Early-Stage Engagement, Growth Partnership: A Thematic Approach, Three Strategic Directions, One Investment Logic, and Four Evaluation Criteria — Insights from Zhou Mi, Investment Director at Matrix Partners China

Time: August 18, 2015 (Tuesday)
Location: IC Coffee, Zhangjiang, Shanghai
Speaker: Zhou Mi, Investment Director at Matrix Partners China

• Comprehensive and Insightful Perspectives
  I. Matrix Partners China’s Investment Preference: Early-Stage Intervention and Growth Companionship
  II. Investment Logic for Internet Healthcare: One Theme, Three Directions
  III. Four Investment Criteria
  IV. Advice for Entrepreneurs: The Importance of Cash Flow
  V. Responses to Questions from the VCBeat Community

Amidst the noise and constant change of investment practice, Zhou Mi always faces everything with a smile. This top-tier Chinese investor, who previously worked at Lanchester Asia and currently serves as an Investment Director at Matrix Partners China, now focuses his attention on project sourcing and investment in the internet healthcare sector. He has led investments in companies such as Gengmei, Zhangshang Tangyi (Pocket Diabetes Doctor), Super Weight Loss King, Yitu, Rich Surgical, Xinuopu, Starry Medical, Suzhou Weizhen, and Suzhou Boying, making him one of the most active investors in this field. Notably, Gengmei, a first-tier player in the medical aesthetics industry, now achieves a monthly gross merchandise volume exceeding RMB 100 million.

At the 9th VCBeat Thinkers’ Salon, Zhou Mi shared his and Matrix Partners China’s perspectives on the currently booming internet healthcare sector with over 100 entrepreneurs in attendance. During the salon, Zhou Mi was remarkably open and thorough, offering what stands as the most rigorous and comprehensive overview to date of Matrix Partners China’s investment logic and methodology in internet healthcare.

Comprehensive and Insightful Perspectives
1. Early Intervention, Accompanying Growth:A defining characteristic of Matrix Partners China is its involvement from the very early stages of a project, growing alongside entrepreneurs. For instance, Momo, widely recognized as a benchmark in China’s mobile internet sector, received its initial investment from Matrix during the angel round, amounting to just a few million RMB. A more familiar example is Gengmei. When we invested in August 2013, the platform had only a few thousand users, who were merely followers on Weibo. At that time, business models such as transaction volume had not even been conceived. Despite significant market skepticism towards our decision at that stage, we proceeded with the investment.

2. One Theme, Three Major Directions:From 2014 to the present, "Internet + Healthcare" has gained significant momentum, with a plethora of creative ideas emerging. In this bustling and vibrant market, what is Matrix Partners' perspective? We hope it isCross-industry integration via the Internet enhances efficiency in traditional sectors, eliminates information and resource asymmetries, and thereby drives transformations in social models. The three major directions are: opportunities arising from transaction matchmaking and matching mechanisms; efficiency gains brought by O2O (Online-to-Offline) models; and free, high-volume SaaS (Software-as-a-Service) models.

3. One Investment Thesis, Four Criteria:A key investment thesis of Matrix Partners China in the internet healthcare sector is that startups in internet healthcare or IoT health must possess cross-disciplinary thinking, as well as a cross-disciplinary DNA and team. Otherwise, even if numerous business opportunities are identified, the lack of advanced strategic approaches will render them uncompetitive. Breaking down this logic, it requiresPrecise market entry point, complementary team structure, reasonable equity allocation, and a business model supported by data.

4. The Importance of Cash Flow:Entrepreneurs must remain agile in the early stages, adapting flexibly to market financing conditions and their team’s capabilities. This may sometimes require making compromises; achieving self-sufficiency is the safest path. Why? Because in the startup journey, cash flow is king—it is the fundamental baseline for corporate survival. In particular, we should avoid overly optimistic projections regarding the speed of fundraising and the amount that can be raised.

I. Matrix Partners China’s Investment Preferences: Early-Stage Entry and Long-Term Partnership
Zhou Mi: I am delighted to attend the VCBeat Thinkers’ Salon in Shanghai. Datao is a very good friend of mine, and I deeply admire the entrepreneurial passion at VCBeat. In fact, my daily work involves similar efforts to what VCBeat is currently doing—systematically analyzing the industry. VCBeat has now become a highly sought-after platform in the investment community. Congratulations, Datao.

