AVCJ Awards 2022: Fundraising of the Year – Venture Capital: Qiming Venture Partners

Q: How challenging is the fundraising environment for China-focused managers?

A: Venture capital fundraising was difficult in 2022. It was much easier in 2021 when many GPs achieved great returns before markets declined. With the global downturn in public markets in the last nine months, LP interest in venture capital has decreased. One explanation is the denominator effect, which has left investors overallocated to alternatives. Another is macro uncertainty, such as the Ukraine war crisis, US-China tensions, and China travel restrictions. We were fortunate to close new funds amid the challenges.

Q: Will conditions improve in 2023?

A: There remain uncertainties in 2023: the Ukraine war is ongoing, inflation concerns in US and Europe still exist, and US public markets may continue to experience challenges in 2023. However, on a more positive note, global mutual funds and other investors may view Asia and China more favourably. Especially with China's re-opening, investors will be able to undertake in-person due diligence on companies for the first time in three years. This may motivate them to increase their investments and help boost market sentiment.

Q: And what about valuations, following the adjustments in many industries in 2022?

A. First, if public markets rebound, private market valuations will rise, with a usual lag of several months. Second, there are currently more than 130 companies waiting to list in Hong Kong. If the IPO window opens and the public market absorbs part of this backlog, private markets will pick up.

Q: Despite the difficult environment, Qiming’s eighth US dollar fund is twice the size of its seventh. How did you cultivate new LP relationships?

A: We have long-term relationships with many of our LPs, although it was not easy to meet people in person during COVID-19 given the international travel restrictions. Our funds have been small historically and minimum cheque size constraints made it difficult for some investors that have been following us through several vintages to participate. We were happy to include some of them this time and we were oversubscribed, even at our current size.

Q: Does a larger fund size signal a shift in strategy, for example towards growth-stage deals?

A: No, we have always been a seed and Series A investor. Most of our portfolio companies only have small teams of 2-10 people when we invest. We like to participate early, building long-term relationships with entrepreneurs and helping steer the direction of companies. Ideally, we continue supporting them in every round through IPO, but we have not always had enough capital to do so. A bigger fund will allow us to participate in later rounds, which also makes sense for our LPs as many of our portfolio companies have grown to become industry leaders in China.

Q: Are you looking to expand the team?

A: No, we're good. Our team is relatively small, even compared to some of the smaller funds in China. We have 15 people covering healthcare, and the overall investment team comprises about 30 professionals. It helps that we work with a lot of amazing entrepreneurs who have scaled companies basically on their own. Since March 2020, we've had 35 IPOs, and 26 or 27 of them are healthcare businesses.

Q: In Fund VI, 40% of the corpus went into healthcare. In Fund VII, it was 50%. How did healthcare become your core strategy?

A: Qiming has a long-term dual focus in terms of sectors. We started going deeper into healthcare 20 years ago and have since invested in nearly 200 healthcare companies. Many have become leaders in their respective industries in China. Our healthcare portfolio represents a dynamic ecosystem spanning all sub-sectors – biotech, early-stage drug discovery, medical devices, diagnostics, and healthcare services. Each sub-sector has its own route to success. On a broader societal and policy level, our investments are also in line with China’s 14th Five-Year Plan and its Healthy China 2030 initiative.

Q: There have also been significant valuation adjustments in healthcare specifically. What are your expectations for 2023?

A: In 2022, the XBI [which tracks US-listed biotech stocks] dropped about 65% and the MSCI China Health Care Index fell by about the same, but we started seeing an uptick towards the end of the year. Some companies bottomed out and have since gained 30%-50%. Largely due to COVID-19, the healthcare sector has been oversubscribed in the last three years, especially by generalist funds and crossover funds. Now, many non-traditional healthcare investors have shied away from the space and switched to portfolio management mode. It is likely that more than 20% of healthcare start-ups in the US and China will close. These cycles have happened a few times in the last 20 years. We believe now is a good time for strong entrepreneurs to build strong teams, focusing on R&D, corporate development, and other core business areas. The sector previously attracted a lot of talent as well as a lot of capital. Now, that talent is consolidating in the best companies.

Q: Did Qiming’s investment pace change in 2022?

A: Our investment pace started to slow down in 2021 because we believed that valuations were unreasonable, and the prudence continued in 2022. But we didn’t stop investing and have been working diligently on portfolio management. We've also been quite active in facilitating IPO processes for our portfolio companies.

Q: Which sectors are most interesting?

A: Consumer-related investment in China has slowed in the past year, and we’ve seen a lot of consumer internet-focused GPs migrate to Southeast Asia in search of new opportunities. Meanwhile, healthcare and health technology still receive much government policy support, along with semiconductors, clean energy, and sustainability-related industries.

Q: There was a lot of hype – and now there are some doubts – about artificial intelligence-driven drug development. As an early investor in this area, what’s your take on it?

A: We did feel the hype. We have been very selective in our AIDD [AI-driven drug design] investments, only backing a small number of companies, including Schrodinger and Insilico Medicine. We heard some TMT funds invested in 10-15 AIDD companies. This is still a nascent area, and we are waiting to see how AI-derived drugs turn out. A clearer picture will only emerge after data from phase-three clinical trials is released and drugs get approved.

Q: What is the biggest challenge or uncertainty around AI-driven drugs?

A: The bar is very high and far more difficult to achieve than one might imagine. The most challenging part is drug discovery and development, not the AI part. For traditional drug companies, that is the core activity – choosing the therapeutic area, discovering drug candidates, and developing clinical trial protocols. Some start-ups in the US and China have reached the clinical trial stage, including Insilico Medicine. It’s probably the only company in the world that utilises its platform both to identify targets and help design small molecule drug structures. And then it is the first company in China to launch clinical trials for an AI-derived drug. This led to a collaboration agreement with Sanofi that is worth up to USD 1.2bn, the largest AI drug discovery deal in Asia.

Q: There is also increased focus on novel drug discovery in China, but where should investors look?

A: Last November, the FDA [US Food & Drug Administration] approved a gene therapy drug for haemophilia developed by uniQure and licensed by CSL. It is the most expensive drug in the world with one-time treatment costing USD 3.5m. We have a portfolio company based in China with this drug in the pipeline, and the price will likely be a fraction of its US counterpart. I think this example illustrates why healthcare in China continues to play an important role in the global value chain, contributing to a more affordable and accessible solution for global patients.

Q: Has the balance shifted in terms of access to start-ups for US dollar versus renminbi funds, with the latter becoming more important than the former?

A: No, because it depends on what currency companies need for different types of operations. We still receive demand from our entrepreneurs for US dollars as they may plan to conduct clinical trials overseas or build global sales teams. Some companies prefer renminbi because it is easier to receive government grants, or they do not want to deal with the hassle of converting US dollars to renminbi.

Pictured: Nisa Leung of Qiming Venture Partners (right) receives the award from Yar-Ping Soo of Adams Street Partners

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