Reid Hoffman, the founder of Linkedin, and his pal, Peter Thiel, one of the Silicon Valley’s pioneer venture capitalists, visited Shanghai this month. I was fortunate enough to attend a forum with them where they discussed how they met at Stanford University, and their early careers as members of “PayPal Mafia”. They also talked about their individual pursuits: Reid created Linkedin, and Peter invested in many of Silicon Valley’s successful companies such as Facebook. During the discussion, I was deeply touched by their entrepreneurial spirits and how venture capital can help shape the technology industry. After the forum, I could not get the question out of my mind – Where is China’s venture capital and how it is functioning?
I had never even heard of the phrase venture capital when I was a college student ten years ago. It was not until the first a couple years in the United States that I caught this phrase somewhere by accident. I found financial market and business venture so intriguing that I even took some courses in the business school to learn more. Thinking back, there was at least one source of venture capital in China when I left the country to pursue my graduate degree—the government. Around the year 2000, the Chinese government started to heavily invest in real estate, providing cheap land and seed money to private companies. Another big investment by the government that I know of was in the pharmaceutical and biotech sector. About ten years ago, the government realized its strategy for economic growth relying on cheap labor and low end manufacturing was unsustainable. Since then, it has invested billions of dollars annually in many universities and academic institutes and has built many new translational science centers in hopes of boosting industry and generating some blockbuster products. The investment results have been mixed. Although extremely large returns have been realized from early investments in real estate, the country is in risk of a bust from the current bubble. On the other hand, the investment into public research institutes resulted in no more than a blossom of fancy publications.
Compared to traditional venture capital deals, where a group of highly specialized people make decisions in round table meetings, the picture of a big government functioning as a source of venture capital might not look very typical. Some might wonder if there is a trend or hope for a growing Chinese private venture capital scene? Fortunately, I tend to think yes. Recently, I received requests to evaluate data packages for many biotech startups that are looking for financing. The requests are mainly through friends who work for private investors. The stories are all similar. These private investors made a fortune during the real estate mania in the past decades. As the market is cooling down, they are looking elsewhere for a return on their capital. Many of these venture capitalists are delving into the uncharted waters of the pharmaceutical and biotech sectors. I guess this is why I have received so many requests.
If these investors are China’s baby steps into the world of private venture capital, private pharmaceutical companies represent a more mature form of biotech venture capital. A friend recently landed a new job in a domestic pharmaceutical company and initiated a new department of in-licensing. The company is one of China’s top generic drug makers and wants to expand their business into innovative medicine. To do this, they need a pipeline of experimental drugs in different stages. The strategy they are taking is to invest in small biotechs for co-development or to license early stage products from other companies. My friend’s job is searching for and evaluating projects and products, and this is why he joined this company. The company is ambitious, looking at both domestic and international market to satisfy their appetite for growth.
Things become more interesting when investment goes both directions. That is, international venture capitalists also invest in China’s biotech companies. Indeed, Lilly Ventures in China, an internal venture capital branch of Eli Lilly that oversees their business here in China, just in-licensed two clinical stage products for Eli Lilly from a Suzhou based domestic biotech company.
This may not sound new by international standards. Private venture capital is already a mature business in the United States and multinational pharmaceutical companies’ internal venture capital groups have been scouting new medicines for decades. However, considering that ten years ago a college student at one of China’s leading universities had never heard of venture capital, the change in China is huge. I am excited to witness how business venture creation and venture capital will foster each other in the decades to come. I want to witness the history in the making. I better not blink.
Quan Zhou has studied and worked in the pharmaceutical center of Boston and biotech center of San Diego for eight years. He moved back to China in 2014 and started his career as a drug discovery scientist.