Q4 2019 Quarterly VC Update: Nisa Leung on the State of Venture Capital Investing

In conjunction with our Q4 Venture Financing Report, I sat down with Nisa Leung from Qiming Venture Partners to get her take on the state of venture capital investing. It is worth acknowledging that at the time of drafting the interview questions, coronavirus was just beginning to appear in China. By the time we went to publish this interview, it was a significant factor in the state of venture capital investing and, more broadly, our global economy. This discussion spotlights the burgeoning impact of the coronavirus on the Chinese market, as well as how Qiming’s portfolio is assisting with the response.

Key insights from Nisa Leung:

On how US/China trade tensions are impacting VC investing: China tech and healthcare investments into the US have dropped 90% as a result of trade tensions. In the meantime, more European and Southeast Asian companies are fundraising in China.

On the economic impact of coronavirus: Many businesses are adversely impacted given China and, increasingly, many countries across the globe are taking a cautious approach to control spread of the virus. The financial market had one of its biggest drops since 2008. In some sectors, we have seen an uptick in their business, including online education, food delivery and, in the healthcare sector, diagnostic and lab tests, to name a few. Companies that have filed for an IPO have delayed, as it is difficult for management teams to go on roadshows with the quarantine requirements. We had a Shanghai Stock Exchange Science and Technology Innovation Board (STAR Market) virtual IPO recently, where the official ceremony was postponed but the trading of the stock began and performed very well. We hope things will be back to normal soon.

VC deal terms favoring investors: The investment pace has definitely slowed down in Q1 in China, but we are still seeing activities as investors perform their due diligence online and through video conference. One of our companies just closed a $100 million round, and one received six term sheets last week. 

Based on the Cooley data for the quarter, how does your experience in the market compare?

The US market has done really well the last quarter or so, but China is quite different. In the last six to nine months, China venture investing slowed down for a few reasons. First, it is difficult for VC funds to raise money, especially in RMB. In the last 18 to 36 months, Chinese government-driven LP investments have slowed down significantly, and thousands of new venture funds that were launched with government-encouraged funding have closed down or become inactive. Many such funds had management teams that had little or no background in venture investing or technology.

Second, with many of the 2019 US-listed Chinese tech companies still under water and with the varying performances of mega-unicorn IPOs such as Xiaomi, Meituan and some of the biotech companies under the new Hong Kong exchange regulation, investors adjusted their pre-IPO valuations to levels where the valuations are less exuberant.

Valuations have come down in the last six to nine months in general. But for high-growth companies or ones with a shorter pathway to profitability, the valuations can still achieve a healthy step-up. Companies that are burning lots of money to gain market share – it is much harder for them to raise money, and we have seen insiders needing to step up and provide bridge loans.

How have trade tensions between the US and China impacted the Chinese venture landscape? Has Qiming’s investment strategy changed? Have the protests in Hong Kong had any impact?

More than 90% of investments decreased from China to the US because of the trade tension and CFIUS. And different law firms have different interpretations for each potential transaction, so investors tend to shy away from uncertainties.

China tech and healthcare investments into the US have dropped 90% as a result. In the meantime, more European and Southeast Asian companies are fund raising in China. At Qiming, we have not changed our strategy. We still focus primarily on China investments, but we have also made investments in other regions if opportunities arise.

The Hong Kong protests had minimal impact on China venture investing. As for the Hong Kong financial market, the second half of 2019 was a very active period at the Hong Kong Exchange, with a record number of filings and with the successful IPOs of Budweiser Asia and Alibaba Group’s dual listing. We also saw a successful IPO for one of our companies, Venus Medtech, which was the first medical device company to list in Hong Kong under the new rules, and it was one of the best performing healthcare IPOs in 2019. So the Hong Kong protests have had a minimal impact on the financial market.

However, there is more of an impact on the financial market from the coronavirus outbreak. It is difficult for Chinese management teams to go on roadshows to meet with the investors due to quarantine requirements. That will probably delay some IPOs for a couple of months, until the coronavirus subsides and then things will hopefully return to normal.

Another area is the STAR Market. People are concerned about whether or not the coronavirus may have an impact on company listings in Asia. We had a STAR board virtual IPO last week for Roborock, where the official ceremony was postponed and the trading of the stock began and performed very well. We hope things will be back to normal soon.

Your focus is life sciences. Does Qiming use the same metrics to evaluate healthcare investments in China? What measures are the life science companies taking in China for the coronavirus?