Next, I will introduce Matrix Partners. Matrix Partners is a U.S.-based venture capital firm that has been operating in China for eight years. Matrix Partners China has now grown into a hybrid VC firm managing both RMB and USD funds. We primarily focus on investment opportunities in the mobile internet sector, complemented by an early-stage fund portfolio that covers enterprise SaaS and healthcare.

Matrix Partners China primarily focuses on investment stages ranging from the angel round to Series B, with typical investment amounts between RMB 3 million and RMB 30 million.

One of our distinguishing features is that we get involved at a very early stage of projects and grow alongside the founders. For instance, Momo, widely recognized as a prominent benchmark in the mobile internet industry, was invested in by Matrix Partners China starting from the angel round with just a few million RMB.

What people are more familiar with is Gengmei. Starting in August 2013, it actually had only a few thousand users, who were merely followers on Weibo. At that time, we had not even considered business models such as transaction volume. It was at this stage that we made our investment, and there was considerable skepticism about us in the market.

A few days ago, VCBeat reported that Gengmei’s monthly revenue had surpassed 100 million yuan. This marks a highly significant milestone in the internet healthcare startup sector, and Gengmei offers valuable insights for exploring business models in internet healthcare.

II. Investment Logic for Internet Healthcare: One Theme, Three Major Directions
Matrix Partners China believes that mobile internet will change and reshape—and is already changing and reshaping—our way of life, including healthcare. This conviction forms the core of Matrix Partners China’s DNA and the foundation of its investment thesis.

Below, I will share Matrix Partners China’s investment thesis, focusing specifically on how we evaluate early-stage internet healthcare startups, the key issues entrepreneurs should pay attention to during their development, and some techniques for securing financing.

"To make our discussion and responses more effective, I’d like to conduct a brief survey. Among the hundred-plus attendees here, how many are entrepreneurs? How many focus on pharmaceuticals? And how many are interested in rehabilitation, weight loss, fitness, or chronic disease management?"

{Voice-over: Nearly half of the attendees are entrepreneurs, and Zhou Mi has engaged with talent from a wide range of fields.}

It’s quite good. Our salon is highly credible, and participants often find much common ground in their discussions. In fact, just two years ago, most investment firms and teams, including my own, completely avoided the internet healthcare sector.

Matrix Partners China does not focus exclusively on investments in the healthcare sector; we conduct cross-sector comparisons across various fields, examining developments in consumer e-commerce, the landscape of social products, the state of the gaming industry, and more. At that time, our comparative analysis indicated that the healthcare sector was not yet ripe for investment. We believed that the monetization potential of many so-called “Internet + Healthcare” models was extremely slow. Consequently, we maintained a highly conservative stance for an extended period.

It was not until the second half of 2013 that we sensed the wind beginning to blow. Our initial foray was into the consumer sector, with early examples including Meiyou and Dayima. Subsequently, we chose to make deep investments in medical aesthetics, after which internet healthcare entered a period of intense fervor.

Since 2014, the “Internet + Healthcare” sector has heated up significantly, with a plethora of creative ideas emerging. Amidst this bustling and noisy market, what is Matrix Partners China’s perspective? We hope it isThe cross-boundary integration facilitated by the Internet enhances efficiency in traditional sectors, eliminates information and resource asymmetries, and thereby drives transformations in social models.

I will provide a few examples for your reference.

Entrepreneurial Opportunities in Transaction Matching and Matchmaking Mechanisms:For example,Pharmaceutical DistributionIn terms of specific segments, I see significant opportunities. This is a massive market composed of countless distributors and pharmaceutical sales channels across China, forming a highly fragmented system. Since we have already moved many industries online—for instance, Jingwei Ventures’ Zhaogang.com brought steel trading online, and even real estate sales have gone digital—why can’t pharmaceutical distribution do the same? By migrating these operations online, we can create platforms for communication, allowing manufacturers to promote and showcase their products. Could such transactions then be completed without the need for in-person interactions? This represents a typical application of transaction matchmaking or internet-based matching mechanisms within the pharmaceutical sector.

