Susie in Shanghai

Last week I met with a woman working for Morningside Capital, an international investment group founded in 1986.  The firm has investments in North America, Europe, across Asia- Pacific, and Mainland China.  The company focuses on investments in innovative technologies and novel business models in the life science industry.  Although I didn’t have a lot of knowledge previously about private equity/venture capital firms, I felt like an expert by the time we finished talking (ok…that might be an overstatement). Still, the talk was extremely informative and interesting. Read the interview below for Morningstar’s mission and her take on hot investments in China:

Q: Tell me a little bit about your background and the path that led you to your current position.

A: I am originally from Shanghai and completed my education and PhD. here.  I actually was an obgyn in Shanghai for a few years, but decided to come to the U.S. to pursue a master’s degree in biochemistry and become board certified there as well.  I quickly realized how different research was in comparison to being a doctor.  I felt frustrated with the research because I wasn’t having any meaningful interactions with other people.  At that point I started looking into other fields and realized I was very interested in business. I decided to transfer to the business school at St. John’s in New York.  I pursued degrees in marketing and health care management, but at that time I was still planning on getting my medical license to be a doctor in the U.S.

Ten years ago when I finished school I realized what a unique combination my medical and business degree was, so it was very easy for me to get a job.  I decided to work for the New York based company, Continuum Health Partners. With this company I was able to rotate to all different departments over two years to get exposure to the different aspects of business.

After 9/11, the mentality of those around me began to change.  Everyone I knew began looking at the opportunities available in China.  This was the first time I seriously thought about where I wanted to live—did I want to be a part of this amazing Chinese development or become a New York resident? After talking to a lot of people I decided to move back to Shanghai to participate in the exciting growth. I thought it would be a once in a lifetime opportunity.

Seeing how much Shanghai had changed in just a few years was amazing.  The people, the city, the mentality, the wealth—everything was different. I came to Morningside Capital in 2003 and entered the PEVC (private equity venture capital) industry.  I just met the founder of the company and then decided to join. I’ve been with them for eight years now and it’s been a great experience to grow with the industry and the company.

Q: Can you tell me a little bit about what you do specifically in your current position?

A:  We invest in young companies with promising technologies in IT and biotechnology. Some are service companies such as hospitals, labs, CROs, and diagnostic services, but we also invest in products, such as a new drug being developed. It’s a pretty standard process; I’m the total project leader and coordinate with IP lawyers, scientists, etc. We also do negotiations and since we focus on early stage investments, we have a lot of bargaining power. I typically will take a board seat in a company versus micromanaging and interfering in daily operations. We help more in developing the company’s goals, financial and otherwise.

We also aid foreign companies in setting up branches in China for the first time.  We help them understand the differences of running a business here and the unique regulatory rules.  It’s really fun because we are essentially a cofounder of the company. We then follow our investments, monitor how they are doing, and conduct negotiations when they are at an exit point.  We can help them get listed or bought out by a bigger company; we are there from startup to maturity, so it’s a very interesting process.

Q: Tell me the way that the market has evolved in the last few years from the perspective of someone in private equity?

A: There has been very rapid change in China. The amount of money available for investments in technologies was fairly limited in the past and health care only represented a tiny portion of investments.  Most of the money was coming from local PE and VC firms versus the government.  Today, people almost think there is too much money! There is funding coming from foreign companies, local companies, and the local governments, which gives start-ups many choices of sourcing of capital.

Additionally, a few years ago everyone was extremely cautious and wanted to invest in solely non-risk companies. Now, more and more firms are investing in the early or growth stage of the company.  Every PEVC company is also hiring specialists in the biotech, health care, and life science industries.

Q: You mentioned earlier that you work with many patent lawyers and in the past I know China has had a reputation for not completely respecting patent laws. Do you think there is a lot more trust now with intellectual property here?

A: IP is definitely being developed here, but Morningside takes a very conservative approach to patent protection.  We don’t use local council at all; we have three in-house patent lawyers and also strictly work with foreign external firms.  With biotech there is so much value in IP so it is not worth the risk of filing a patent in China.  We always file a patent in the U.S. first.  IP diligence is very important before we make an investment.  I always say that if there is one place to save money, it is definitely not on patenting.  In China you need to have a very strong IP legal team.

Q: What do you think the biggest opportunities are right now in terms of small companies getting started? What kind of companies do you see making the most traction— are they IT, chemical, etc.?

A: The hottest investments in China right now are channel companies. They are typically distributors that buy a product from a company at a discount and then resell them at a higher price. The most attractive types are those providing some type of value addition such as technical competence and support, possible accessories that go with products, or even, in the case of reagents, some type of packaging into package sizes more convenient for local users. Distributors are very important in a huge country like china because companies can’t set up their own sales forces quickly. They are also useful because the culture is so diverse in all the different regions and relationships are so important here, especially if you are selling to a government-owned facility. Oftentimes large companies opt to eventually sell direct and to buy those high quality “channel companies” so they can have direct access to the end user and ultimately sell more because they can pay to add higher caliber sales personnel.

