CDH Investments

In an interview with StartupCity, Dr. Dan Liu, senior partner, venture and growth capital, CDH Investments, sheds light on the venture capital market in China and the progress Chinese startups are making.

Could you brief us on your roles and responsibilities at your current organization?

I am a senior partner at CDH Investments, one of Asia's leading alternative asset management firms, where I hold the position of managing partner for the angel fund and oversee the growth fund. With a focus on the Healthcare and Life Sciences sectors, I serve as the primary project officer and have gained recognition from reputable media and rating agencies in China.

My educational background includes a Ph.D. program in cancer biology from Vanderbilt and Yale University, where I also continued a short-term postdoc at Department of Surgery of Yale. Prior to joining CDH, I gained valuable experience at Bain & Company in Shanghai, where I used to provide management consulting services to multinational pharmaceutical, diagnostic, and healthcare companies. Currently, I am a board member in many public and private companies.

What according to you are the leading trends and challenges in the industry?

The Chinese capital market differs significantly from many others due to various factors, including cultural, governmental, and economical dynamics, making it more complex. One notable distinction lies in the behavior of entrepreneurs.

In China, many bootstrap their businesses and retain a substantial founder's share even during subsequent fundraising rounds, both before and after the initial public offering (IPO). This helps them maintain control over the company, while investors typically hold a smaller portion and lack control, despite having board seats. This is in contrast with the practices in the U.S. and other regions.

As a result, our investment approach in China requires a long-term commitment of around five to eight years, as the exit channels in the Chinese capital market are not as plentiful or efficient as in other foreign countries. But from the other side, we benefit from the high growth of economics and innovative industry development. We work closely with founders and entrepreneurs to offer value-added services like strategy consulting, talent acquisition, business collaboration facilitation, and resolving internal team-related issues.

" The Chinese capital market has transitioned to what can be called a 3.0 stage, with a focus on indigenous innovation rather than merely following the footsteps of the US or other developed countries, a 2.0 stage "

For example, regarding exit channels and share liquidity for healthcare companies, there are notable differences between China and other foreign countries. In the US and other markets, the IPO pathway is relatively clear, allowing biotech companies to go public even at the preclinical stage or before filing an Investigational New Drug application.

However, in China, although the Star board and Hong Kong stock exchanges have refined their regulations, a company typically needs to reach the clinical stage, most likely after the proof of concept stage—which takes about three to four years— before being eligible for public listing. The Chinese market has limited activity in terms of trade sales and mergers and acquisitions (M&A), unlike foreign markets. In the long run, I expect those activities would become more common.

This lack of activity in M&A is influenced by various factors, including government regulations on public companies, tax considerations, and strategic complexities. Chinese entrepreneurs’ preference to bootstrap their businesses, viewing such deals as limiting their aspirations in combination with other factors has contributed to the relatively inactive M&A landscape in China.

How has the impact of COVID been on the market?

The COVID-19 pandemic has adversely affected the Chinese capital market and the overall economy. Quarantine requirements hindered companies from conducting business and pursuing IPOs objectively, while sectors benefiting from the pandemic represented only a small portion of the healthcare system and economy.

Over the past 12 to 18 months, both the mainland China and Hong Kong stock exchanges experienced significant declines in their indices, with investments in the primary market dropping by approximately one-third to half compared to the previous year. Although people anticipate a return to normalcy this year, as of today, there has been no substantial bounce back, and the growth observed has been continuously weak.

How do you create improved investment or funding strategies?

In China's unique healthcare landscape, we capitalize on opportunities such as by providing affordable, user-friendly, and customized healthcare products. Our focus areas also include innovative fields like cell and gene therapies. For instance, I recently invested in a top-ranked macrophage cell therapy platform company specializing in next-generation CAR-macrophages. This company is set to enter the clinical stage later this year, demonstrating significant progress within a short timeframe.

We also explore sectors like synthetic biology, leveraging China's position as a leading global manufacturer and exporter. By embracing the trend of offering eco-friendly manufacturing, we align with our investment goals and the ESG principles championed by the Chinese government.

What is the future of the market in China?

The Chinese capital market has transitioned to what can be called a 3.0 stage, emphasizing a focus on indigenous innovation rather than merely following the footsteps of the US or other developed countries, , a 2.0 stage. Many startups aim to become a market or industrial leader in areas where they excel, rather than being a fast follower.

Startups in China are increasingly driven to become market leaders domestically while establishing a strong competitive advantage over foreign investors in pioneering global technology areas. We observe numerous emerging startups exhibiting this potential and actively working towards their goals.