The Booming O2O:Another point is that everyone knows O2O (Online-to-Offline) is extremely popular. Just as people use Didi for ride-hailing and Ele.me for food delivery, entrepreneurs frequently rely on these platforms in their daily lives. Recently, I have noticed some entrepreneurs making interesting attempts in areas such as rehabilitation, including neurological and cardiovascular rehabilitation, where significant pain points exist. Hospitals often lack available beds, and many procedures require long-term treatment by professional physical therapists or with specialized equipment. It causes immense distress for patients and their families to make repeated trips to the hospital only to find no beds available. I believe rehabilitation holds substantial market potential as an O2O service model. For instance, connecting rehabilitation therapists with hospitals could effectively address this critical pain point.

Another case in point is the O2O (online-to-offline) nursing services. The most profound experience for everyone is the long queues at hospitals. In fact, in many areas involving less critical care, such as health check-ups and appointment registration, internet-based platforms can facilitate time matching to fully utilize the schedules of doctors, nurses, and physical therapists, thereby enabling home-visit services.

Free, high-volume SaaS model:As is well known, SaaS enjoys widespread adoption across society, and Matrix Partners China has invested in many related companies, such as Ele.me. How did Ele.me operate? It provided its SaaS software to small restaurants; once these establishments installed the software, online orders would flow in. This approach offers a first-mover advantage: once a particular SaaS provider dominates a sector and scales up, it becomes exceedingly difficult for competitors to capture that market share. Therefore, SaaS remains a highly attractive sector today.

There is also significant potential for SaaS adoption in the healthcare sector. If you pay attention, you will notice the substantial demand for SaaS solutions in healthcare and pharmaceuticals. However, the current reality is that most high-quality SaaS providers are foreign companies with prohibitively high prices, which are unaffordable for small and medium-sized enterprises (SMEs) in China. As a result, these domestic SMEs often resort to low-cost, low-quality alternatives. By applying cross-industry thinking and introducing internet-based strategies, can we elevate the quality of domestic SaaS to meet or approach international standards while offering it for free? I believe that SaaS services should adopt the Ele.me model: provide free installation to users, and as transactions flow through the platform, transaction volume will grow, thereby establishing a clear business model.

Many people can spot opportunities, but the winners are often teams with superior thinking, technology, and product capabilities. Keep two principles in mind: First, the internet’s rules of the game can easily disrupt established industry norms. Take SaaS, for example: if my solution is free and user-friendly, who would you choose? Second, once I have secured this user niche and users find the experience comfortable, why would they switch? In such a scenario, you effectively monopolize the market.

III. Four Investment Criteria
A core investment thesis of Matrix Partners China in the internet healthcare sector is that startups in internet healthcare or IoT-enabled health must possess cross-disciplinary thinking, as well as a team and organizational DNA with cross-industry expertise. Without such advanced strategic approaches, even the most abundant commercial opportunities will not translate into competitive advantage.

Below, I will break down this logic and share it with you:

First, it is necessary to examineThe project’s domain and entry point.For instance, whether in rehabilitation, nursing, or pharmaceutical distribution, startup teams must identify a highly precise entry point. This focus must be crystal clear; only by concentrating limited resources on a narrow niche can startups generate sufficient pressure to rapidly penetrate and dominate the sector.

Second, it is necessary to examineWhether the teams are complementary.We believe that the founding team should ideally possess both extensive industry experience and accumulation, as well as fundamental capabilities. The CEO should ideally have a dual mindset, combining deep industry knowledge with internet thinking. We have observed cases where the primary founder of a project had abundant industry resources and knowledge but lagged somewhat in internet thinking, which could significantly impact long-term development.

Third,The equity ratio should be reasonable.What constitutes a reasonable structure? We hope to see a clear leading figure with dominant ownership, rather than a scenario where four or five individuals hold equal stakes of around 20% each. In such cases, who ultimately bears the responsibility? Unclear allocation of responsibilities, rights, and interests poses a significant risk. For instance, if an investor holds more than 50% of the equity in a promising project but does not hold any position within the company, it becomes virtually impossible to secure further financing. This is because any new investment would dilute the shares of those actually running the business, making negotiations essentially unfeasible.