Our focus at Morningside is more on tech. companies and drug discovery.  We only invest in highly novel technologies that are at the forefront of their research area. If an innovative technology has clear potential and there is a market for it in China, we will get the license from the US (typically Harvard, Johns Hopkins, etc.), patent it, and develop it here in China. We also invest in companies that have a novel business model.  For example, the hospital labs in China cannot conduct molecular pathology work, so there is a huge and empty market for this service. We invested in the first esoteric lab in China when it was still in the registration process and now the company does testing for over 600 hospitals in China. The Mayo Clinic is making their first Chinese investment with this company.  It is difficult to find a completely new business model to invest in, but it is very important.

I personally think that commercial insurance will also be a hot investment in the future.  Since everyone currently has to pay for health care individually, I think there is huge potential for this market once the government lets insurance companies compete. I could also see a lot of potential in elderly housing and hospice services because we have a huge aging population. Neither the government nor hospitals are able to fund care for everyone, so there is a huge need for that.  Strong management will be needed in order to implement this type of service to ensure high quality and high standards.

Q. I’d like to run some ideas by you as to why the life science industry has been in such demand in China.  First, with the emerging middle class and a stronger economy, there are more people wanting better health care and thus better medicines.  Unfortunately, importing a lot of the western medicines is simply not affordable and as a result, there are a lot of new companies opening up in China that can produce westernized medicines.  Additionally, there are many foreign scientists coming to China to teach the local scientists about the trend to develop large molecules, and hiring a PhD. in China is much less expensive than in the U.S. Third, there has been an explosion of wealth here and people want to invest their money in biotech, IT, and other hot industries. What is your perspective on these factors?

A: Morningside was founded in a way similar to the third factor you mentioned.  Our chairman, Dr. Gerald Chen, came from a very wealthy family and wanted to invest money in something he was interested in—science. Health care as you mentioned is of course a booming industry here in China, as well as in the U.S. for that matter.  The Chinese government will always invest in this industry and give incentives to these companies.  You also mentioned people expecting better care, which is definitely true.  A higher income equals higher standards.  A few years ago, maybe one out of twenty people would want a yearly physical; now, everyone wants it and expects it from their employer.

In the past, everyone relied on TCM (traditional Chinese medicines) or had to import their western medicines.  China never made it’s own compounds, but this will definitely be a changing trend.  China will not only be making it’s own drugs, but they will be improving the technologies of past drugs.  This is an extremely enticing field to invest in not only because of the financial returns, but because it is very rewarding to help people and bring them the medicines they need.  Morningside is not a typical VC firm because we want a more qualitative versus quantitative return.

Q: What else does it take at Morningside Capital to get you interested in a small business? Do they have to be a certain size or stage of development?

A: Overall, we mainly focus on very early stage investments.  We will either license out a technology or be the first investor in a newly formed company.  With drug discovery, we get involved in the early pre-clinical stage.  However, for a service or channel company we won’t invest until we see a scalable, profitable business model with a strong management team.

Q: What is the interplay between Shanghai and Beijing as to who is getting most of the funding?

A: In China, Morningside has offices in Honk Kong, Beijing, and Shanghai so we are like big family and teamwork is very important. Hong Kong is the headquarters for Asia and is mostly an administrative office. Shanghai and Beijing split up work on a regional basis—Shanghai mostly deals with investments in South China and Beijing, the North. Sector-wise the Shanghai office is more focused on health care investments and medical devices whereas Beijing focuses on biology, pharmacology, and drug discovery. There really is no clear-cut line though; it is always a team effort.

Q. What do you like about working in private equity?

A: My work is very exciting. It’s a very positive field because a) there are great financial returns; b) you get to see the companies you invest in grow and succeed; and c) many of the companies I do business with provide services that are benefiting other people. I’m constantly busy, travelling, and under pressure, but the satisfaction I get from the work is worth it.  I am very happy to have this job.

Q. Are there many other women in your field?

A: There are definitely more men than women, but I feel like this is changing and more women are entering the industry.

Q: As a recent graduate, can you offer me any advice in terms of business and which direction to head?

A: If you are sure you don’t want to pursue science alone, don’t go for your PhD.  A master’s degree will give you enough of a technical background and will let you develop your own research style.  If you are interested in being a lawyer or a banker, you have to realize you will be a service provider.  Your financial returns can be calculated based on the amount of hours you put in serving the client.  If you would rather be on the buying versus sales side of business, I would suggest going into a field like mine because I think you have more control over your own success. You could find an analyst job in a PEVC firm before pursuing an MBA and then you will be in a better position when you re-enter the industry.  This has just been my personal experience, but I definitely would recommend it!