Reality Check on HealthTech in Asia
Last week, the Financial Times article Investors begin to sour on Chinese health apps by Tom Hancock and Don Weinland gave readers a brief overview and hypothesizes on the reasons behind China’s HealthTech investment hype fading and investors beginning to lose confidence in cashing in on the next big thing.
Ping An Good Doctor valued at $3Bn in a funding round last year helped contributed to the enchantment of the HealthTech market in China. We should however bear in mind that Ping An Good Doctor’s $500M USD series A in May 2016 which certainly put HealthTech in China on the investor map, is an outlier when compared with other Series A funding events across the world.
Asia, similarly to China, is experiencing a rapid growth of health-related apps and online solutions, driven by increasing consumer buying power and limited health systems, dynamics which are attracting strong investors interest.
The healthtech scene in Asia is still relatively nascent and, although we are seeing significant growth in HealthTech investments ($3B invested in 2016 alone), it is too soon to speak of exits as we are only at the beginning of this promising transformational journey.
A complex environment
Unlike the developed world, Asia is predominantly composed of developing economies with limited health systems and a fast growing in affluence consumer. These limited health systems create a radically different set of needs which are both capability and capacity in nature (awareness, access and affordability), unlike developed markets which are seeking greater efficiencies.
The Asian marketplace is an enormously attractive proposition. By 2030, 85% of predicted growth in the middle-class worldwide will come from Asia and the region will account for more than 50 percent of global middle-class consumption. In step with this explosive growth, and empowered by the proliferation of new digital technologies and connected devices, the highly evolved Asian consumers are taking greater ownership for their health and seeking relevant online solutions. However, most digital solution providers find building large user traction relatively simple, most are still trying to identify how to effectively monetize each user.
The perceived regulatory risk, as reported by the Financial Times article, is grounds for concerns. The challenge for healthcare regulators across Asia is to be able to adapt quickly enough to accommodate the pace of innovation without undermining their necessary role e.g. safety in the case of healthcare. Not getting this right will often prove to be a limiting factor for innovators!
“It’s better to be long-term greedy, than short term greedy”
Chamath Palihapitiya, Founder, SocialCapital
Founded by HealthTech entrepreneurs and investors with the mandate to build sustainable momentum in the Asia ecosystem, Galen Growth Asia’s take this opportunity to share its experience and guidance for the benefit of all interested stakeholders to address the real HealthTech ecosystem challenges in Asia.
Regulation plays a critical role in enabling a vibrant HealthTech innovation ecosystem and Galen Growth Asia believes that the creation of a HealthTech Regulation Sandbox (a regulatory sandbox is a constructed well-defined space), within which companies can experiment with innovative solutions in a relaxed regulatory environment with the support of a national regulator for a limited period of time while they validate and test their business model.
Health is essentially a gigantic, lucrative, and recession-proof business which faces constraints that are unfamiliar to non-health related tech. This is especially important on the investor side, where VCs might see explosive growth in consumer tech companies, but need to buoy those expectations with health companies. Almost every VC investor will emphasize that venture capital was designed to make risky bets on companies that have longer return timelines, so healthcare is an important place to be. Experienced investors also recognize that their portfolio will have a mortality rate which from available research, will range from 25% to 90% so HealthTech startups failing is and should be expected.
Over the past year, GGA has reported a significant number of healthtech investments deals across Asia which have been directed at B2C solutions primarily because these are e-commerce solutions with a health flavour. Savvy investors and founders we have engaged with have stated that a business model solely reliant on monetising the consumer / patient will require significant time and investment to generate the necessary traction and profitability and so have evolved their business model to include a B2B layer. Much like Google begun attracting users of its search engine at a loss for many years, it was eventually able to monetise each user via its advertising engine.
It will remain a challenge for crossover investors in Asia to fathom healthtech. There are simply too many core parts of the business cases that fly in the face of standard investment methodologies. Healthcare does not reduce to a nice ‘buyer – seller” model. The sales cycles are longer with the lead time to revenue even longer. There are inherent complexities such as large, slow-moving incumbent organizations, even slower moving governments, highly politicised regulatory frameworks and the need to integrate clunky legacy networks.
Healthtech defies the standard modeling used to assess other technology startup categories. The upfront investment, both technical and regulatory, can seem inordinately high. However, the LTV of a healthtech user is hundred to thousand-fold greater than an ecommerce user and with very low churn.
But in contrast, there are amazing unit economics where huge ARPU potential is matched by virtually zero churn. The US investors that have contributed to HealthTech’s growth are validating this premise.