Fourth: Must haveData support.We believe that innovative theories alone are insufficient for a product; it is preferable to conduct pilot programs and collect empirical data. For instance, if offering in-home services, one must have case studies demonstrating such services; if operating a matching platform, there must be both service providers and clients, with at least a baseline reserve of users. This approach makes pitching to angel investors significantly more secure.

During the angel round, fundraising amounts typically range from RMB 3 million to RMB 6 million, with approximately 10%–20% equity dilution. By the Series A stage, the rationale is as follows: the project has accumulated more data, its business model is clearer, and the product should have reached at least its second version; generating some revenue—specifically gross merchandise value (GMV) or transaction volume—is preferable. Under these circumstances, the company can raise between RMB 10 million and RMB 30 million, or an equivalent amount in US dollars.

IV. Advice for Entrepreneurs: The Importance of Cash Flow

My understanding is that there are two types of startups: one that is self-sustaining and responsible for its own profits and losses, and another that burns cash to build a large-scale platform.

Here is a sincere piece of advice: not every entrepreneur is suited to burning cash to build a platform-based enterprise. There is a prevailing notion known as the “Series B Cliff.” Why? Because the current macro financing environment is no longer as optimistic as it once was, and Series B investors have become exceptionally demanding in terms of risk and return expectations. In the early stages, founders could largely rely on passion and storytelling; however, by the Series B stage, the reality turns harsh, with intense pressure placed on metrics such as data performance, revenue, and profitability.

Therefore, in the early stages, entrepreneurs must remain agile and adapt flexibly to market financing conditions and their team’s capabilities. At times, this may require making certain compromises; achieving break-even status is the safest approach. Why? Because on the entrepreneurial journey, cash flow is paramount—it is the fundamental baseline for corporate survival. In particular, we must avoid being overly optimistic when projecting the pace of fundraising and the amount of capital that can be secured.

My assessment is that since the second half of this year, investment firms have been slowing their pace and tightening their criteria. In this environment, a project’s cash reserves are particularly critical. If you can secure RMB 3 million more than your competitors, you can extend your runway by 15 months, thereby increasing your chances of securing the next round of funding and outlasting others in terms of survival.

V. Q&A with the VCBeat Community
Alright, we’ve now entered the interactive session. The VCBeat Shanghai support team has been truly impressive:

Q1: Mr. Zhou, hello. I’d like to ask a broader question. Currently, the investment community is heavily focused on consumer-facing (2C) services. As you just mentioned, business-to-business (2B) models tend to gain momentum more slowly. Are you considering 2B opportunities?

Zhou Mi: You are quite right. The directions can be broadly divided into B2B and B2C, with B2C being hotter. However, we also pay close attention to B2B, as we have a substantial enterprise services investment portfolio, including Xiaoshouyi (Neocrm), Beisen, and Yonghong BI. If you are engaged in the B2B sector, you should be familiar with what these companies do. Overall, big data, human resource management, and sales management are still based on SaaS models. We have also invested in QingCloud in the cloud computing field.

We are very fond of the B2B direction. This sector is characterized by a slow start and high technical barriers, making it difficult to displace incumbents once established. However, B2B companies rarely command lofty valuations, as their future prospects are tangible and predictable. When running the numbers, we often see financial projections such as RMB 2 million in the first year, RMB 6 million in the second, and RMB 20 million in the third—forecasts that fail to generate much excitement. In contrast, the B2C space is different; with numerous comparable benchmarks and existing B2C valuations available, it appears to offer greater upside potential.

The cases I have reviewed recently are all solid B2B ventures focused on specific niches, with reasonable valuations and promising potential for strong future returns. The B2B sector rigorously tests a company’s capabilities, particularly in product development and marketing. For instance, while many assume that R&D expenditure is the largest cost driver for SaaS companies, marketing expenses actually amount to three times their R&D spending. Therefore, we advise entrepreneurs not to expect profitability simply after raising RMB 20–30 million; the reality is far more complex, as substantial capital is consumed by market expansion efforts.

