital. The recent ease of fundraising for USD-denominated funds compared to RMB-denominated funds further reflects this trend.
 
Of course, the “capital winter” is relative. Recently, several companies have still attracted investor favor and secured substantial funding, including deals that have been recently closed or are imminent. Gou Zhengmeng believes that enterprises need sound operational mechanisms, clear business logic, and sufficient growth potential within their respective sectors and fields. Only such companies will enjoy sustained capital support, fostering closer and more effective partnerships.
 
Gou Zhengmeng stated that the development of China’s venture capital industry and its interaction with capital should become more rational, expanding along the main thread of value creation. Over the past three to four years, capital manipulation and entrepreneurial impulsiveness driven by excessive money supply have been further regulated, steering the sector toward sound and healthy development.
 
Given the current macroeconomic environment, Elephant Doctor is not overly concerned about the impact of the capital winter on its actual operations. The company’s existing investors have already confirmed their commitment to participate in its next round of financing. Meanwhile, industry adjustments and changes serve as a reminder for Elephant Doctor to build up more effective reserves during this downturn in capital availability.
 
From an overall perspective, the current capital downturn will not subside immediately due to the trade dispute between China and the United States, as well as China’s economic transition. Particularly on the monetary supply side, confidence in future development will take time to restore and may remain weak for another six months or so. Therefore, enterprises need to adopt a forward-looking approach in their operations, implementing scientific personnel and cost controls, and making planned investments—increasing spending where necessary and cutting it where essential. Gou Zhengmeng emphasized that this point is crucial.

As someone who has weathered industry downturns and a serial entrepreneur, Cong Lulu expressed her gratitude for these challenging periods. Looking back, she noted that although each downturn saw a significant number of companies go bankrupt, many others survived and are now thriving. Indeed, numerous industry giants emerged stronger from these harsh conditions.

It was 2015, and the entire industry was talking about a “capital winter.” At that time, Cong Lulu was launching her own startup; unfortunately, her venture failed to escape the chill of the downturn.

After her startup failed, Cong Lulu also reflected on this issue.

During the industry’s financing boom, many companies were able to secure funding. Upon receiving capital, they shifted their focus to market competition, engaging in indiscriminate “cash burn” while neglecting what truly matters: determining what products to develop, which user segments to target, and what ultimate value to deliver.

The companies that ultimately survive will be able to hunker down, “stockpile for the winter,” and gradually refine their services and products; when the harsh winter passes, the value of such enterprises will naturally emerge.

Meanwhile, investment firms have accumulated substantial capital reserves during the winter of funding. As this capital chill recedes, these investors will naturally gravitate toward high-quality projects. What defines a high-quality project? It is, of course, those enterprises that have weathered the funding winter and retained a loyal user base.

Cong Lulu stated that experiencing a capital winter may actually be beneficial. From another perspective, during a capital winter, there are fewer distracting noises surrounding enterprises. This is the time for companies to calm down, conserve their strength, and refine their products and services while ensuring their survival, awaiting the end of the capital winter.

Many companies fear the “capital winter” because they worry that their products and services will not be recognized or accepted by the market, thereby lacking any raison d’être. Take O2O (online-to-offline) as an example: its ultimate demise was not due to the capital winter but rather to its inherent service value. Even without a capital winter, many internet-based O2O ventures would still have failed. For some companies, the capital winter is merely an excuse; what truly troubles them is whether anyone will actually buy their services and products.

Cong Lulu summarized that when enterprises encounter a capital winter, they should avoid following the crowd and instead take time to consolidate. Regardless of whether capital is hot or cold, enterprises must accurately identify their own positioning on this basis and focus on doing things of genuine value.

Founder of Zhuojian TechnologyWeiJianfeng also offers his own insights into the capital winter. He stated that for entrepreneurs, the winter may have always existed; what matters is what methods and measures are adopted to navigate through such a crisis. Amid the capital winter, Zhuojian has been continuously reflecting on its strategy and making strategic arrangements. At the capital level, it is increasing revenue and reducing expenditures, while at the business positioning level, it is streamlining its scale. Zhuojian has already secured land under government preferential policies and will use this plot to construct its own office building. From a management perspective, Zhuojian is also making continuous progress.

Huan Dandan, Vice President of Anhan Medical, stated that investment firms must continue to invest regardless of the circumstances; however, during a capital winter, their investment strategies tend to be more cautious.

Even during a capital winter, outstanding enterprises continue to attract significant attention and interest. As a technology-driven company, Anhan completed a round of financing last August and maintains substantial cash reserves; therefore, it is not overly concerned about the current capital downturn.

Wang Xiaocen stated that the capital winter does not necessarily affect every enterprise. Some companies continuously iterate their products and engage in trial-and-error after their projects take shape, securing financing at various stages based on interim achievements. This process helps them build new competitive advantages. Some projects even secure financing across all relevant sectors in one go, effectively “telling their own story” in a way that leaves little funding opportunity for competitors, which itself constitutes an advantage. These enterprises then use the raised funds to continuously upgrade their teams, gradually forming yet another layer of competitive edge.

The more troubling aspect is that many internet platform-based projects now resemble department stores, a trend the venture capital industry refers to as “department store-ization.” These companies engage in a wide array of business lines, yet there is weak synergy among them. If these operations were broken down into individual businesses and compared with leading players in their respective sectors, the sum of the valuations of those sector leaders would still fall short of matching the valuation of such a platform project. Consequently, these types of projects face significant risks of valuation bubbles and substantial challenges ahead.

Wang Xiaocen pointed out that many companies begin to engage in investment and mergers and acquisitions when they are unable to pursue high growth, a trend that may intensify in the future. Following M&A activities, the efficiency and approach of post-merger integration will be the core factors investors consider when assessing these companies’ future growth prospects.