Can Internet-Based Private Equity Financing in Healthcare Solve the Challenges Faced by Private Equity Funds? — TouWho Network's Prospectus

Zhao Yanyu, Executive President of VCBeat

I first met Zhao Yanyu, Executive President of VCBeat, at the Hengqin Forum in Zhuhai. Refined and elegant, she is a rare beauty in the investment community; though she could have relied on her looks for success, she chose to pursue a career in venture capital.

“Touhu” in the Book of Rites records: “Touhu is a ritual for the host and guests to engage in banqueting, drinking, and discussing talents and arts.”

Zhao Yanyu told a reporter from VCBeat (WeChat ID: vcbeat) that “Touhu” was originally a drinking game played among scholar-officials in ancient China. However, on Touhu.com, “Tou” symbolizes investment, while “Hu” represents the practice of medicine to aid the public. This concise yet meaningful name clearly conveys Touhu.com’s business focus on investing in the pharmaceutical and healthcare industries. Touhu.com officially defines itself as an internet-based private equity financing and investment platform serving the pharmaceutical and healthcare sectors.To put it plainly, VCBeat serves both projects and investment institutions and investors.。

It is understandable that the goal of investment and financing platforms is to serve startup projects. So why does Touhu.com choose to serve investment institutions? Let’s take a closer look.

China’s venture capital industry only began in 1998. After 18 years of development, the sector reached its peak by the end of June 2016, with the Asset Management Association of China registering 11,168 private equity fund managers and employing 402,500 professionals in the private fund industry.

Previously, outsiders remained unaware of how private equity funds operated internally, until the 2007 IPO of PE giant Blackstone lifted the lid on the black box of PE operations.

Venture capital refers to equity investments in non-listed companies with high-growth potential. The objective is not to gain controlling stakes, but to provide financial or other resource support to foster their growth, ultimately achieving substantial returns through exit strategies. Therefore, the core competency of private equity fund managers lies in continuously identifying undervalued companies and realizing profits by selling their equity holdings at higher prices once the market recognizes the companies’ value.

In this process, private equity fund managers leverage their capital and resources to support companies with growth potential, which also constitutes the process by which private equity funds create social value. Of course, in practice, the challenges faced by institutions are far more arduous than this idealized process suggests.

In investment, personal insight and capability are important, but what matters more is access to information. The more information one obtains, the higher the probability of identifying promising projects. Therefore, large investment firms employ numerous junior investment managers who leverage their professional networks or actively scout deals to maximize the chances of discovering high-quality opportunities. Interestingly, many companies seeking financing are also searching globally for suitable investors. These companies typically rely on personal connections or intermediaries such as financial advisors (FAs) to identify appropriate investment institutions.

Capital and project matchmaking has long relied on such traditional and antiquated methods. In the process of mutual search between fundraisers and investors, the matching of information between the two parties is characterized by inefficiency and randomness.

In China, an increasing number of private equity firms are going public. The motivations behind these listings are evident: one of the long-standing weaknesses of private equity firms has been the lack of permanence in their capital structure.

The lack of a mature fundraising market for RMB-denominated funds has long been a pain point hindering the development of private equity (PE) investment firms in China. Typically, PE firms raise capital through channels such as wealth management companies and private banks; however, high distribution fees erode the profit margins of fund managers. According to previous reports by Global Entrepreneur, a PE fund manager who previously distributed products through Noah Wealth stated that Noah Wealth charges a one-time 2% commission on first-year assets, followed by an annual limited partner (LP) maintenance fee of approximately 1% throughout the fund’s term. Conditions are even more stringent for smaller PE funds.

The difficulty in fundraising not only affects the returns of private equity fund managers but, more importantly, influences their investment decision-making. It is increasingly common for limited partners (LPs), who hold substantial capital, to participate in investment decisions, as exemplified by China Merchants Capital’s dual-investment-committee system and the specific requirements imposed by government guidance funds regarding investment returns or project selection.

The profitability of private equity (PE) funds primarily stems from management fee income and carried interest distributed upon fund exit. Theoretically, PE firms first raise capital from Limited Partners (LPs). Following fundraising, they charge an annual management fee based on either committed or paid-in capital. Upon the fund’s maturity, if the PE firm meets pre-agreed terms (such as achieving an annualized return exceeding a specified benchmark), it receives a percentage of carry from the net profits.

The most common structure is: a 2% management fee plus 20% carried interest. Typically, management fee income merely covers the firm’s day-to-day operations, and the primary source of profitability should stem from profit sharing; in reality, however, the majority of firms derive their main revenue from management fees.

The emergence of these phenomena has prompted reflection on whether investment institutions need to undergo internal reforms in their business models. In recent years, various new business formats have emerged in both Silicon Valley in the United States and China’s venture capital industry. Examples include equity crowdfunding, venture capital combined with incubators (maker spaces), technology real estate integrated with venture capital, and the upcoming one-person venture capital firms. Amidst these continuously emerging new business formats, internet-based private equity financing platforms such as Touhu.com have also come into being.

Internet-based private equity financing (then referred to as equity crowdfunding) was introduced from the United States to China in 2011, sparking the idea among many forward-thinking venture capitalists to optimize traditional private equity investment through internet-enabled approaches. As a practitioner in the field of internet-based private equity financing platforms, Zhao Yanyu has been continuously exploring how to leverage internet tools to address the challenges faced by private equity funds.

