Fangzheng Securities Jiang Tianjiao: Internet Healthcare Unicorns Have Emerged, but Real Growth Begins in 2018 | Future Healthcare 100 Summit 2017

“2017Future Healthcare100Qiang” Forum, themed “The Era of Species Explosion,”2017Year12Month15Day-17held at the Beijing Marriott Hotel.

The camel’s long march, the cheetah’s energy, the wildebeest’s trail, the elephant’s turn, and the crocodile’s strike—these animals, seemingly worlds apart from the healthcare industry, are closely intertwined with the keynote address of this forum.

At the “Unicorn Parallel Forum” held on the afternoon of December 16, a director of Founder Securities and head of its healthcare industry division delivered a presentation titled “Galloping Again After Resting: Where Are Unicorns Rushing?” offering new insights into the era when internet healthcare unicorns are vying for dominance in China. Below is the curated report by VCBeat.

Jiang Tianjiao, currently serves as Director of the Industrial Finance Department at Founder Securities and Head of Investment and M&A in the Healthcare Industry.

Formerly Vice President of Haoyf.com, responsible for strategic mergers and acquisitions; led investments totaling over RMB 200 million in five Series A internet healthcare companies. Previously served as a Senior Analyst covering the internet and healthcare sectors at Founder Securities Research Institute. Member of the top-ranked team in New Fortune’s Best Analyst Awards and the Crystal Ball Best Analyst Awards. Additionally, holds appointments as a Special Researcher at the National Internet Institute, the Institute of Public Policy of the Chinese Academy of Social Sciences, and the School of Social Sciences at Tsinghua University; serves as a contributing writer and lecturer for Pharmaceutical Executive magazine. Co-authored the published books Internet Transformation: Decoding Chinese Management Models and Internet + Healthcare (published by CITIC Press). Possesses in-depth understanding and extensive resources in healthcare investment.

Thank you to VCBeat for the invitation. I am also delighted to have the opportunity today to share some of my thoughts with everyone. The title of my presentation is somewhat of a mouthful: “Galloping Again After Resting at the Trough: Where Are the Unicorns Rushing To?”

Why This Title? Those familiar with and tracking entrepreneurs are well aware that in 2016, internet healthcare faced significant skepticism, and the entire industry fell into a slump. Currently, from a valuation perspective, unicorns in the internet healthcare sector have emerged, but they have not yet entered a phase of rapid expansion. I believe the true surge will begin in 2018. Today, I aim to analyze the challenges and opportunities we face from the perspectives of industry and enterprise.

A few months ago, a third-party organization conducted a survey titled “Sentiment Index of 60 Investors on Subsectors of the Healthcare Industry.” The results showed that throughout the second half of 2017, internet healthcare was viewed with the greatest skepticism. I was shocked at the time,But at the same time, my other reaction was: The opportunity for internet healthcare unicorns has finally arrived.

Why is this the case? Any entrepreneur immersed in the industry can attest that competition for resources in the internet healthcare sector is fierce. Countless internet healthcare startups are vying for doctors, patients, and other medical resources. The customer acquisition costs for both doctors and patients are exceptionally high, with much of the investment proving futile. This noise has elevated the overall cost structure of the entire industry to a new level.

Currently, internet healthcare is the least favored sector among investors, and small enterprises within this space are facing immense challenges. However, under such conditions, the industry’s talent, resources, and promotional investments will begin to return to normal levels. Therefore, I believe that opportunities for unicorn companies in the internet healthcare sector have arrived.

Now that the opportunity has arrived, can we start sprinting, running at full speed, and burning through cash once again? I would like to raise a perennial question: What factors have constrained the development of internet healthcare, preventing it from advancing as rapidly as other niche sectors?

I believe the reason is “low frequency.”

“Low frequency” is a highly distinctive attribute in healthcare demand, differing significantly from the “low frequency” seen in industries such as tourism. While most people travel no more than ten times a year—making tourism a low-frequency industry—these trips are actively planned and initiated. In contrast, the “low frequency” nature of healthcare utilization is passive and unplanned, posing more serious challenges.

Medical needs arise only when people fall ill. This is not a planned occurrence, and it is difficult to use promotional tactics to increase the frequency of consumption. The number of times a person falls ill in a year is not under human control, which poses a significant challenge for internet healthcare. If a person were to fall ill 12 times a year, how many of those instances would lead them to open the app?

For common ailments such as colds, fevers, or minor headaches and fevers, most people either endure them or self-medicate with over-the-counter drugs. Moreover, how many users continue to open a healthcare app after their initial use? When faced with similar illnesses in the future, most individuals tend to rely on their prior experience rather than consistently using internet-based medical apps.