Currently, there are not many institutions interested in the B2B sector, so if you are engaged in B2B business, you face limited options, which is a problem.

Question 2: My first question pertains to the medical aesthetics sector, where there are currently at least seven or eight similar projects. What is your outlook on the future market? Second, which areas are you currently focusing on? Third, could you elaborate on your investment mandate?

Zhou Mi: Let me first address the latter question. Frankly speaking, I am open to all project opportunities, as Matrix Partners China is positioned in the broader healthcare and health wellness sectors. Our evaluation criteria focus solely on whether a project is of high quality and offers strong cost-effectiveness, without restricting ourselves to any specific sub-sector. Furthermore, investors are frequently asked about their investment priorities. My perspective on this is that, under the guidance of our overarching investment thesis, we conduct thorough explorations across each sub-segment rather than confining ourselves to a single domain.

For example, in February and March of this year, I intensively examined doctor-focused and image-based social platforms, then began researching O2O models in the healthcare sector. We also conducted a comprehensive review of projects involving home-visit rehabilitation therapists, nurses, and caregivers. Therefore, I believe there is no fixed standard; as long as a project is attractive, we will pursue it relentlessly.

Regarding the medical aesthetics sector you just mentioned, many companies in this space have already secured funding. I am not at all concerned about this; the next phase will involve fierce market competition for these projects, akin to the battles seen in food delivery and group-buying platforms like Meituan. The lead investor in Gengmei’s latest round is VIVO Capital, a major U.S. investment firm. This marks their first investment in China’s internet healthcare sector, and both their China team and the U.S.-based investment committee attach great importance to this deal. Their philosophy places significant emphasis on shifts in the competitive landscape. They believe that even if it requires substantial cash burn now, capturing market share is essential. Consequently, we can expect intense market competition ahead, and after the dust settles, only one or two strong players are likely to remain.

Additionally, I would like to highlight another trend: investors from industrial capital have begun to strategically focus on the medical aesthetics sector, with several large internet-listed companies preparing to enter this market.

Q3: Hello, Mr. Zhou. How do you view the medical imaging niche, and how has Matrix Partners China positioned itself in this sector?

Zhou Mi: There are several directions we are currently pursuing. First is physician social networking; we have just invested in Yitu, where medical imaging serves as a component of social interaction. Second, I am particularly focused on the socialization of medical imaging, specifically third-party imaging and testing centers. This strategy requires significant resources, including capital investment, the financial strength to purchase equipment, and established industry connections.

{Finally}, here’s some good news: if you follow VCBeat on WeChat, you’ll see an invitation from Matrix Partners China. Next Wednesday, Matrix Partners China will host a brand Chuangxianghui Events ←_← Please click here, bringing together a constellation of industry leaders, including Zhang Ligang from iKang Guobin, Yu Ying, the “Superwoman of Emergency Medicine,” Fan Jing, a specially appointed researcher at the National Health and Family Planning Commission, and Shen Farong, founder of Xingxiangyuan and President of Zhejiang Greentown Hospital. We have also invited entrepreneurs in the internet healthcare sector to join in this dynamic exchange of ideas. You are all welcome to partake in this feast of thought.

Special Acknowledgements:

• VCBeat’s Think Tank Symposium, generously supported by Matrix Partners China, and the selfless sharing by Mr. Zhou Mi, Director at Matrix Partners China, with the VCBeat community




• Ms. Zhai Jingbo, the initiator of HiMed’s initiatives, made thorough preparations for this Think & Share Session. We sincerely hope that the HiMed Medical Salon will continue to thrive, as we collectively build a robust incubation platform for healthcare entrepreneurship.




• IC Coffee provided such a wonderful venue that VCBeat Think Tank will host more salons in Shanghai in the future.




• We thank the entrepreneurs and friends in Shanghai for their support and participation in the VCBeat Think Tank. Moving forward, we will continue to provide online coverage and host offline salons in the Yangtze River Delta region, jointly promoting the rapid development of internet healthcare.

Preview:

We will continue to share more highlights from the Shanghai event. The exciting content from the Hangzhou stop on August 19 will also be compiled and shared with you soon. Moving forward, VCBeat Think Tank will visit more cities across China. Stay tuned to VCBeat!