Between China’s huge growth in recent years, and reimbursement concerns (and increased taxation) on US medical devices, many startups are eyeing China as both a source of funding, as well as a primary or secondary market for their products and solutions. This strategy has great potential. But there are also several very important considerations and potential mistakes that entrepreneurs considering this option must be aware of to execute it successfully:

  1. Your product should be at a more advanced stage than for the average Western investor.

Chinese investors have a relatively low appetite for risk compared to their US, and especially compared to their Israeli counterparts. There are multiple cultural and practical reasons for this.

Culturally, this may have to do with the older generation of Chinese investors, who lived through China’s Great Depression (or grew up in its aftermath). As a result, the idea of “gambling” on an innovative, yet early stage concept is not very appealing to many Chinese investors.

Practically, it has to do with the synergies and resources that Chinese investors usually can bring to the table. A US or Israeli investor funding an early stage healthcare analytics startup may be able to connect them with a complementary population health or data security firm in their (or their colleagues’) portfolio(s). But where the Chinese investors can often add value is in areas such as:

  • Rapid prototyping
  • Sourcing and manufacturing
  • Regulatory approvals
  • Distribution channels

This means that if a Chinese investor puts their money into a very early stage startup, there will be relatively little they can do to help them advance their product. So they will basically be just waiting and hoping that the company can arrive at a stage where they (the investor) might contribute more value. While there are of course early stage investments made by Chinese funds, the above reasons explain why a disproportionate number of investments in Israeli startups are made at a later stage, especially compared to Israeli and US investments in recent years.

  1. Be sure to investigate and fully understand the Chinese investors’ and distributors’ intentions and incentive structure

Another trap that startups can fall into is “partnering” with an investor or other Chinese stakeholder whose interests are not aligned with their own. While many startups are understandably concerned with the threat of their intellectual property (IP) not being protected in China, most do not properly evaluate the other risks involved, including those from the actual investor/distribution partner.

One of the worst case scenarios of choosing the wrong investor/partner is that a startup will need to give up their Chinese distribution rights to the wrong entity. Another damaging scenario is one whereby a lot of time and other resources are wasted, maybe even equal or greater than that of the investment itself. Some of the goals of Chinese investors that may not be aligned with those of the startup are:

  • Winning a contract (unrelated to the startup’s business) from the local government in exchange for bringing startups to the city or province (to boost the regional “innovation stats”).
  • Receiving matching funds, tax incentives, or land from the government (for the same reason as above) that will not go towards additional investment in the startup.
  • Gaining access to a particular component or material design involved in the production of the product.

Being aware of the local incentives on the Chinese side, and investigating them before making a commitment, is a step that Western entrepreneurs are not generally used to taking. But it is one that will be worth it in the long run for startups seeking to gain from the huge potential of the Chinese market.

  1. The health care sites and product decision making processes are very different than in the US.

In the US, two-thirds of hospitals are not-for-profit and the remaining third is split between public and private.  Despite significant growth in Chinese private healthcare, most of the hospitals are still publicly owned and managed.

In the US, 21.9% of hospitals are public, and they account for just 14.1% of hospital stays.

Private hospitals (includes for-profit and non-profit) in the US are 57.0% of total hospitals, and account for 72.8% of stays.

Patients with complex conditions are more likely to be treated at private hospitals as well. Since the decision-making processes at private hospitals are relatively decentralized and the complexity (and therefore demand for advanced technology) is higher.

Compare that to China, where the majority of hospitals (62%) are still public. Of equal importance, of the hospitals designated as Class I (primary care/prevention), Class II (regional general care), and Class III (high standards, advanced technology), only 10% (1,399) are Class III, which is likely where demand for cutting-edge innovative hospital technology might come from.

What this means for medical and healthcare startups interested in China is that if you are focused on cutting edge technology, your market will be smaller. While there are definitely exceptions to this (for instance, in Q2 of this year, Israeli firm Mazor Robotics sold 27% of its nearly $1mil per-unit device to China, which accounted for 60% of its non-US sales), the largest opportunities in China are still in bringing accessible technologies, such as fast, low-cost diagnostics, imaging, and surgical solutions. These are the types of solutions that will add value and be affordable to the vast majority of hospitals (and clinics) that must treat large numbers of patients, but refer elsewhere for complex cases such as advanced cancers, aggressive cardiac surgery, and others requiring ultra-hi-tech solutions.

mHealth is another huge opportunity (Chinese are relatively comfortable using apps to diagnose and navigate health care decisions–just like they often use mobile devices for shopping and banking functions). Pharmaceuticals in China has become a more difficult business recently, after the Chinese regulators have recently cracked down on a tremendous level of fraud in late 2016.

Rafael Mazuz, Managing Director of Diligence Wound Care Global, which provides services for multinational firms, investors, and startups involved in wound care and regenerative medicine products and services, adds the following about the importance of understanding the role of care sites and decision making processes for firms considering entry to China:

“While many of the healthcare challenges in China are similar to those in the Western markets, it is crucial for startups to approach it with an understanding of how the local referral systems and decision making processes work differently to connect patients with solutions,” he says. “For example, the problem of chronic and non-healing wounds in China is huge. But the number of specialty wound care centers in the country is only about 4 percent of the number in the US. That’s a significant disconnect when talking about how to get advanced medical products to the patients who would benefit from them. It doesn’t mean there is no opportunity, but it does mean that it requires a nuanced strategic approach.”

  1. The biggest opportunities are in bringing modern healthcare to the masses, not necessarily totally disruptive technologies to a few.

China generally has issues like basic capacity under control (whether it’s roads, housing, or hospitals). In fact, China has more hospital beds per thousand (3.8) than the US (2.9) (CIA World Factbook). But some of the most pressing diseases and causes of death in China are different than elsewhere. As a result, there are opportunities to make diagnosis and treatment of them more readily available to healthcare providers and patients.

For example, in China, the leading cause of death is stroke at 23.7% of total deaths, while in the US, it is the #5 cause, at just 5.1% (Source: WHO). Key differences such as these are important for startups developing medical solutions for China. For instance, an effective yet available solution to rapidly diagnose or treat strokes would clearly be a huge benefit in China, especially for patients who cannot easily access tertiary healthcare centers.

You Lyu, CEO of Vadi Ventures, a firm that supports partnerships between Chinese investors and Israeli entrepreneurs, offers the following advice, “Generally, Chinese investors looking for investment in medical devices from Israel are seeking not only disruptive technologies, but something that could be marketed easily. Instead of making the users accept new devices, modified ones that are less risky and not so expensive will be more welcome.”

This advice is also in line with the Chinese government’s official priorities to achieve by 2020. While there is plenty of money to be made in many aspects of Chinese biomedical device and healthcare, the highest potential innovations will relate to these key initiatives.

Conclusion

While startups targeting China for medical and healthcare investment and sales are accessing a huge market (and potentially much less competition), such an approach should consider the important risks and differences in the Chinese investment and healthcare ecosystem. It is worth addressing these and related concerns in the planning stage to avoid any costly mistakes or missed opportunities during both the fundraising and market entry phases.