The issue with low-frequency demand, on the surface, is that it is difficult for products to be effectively delivered via mobile apps—but this is only a minor concern. A more serious problem is that low-frequency demand makes it challenging for internet healthcare services to build brands and platforms that become firmly entrenched in users’ minds.

I sometimes ask healthcare professionals, “Which hospitals rank fifth and sixth nationwide in orthopedics?” Hardly anyone can answer, let alone the general public.

This is quite puzzling. Isn’t it impressive for an orthopedic hospital to rank fifth nationwide in China? Of course, it is!

Are these hospitals built in just one or two years? Of course not! They are the result of decades of relentless effort!

This is puzzling: a highly reputable medical institution that has diligently cultivated its practice for decades remains largely unknown. Why? The answer lies in the low frequency of healthcare demand. This poses a significant challenge, as the infrequency of healthcare needs prevents service providers and brands from establishing strong mindshare among consumers, thereby creating substantial obstacles to commercialization.

Next, I would like to discuss and share my thoughts on this issue with you:

The first wave of unicorns in internet healthcare has emerged; the issue of “low frequency” must be thoroughly understood and resolved.

The first strategy is to identify high-frequency segments. The healthcare industry comprises numerous niche sectors, not all of which are low-frequency; for instance, consumer healthcare services such as minimally invasive cosmetic procedures. In the medical aesthetics sector, usage frequency can be driven through promotions and campaigns. Similarly, could this approach apply to dentistry or health check-ups? These areas may also yield niche segments with relatively higher service frequency.

Are there other similar niche segments? I believe chronic disease management is one such example. Patient engagement in chronic disease management is proactive, and it constitutes a long-term, continuous process. This makes it a high-frequency niche segment. Of course, chronic disease management itself faces many challenges that need to be addressed, which will not be discussed in detail here.

Furthermore, from the perspective of service providers. Patient-side interactions are low-frequency, but shifting from serving patients to serving doctors turns it into a high-frequency scenario. Doctors’ use of internet-based tools for physicians is relatively considered a high-frequency demand, although there is an issue of distinguishing between genuine and pseudo demands within this context.

The aforementioned approach is referred to as “identifying high-frequency scenarios.” In addition, there is a second solution—“creating high-frequency scenarios.”

There is currently a health management concept that suggests shifting the driving force to doctors or health managers to stimulate demand, since users themselves have not yet generated such demand. Another approach is e-commerce: while demand for healthcare services is low-frequency, demand for medical devices and consumables is high-frequency; thus, e-commerce can relatively easily create a segment of high-frequency consumer products.

Third, aggregate low-frequency activities into high-frequency ones. Take local services as an example. Locksmithing and moving are both low-frequency needs, but why does 58.com exist? It essentially aggregates these low-frequency demands, thereby creating a high-frequency demand.

This is aggregation based on demand; another approach is aggregation by population. The usage frequency of a single individual or household is not high. Can we extend services to residential communities to aggregate the demands of the population? For example, with parcel lockers in a community, an individual’s usage frequency is generally low, but when the usage frequencies of a group are aggregated, it becomes a relatively high-frequency demand.

Fourth, when we cannot identify a high-frequency direction, we may as well accept the reality of low frequency and leverage it to generate commercial value. For instance, by selling health insurance, users’ subsequent low-frequency needs can actually create short-term profits. Of course, this also raises the issue of balancing users’ sense of gain.

In addition, to address the challenge of low frequency, commercial returns can be offset by increasing the average transaction value.

The first wave of unicorns in internet healthcare has emerged, yet we must engage in deeper reflection on the industry’s common challenges and develop more effective solutions to address its core constraints.

However, resolving the issue of low frequency does not mean all problems are solved. If you become directly involved in internet companies, you will discover that they actually face a multitude of challenges.

For instance, my report from two years ago highlighted the strategy of focusing on specific disease subcategories—an approach that some practitioners later dismissed as “correct but trivial.” Now, it may be worthwhile to delve deeper and consider whether such heavy vertical specialization might even entail certain irrationalities, or perhaps is fundamentally a flawed approach.

Take O2O (online-to-offline) as another example. After being segmented by both geography and disease severity, it fails to generate substantial traffic on the ground. Furthermore, regarding consumer habits and mental models, when faced with medical issues, many people still turn to Baidu as their first choice; few directly opt for internet healthcare platforms. Why is this the case, and how can it be addressed? These are questions worth contemplating.

Since the end of 2016, a new trend has emerged within the industry: the era of internet healthcare has passed, and we are now entering the AI era, with AI regarded as the savior of internet healthcare.

Admittedly, medical artificial intelligence can address numerous challenges, and the medical AI sector is undoubtedly a sunrise industry. At VCBeat’s Artificial Intelligence Forum in 2017, I presented a relatively comprehensive classification of artificial intelligence. From hardware to software, and even health management, nearly everyone across the industry claims to be engaged in medical artificial intelligence.