The rational distribution of benefits forms the foundation for the operation of this ecosystem. Within the VCBeat network ecosystem, entrepreneurs, as value creators, are not required to bear additional costs. Lead investment institutions and individual co-investors are the beneficiaries of corporate value appreciation. Lead investment institutions leverage their professional expertise to identify and support corporate growth, while individual co-investors provide resources for corporate expansion by foregoing the time value of their capital; consequently, they are entitled to share in the returns generated by the increase in corporate value.

Touhu.com adopts a “lead + co-investment” mechanism to raise project funds, thereby achieving both professionalism and efficiency in capital raising.

Lead investors on Touhu.com are typically professional investment institutions. They are entitled to a share of project management fees and investment returns, while assuming corresponding responsibilities, including conducting due diligence, assisting portfolio companies with operations, managing post-investment activities, and cooperating with Touhu.com on information disclosure.

Ordinary individual investors can easily participate in equity investments through Touhu.com. When applying to become a certified investor on Touhu.com, investors are required to provide valid identification documents and accurate personal financial information, determine their risk preferences, and undergo detailed consultation with Touhu.com. This process ensures the authenticity of the investor’s identity information and confirms that the investor meets Touhu.com’s criteria for qualified investors.

When a platform possesses extensive resources, prioritizing the matching of vast amounts of information to meet demand is paramount. Many skeptics argue that matching information between investors and fundraisers involves non-standardized entities, making it difficult to process such massive datasets through standardized methods. However, practical experience has demonstrated that these seemingly complex data can be effectively organized.

Just as with the highly mature online platforms currently in operation, individuals’ criteria for a partner are non-standardized. Nevertheless, there is structured information available—such as age, height, and occupation—that can be processed and matched in the initial stage, thereby increasing the probability of successful matches through subsequent arrangements.

The current venture capital investment environment differs significantly from the past. There has been explosive growth in the number of entrepreneurs and in the demand for mergers, acquisitions, financing, and investments. The equity investment industry continues to expand in scale, with a rapid increase in the number of participating institutions and professionals. Meanwhile, as social wealth accumulates, the number of high-net-worth individuals and families is rising day by day. All these factors have provided the necessary conditions for the large-scale operation of equity investment businesses.

Currently, Touhu.com has over 2,000 registered users, primarily comprising investors/institutions, industry professionals, and entrepreneurs. Given the barriers between resources, capital and projects cannot be matched in a short period. Zhao Yanyu hopes to leverage the Touhu.com platform to accelerate interactions among these parties and speed up the development process.

Furthermore, regarding its revenue model, unlike most equity financing platforms that generate revenue through front-end fee sharing, Touhu.com derives its profits from revenue sharing with the investment side, thereby aligning the interests of the platform with those of investors.

To clearly understand the operational process of VCBeat, let’s take the “Spirulina” project launched on VCBeat as an example. The company behind the “Spirulina” project specializes in the research, development, and industrialization of gene technology. Its products include gene assembly stations, gene operating systems, gene databases, and gene big data cloud platform services.

The “Spirulina” project was officially launched on December 10, 2015. Within the first 14 days, 21 investors expressed interest in subscribing, with a total reserved amount of RMB 23.14 million. Subsequently, the subscription period was closed, and the project entered the payment phase. Ultimately, 16 co-investors were confirmed based on the order in which they completed their payments.

“Spirulina” is a project introduced to Touhu.com by a professional lead investment institution. The lead investor has completed due diligence and investment analysis on the project and expressed its intention to invest. Subsequently, the project was submitted to Touhu.com through the platform’s institutional channel. The project aims to raise a total of RMB 15 million, with the lead investor intending to subscribe for a portion of the equity, while the remaining shares will be raised through Touhu.com. After review by Touhu.com’s Investment Research Department, the project was deemed compliant with Touhu.com’s listing standards, and the “Spirulina” project has been officially launched on the platform for fundraising.

The "Spirulina" project has currently entered the post-investment management phase. The lead investor submits the annual operational report to VCBeat on schedule and promptly discloses project progress to investors. The project is developing well and has completed a new round of financing, with the company's valuation increasing fourfold compared to the previous investment round.

As a platform, VCBeat not only provides financing services for China’s healthcare industry but also expands its project sourcing footprint overseas. Zhao Yanyu pointed out that in the healthcare sector, it is widely acknowledged that there are many high-quality projects abroad, prompting many institutions to attempt overseas investments; however, these efforts have yielded limited results. The primary reason lies in the significant differences in business culture between China and the United States: without communication and understanding, trust cannot be established.

Therefore, there is a need for a platform familiar with both parties to serve as a communication bridge, reducing communication costs between them. This is the direction that VCBeat (Touhu.com) is currently exploring. Earlier this year, VCBeat completed the expansion of medical and health industry resources in North America, establishing connections with overseas strategic partners. In June, its first overseas project began its pre-launch phase, marking steady progress toward its established goals. Through internet-based platform operations, VCBeat enables the most efficient matching between domestic and international institutions and investors.

Since its launch, Touhu.com has facilitated financing for five companies in the healthcare sector, with total amounts exceeding RMB 230 million. The projects span various fields, including genomics, pharmaceuticals, and medical devices. Zhao Yanyu stated that Touhu.com is not confined to any specific niche but provides services to the entire healthcare industry.