Qiming China has invested in more than 107 healthcare companies so far, and many of them have actually grown to be leaders in their subsectors – quite a few of them have gone public or are planning an IPO soon. After graduating from Stanford MBA, I returned to China to co-found a few healthcare companies, and the China healthcare industry was nonexistent. In 2003, when I went to the largest medical equipment conference in China, almost all exhibitors were exhibiting the same products – namely patient monitoring systems and black-and-white ultrasound machines. These were the only products that were manufactured in China, but every year since then, new products have been introduced in the market, often times copying what was available internationally. Now, almost all products available globally are developed and manufactured in China, so this is very encouraging.

In fact, there is stark contrast as to how the sector has grown in the last 17 years. During the SARS outbreak in 2003, I was asked to introduce infectious disease experts to Hong Kong government officials to find ways to tackle SARS, and China had to solicit overseas help to develop the diagnostic tests, as it had no capability. Today, over 100 companies in China have developed different diagnostic tests for the coronavirus. China has just donated a batch of diagnostic tests to Japan. Over 100 clinical trials are ongoing for coronavirus treatment in China, and only three of those clinical trials are outside of China. Half are using traditional Chinese medicine to boost immune systems, and half are using Western medicines that are developed primarily in China. Moreover, one of our companies, CanSino, successfully developed the Ebola vaccine currently deployed in Africa, and the central government has requested that they develop a coronavirus vaccine. The CEO was in Geneva for the WHO innovation forum two weeks ago to discuss ways to combat the virus.

Do you have any thoughts about the capital markets going forward? Are China-based issuers currently favoring US or HK markets? Do you believe M&A will be a favored exit option in the near term?  

We are positive about the capital markets going forward. When the coronavirus subsides, we will probably have around 20 companies looking for IPOs in the next 24 months. Some of them have already filed or are gearing up, and many of them are in the healthcare sector.

The benefit of Chinese companies is that we have multiple options for exits, including the US, Hong Kong and Chinese markets. The exit channel is dependent on the company structure; the management team’s preference about whether to raise USD or RMB; the management team’s vision for the company and whether they would prefer a more global connectivity, thus listing in the US and Hong Kong; the potential investors for the types of companies, etc. Sometimes we also see companies prefer Chinese or Hong Kong markets simply due to language reasons.

What is really interesting is that we are seeing increasing interest from global mutual funds to invest in quality healthcare and tech IPOs on the Hong Kong Exchange since the change of the rules. The quality of the overseas investors is improving, and investors are increasingly realizing that there are some top-notch companies listing out of Hong Kong on which they should not miss out.

I believe M&A will continue to be a next option. In the US, M&A accounts for around 90% of healthcare exits. The number is much lower in China, where the majority of the preferred exits are still IPO. But as more global and local healthcare companies are interested in acquiring locally developed technologies and channels, the M&A proportion will continue to grow. As for tech, BAT remains to be an active acquirer. Two of our cybersecurity companies were acquired by Alibaba within a week in Q4, and we see a continued interest from MNCs and local tech giants to remain active.

About Nisa Leung

Nisa Leung is a managing partner of Qiming Venture Partners, leading its healthcare investments. She has been recognized by the Forbes Global 100 VC Midas List in 2019, named Top 3 Best Female Venture Capitalists in China by Forbes in 2018 and won Venture Capital Professional of the Year by Asian Venture Capital Journal in 2017.

She sits on the boards of Gan & Lee Pharmaceutical, Zai Lab, Venus Medtech, Nurotron, dMed, CanSino Biologics, New Horizon and Insilico Medicine, among others. Her other investments include Aeonmed, Berry Genomics, CITIC Pharmaceutical, Crown Bioscience, Novast Pharmaceuticals, OriGene Technologies, Richen, Wuxi Leiming, Chain Medical Labs, Qiagen Suzhou, Cure Genetics, Sinocelltech, Apollomics, SinoUnited Health, Schrödinger and Jacobio Pharmaceuticals, and others.

She is a visiting lecturer at Harvard Law School, a founding vice chair of PhIRDA Investment Committee, a committee member of Hong Kong Innovation and Technology Development and Re-Industrialization and a member of Stanford Graduate School of Business Advisory Council. She also serves on the board of trustees of the Hotchkiss School and is a board member of the Hong Kong Palace Museum.

Prior to joining Qiming, she was co-founder of Biomedic Holdings, with operations and investments in medical devices, pharmaceuticals and healthcare services in China, including NovaMed Pharmaceuticals and U-Systems. Nisa was venture partner of PacRim Ventures in Menlo Park and was previously with Softbank/Mobius Venture Capital.

Nisa earned her MBA from Stanford Graduate School of Business and a BS from Cornell University.

About Qiming Venture Partners

Founded in 2006, Qiming Venture Partners is a leading China venture capital firm with offices in Shanghai, Beijing, Suzhou, Shenzhen, Hong Kong, Seattle, Boston and the San Francisco Bay Area. Currently, Qiming Venture Partners manages seven USD funds and five RMB funds with more than US$4 billion assets under management.