However, we need to consider a core question:Are there no successful projects in the era of internet healthcare due to a lack of artificial intelligence?By integrating artificial intelligence into these initiatives, will the industry necessarily enjoy smooth sailing? Currently, AI remains heavily dependent on patient capital; therefore, whether AI represents the hope for internet healthcare and constitutes the next direction for development remains a question worthy of careful consideration.

Most AI products remain in the deployment phase, which is a significant challenge. While the technology appears sound, it remains uncertain whether demand has been validated and whether strategies for scalable replication are in place. Therefore, whether AI can deliver short-term solutions for internet healthcare is also uncertain; rather, it serves more as a direction for expansion.

AI is always associated with big data. I believe enterprises should clearly recognize the significance of big data to their own operations and experience. If understood through the lens of the industrial era, data is essentially inventory. Whether acquired for free or at a cost, the essence of obtaining data is actually purchasing raw material inventory.

Under the industrial system, inventory refers to items that cannot be processed into products or sold, and thus remain on the balance sheet. Data itself has a shelf life; much like raw materials, it deteriorates and spoils over time, leading to a corresponding decline in its value. Therefore,The value of data does not lie in the volume acquired, but rather whether it can be processed and transformed into a commercialized product.

If superficial elements are counted as data, the volume of data we can obtain is enormous.ButThe quality of data is more important., it is impossible to prepare quality dishes with spoiled vegetables and meat. Evidently, the market has cooled significantly compared to two years ago; acquiring users at scale through free incentives is no longer the mainstream strategy, and the entire industry is moving toward more orderly development.

The above are reflections on the relationship among AI, big data, and internet healthcare.

So, regarding internet healthcare unicorns, the question that concerns everyone most is: what might an internet healthcare unicorn look like as it grows?

I believe this can be illustrated using the numbers one, two, three, four, up to infinity.

An internet healthcare unicorn should possess at least two core resources: physicians and patients. Three key elements keep these resources actively engaged: data, technology, and services. Technology supports services, services generate data, and data optimizes technology, creating a positive feedback loop. With these three core elements in place, the four most important related industries for an internet healthcare unicorn are medical institutions, pharmaceutical manufacturers, pharmaceutical distributors, and commercial insurance providers.

The above outlines that “one” internet healthcare unicorn must possess “two” core resources, exhibit “three” key elements, and be linked to “four” major industries.

So, what is meant by “infinite”? It refers to the entire healthcare ecosystem. The healthcare industry chain and its environment are highly complex, and such complexity gives rise to ecological logic. Just as mushrooms do not grow in household potted plants but thrive amidst the diverse materials found in forests, a complex ecosystem will continually give rise to new elements—this is the expansion of the ecosystem. Subsectors that may seem distant from internet-based healthcare, such as CROs (Contract Research Organizations), genetic testing, medical device innovation, and pharmaceutical R&D, all hold potential for growth.

On the Profile of Internet Healthcare Unicorns: An Alternative Perspective, I Believe Three Essential Conditions Must Be Met:

First, leadership in business scale, which refers to online services in internet healthcare, including mainstream service models such as online consultations and physician appointments. Second, leadership in financial scale, encompassing revenue and profits; there should be at least one robust primary source of cash flow, supplemented by revenue from innovative businesses, to support future income growth potential. Third, and often overlooked, is the authority and credibility of content and brand. In the healthcare industry, trust is paramount, making platform authority and credibility crucial.

Furthermore, we have observed that many internet healthcare companies are expanding from online platforms into offline services, a strategy that most major tech giants are currently considering or implementing. I believe this is a sound approach, given that the offline sector features well-established business models and stable cash flows, which can support operations such as meeting the demand for medical devices and pharmaceutical products.

For internet healthcare platforms, there are indeed viable entry points for expanding into offline services. These include home medical devices, specialized or general practice chain medical services, pharmaceutical distribution, and traditional Chinese medicine decoction pieces, among others. Currently, most healthcare companies enter the market through medical institutions, but there are many other strategic approaches worth exploring.

Of course, the above analysis is based on logical reasoning; the information available is inevitably incomplete, and the industry evolves rapidly. Therefore, I cannot guarantee that my information is entirely comprehensive or accurate. Ultimately, a company’s business outcomes depend not only on the quality of its decisions but also on its execution capabilities. This involves issues related to team dynamics and incentives, which fall outside the scope of today’s discussion. Hence, I will present my views solely from the perspective of corporate strategy.

Finally, I would like to say to all innovative healthcare practitioners: When people are looking up at the sky, we choose to stay close to the ground; when people are staying close to the ground, we rise and choose our path; when people begin to choose their paths, we once again look up at the sky! Salute to all entrepreneurs!