Why We Do What We Do

Our Team (L to R): Joseph, Joice and Ed

TL;DR

• I never thought I’d start a VC fund and this article explains why :)
• Healthcare is important for society, it’s an attractive but difficult sector to invest in, and emerging Asia has underinvested historically
• Technology is at the core of developing new care models that allow for sustainable and equitable delivery, while allowing for greater investment to take place
• Impactful technologies can be found anywhere in the world, but platforms are harder to migrate than products
• Investing at the seed stage gives you more room to manoeuvre, deal selection, and allows you to take advantage of geographic arbitrage opportunities

Background

If you asked me 5 years ago whether my first angel investment in my mentee’s diagnostics startup would lead me to eventually leave my lucrative management consulting career to start the world’s first seed stage health tech fund dedicated to emerging Asia, I’d call you crazy.

Well, since that first startup, I continued to angel invest in healthtech, and saw the impact my investments were having on the world (and on my future retirement plans) outweighing that of my consulting engagements. I needed to do this full time, and definitely needed more help to realise greater impact… thankfully Joice and Ed answered the call and so here we are today!

Given the recent coverage of and interest in some of our portfolio investments, I thought it was time to share the rationale behind our fund’s triple focus on seed stage, global health tech solutions, and emerging Asian markets.

We often get questions like — why not a bigger fund? Why global? Why target emerging markets? Why not do biotech? Why do it in Singapore?

We like to think we have some pretty good answers (although not always what people want to hear), and I hope that with this short article we can address some of these questions as well as catalyse some interesting discussions. I acknowledge that we are just scratching the surface today and perhaps with more research and reflection, we can one day write a book on the same topic.

Why Healthcare for All

The Societal Case

The right to health is enshrined in the United Nations’ 1948 Universal Declaration of Human Rights and we have utterly failed at fulfilling this mandate. To this day, over half of the world’s population lacks essential access to healthcare[1]. Across Asia we estimate that there is a shortage of over 4 million doctors and nearly 30,000 hospitals based on World Bank and WHO data.

Moreover, existing resources (especially top institutions, both public and private), are generally concentrated within the top urban centres with quality decreasing as a function of distance (as top doctors do not want to live in the countryside). This does not bode well for the nearly 50% of Asians still living in rural settings, or those living in Tier 2 or Tier 3 cities.

Lack of access to healthcare has ripple effects beyond the afflicted individual — it affects families, employers, and societies as a whole. As a direct consequence, nearly 100 million people each year are being pushed into extreme poverty due to healthcare expenditures[2]. This is not unique to developing countries — medical expenses are by far the top reason behind personal bankruptcy in the United States[3] . Beyond the direct financial toll, there are significant indirect costs on overburdened family members, lost workplace productivity, and stunted developmental opportunities.

Even those who do have access to health often make an internal trade-off on whether to seek care due to time required, uncertainty of outcome, stigma, and potential expenses involved. Others simply take their health for granted until they can’t, incurring massive personal and societal costs.

The sad reality is that most of the causes of poor health are preventable or sufficiently addressable with the right care models and supporting technologies. These are the sorts of problem statements that we try to address.

Wait, What About Biotech?

Biotechnology or even the latest advances in surgical implants, while important to push the frontiers of medicine and science, generally do not address these fundamental problems that affect a far greater number of people today, given the emphasis on more focused, specific patient populations. The high R&D costs associated with these high-tech endeavours are invariably passed onto the patient or payor (with some new therapies going for upwards of $400,000 / course), thus almost by definition preventing widespread access for a long time.

Make no mistake — the definitive cures for many debilitating diseases (including cancer), severe traumas, and keeping ourselves ‘forever young’ will be found in biotech and/or cybernetics and they will be ultra-personalised. I would love to see the day where these types of solutions are the only obstacles between where we are today and a future without disease — it means we accomplished our mission of fixing the basics first.

The Investment Case for Healthcare and Why It’s Hard

Healthcare is an industry that appears to be quite resistant to global boom and bust cycles. As long as we continue to grow old and get sick, there will be demand — the only difference being the tools and treatments available and how they are financed. That being said, we strongly believe that expensive medicines and technologies will be more susceptible to downturns, especially from governments with tightening budgets, in favour of health system efficiency or preventative approaches. For example, given 50–80% of most global pharma company revenues come from the USA, what would happen if CMS (the world’s largest public payor) decides to start negotiating aggressively on drug prices?

Demand itself is accelerating — we will nearly double the number of elderly people in the next 15 years to 690 million people across Asia, while we continue to urbanise, get online, and become wealthier. The middle class in Asia, which has tripled to 1.5 billion people in the past decade, will continue to grow, driving healthcare consumption hand-in-hand. On a macro-level, spending on healthcare has outpaced GDP growth by ~1%/yr over the past decade across emerging markets and we do not expect this to change.

It’s wonderful to imagine how to take advantage of the $900 billion spending gap that exists even today in Asia (if you compare healthcare spend as %GDP vs global average), yet these dreams shatter when people discover (often the hard way) that investing in healthcare is very hard — and kudos to those who have survived unscathed.

The hard reality is that each health system is different and developed along unique paths — financing models, delivery models, regulations, training, foreign ownership, labour laws, etc., and assuming solutions that work well in say, Indonesia, would apply well to China is very risky, especially as the number of decisionmakers and stakeholders increase. You really have to understand each health system (politically and structurally), what ‘good’ looks like within the context of said system, how to properly value the opportunity, and when to exit, on a market by market basis.

Our hypothesis is that the rising demand and constraints on supply will provide the impetus for consumers, institutions and governments to spend more on healthcare if presented with efficient and effective opportunities to do so — especially if it means avoiding downstream catastrophic expenditures or challenges to the social compacts promised by governments. For example, most Asian governments have promised universal health coverage, made the effort of educating the public that such services are available, and now they must find ways to deliver. Private insurers can’t just keep raising premiums indefinitely, either.

The Case for Technology

It is clear that if we are going to radically expand access to healthcare, it’s not going to be achieved by retaining current models of care — you simply cannot train new doctors and build hospitals quickly enough, no matter how much you try to harmonise operations and gain efficiencies.

Asia cannot wait, and this may be the pressing need that may bend the barriers described above.

Similarly, on the delivery side, going to the hospital whenever you feel really sick, or after 5–10 years of mismanaging your chronic disease until it’s become too serious to ignore won’t cut it anymore, especially if a) getting an appointment takes 6 months; b) you have to miss work, or leave your family behind because of the long commute and the crammed waiting room on the day itself; and c) you are risking poor outcomes because your doctor is burnt out or undertrained. This is the reality for many people not only in Asia, but around the world.

Healthcare must shift from an expert-centric, ‘one size fits all’ model to something that is proactive, patient-centric, personalised, and pervasive in order for it to be sustainable.

Furthermore, to avoid perpetuating inequities of access and quality (i.e. the wealthy and/or powerful can cut the queue and get best doctors), it must involve solutions that:

1) Prevent most citizens from becoming patients — through new ways of screening for illnesses or risk factors, at work, at schools, or in your own home;

2) Prevent patients from becoming serious patients (i.e., hospitalized) — through better management of identified risk factors via low-cost wearables, apps, or telemedicine platforms; and

3) Pushing serious patients through the system efficiently and effectively (so they do not return to the hospital) — through faster / better / cheaper medical equipment, improved or automated work flows and processes, electronic health records, and intelligent decision support.

We see technology at the heart of such solutions — and we are blessed to live in an age where there are many technologies out there, so how do you know which to support?

We think that new technologies must exhibit or enable any (and ideally all) of these four attributes:

1) Collect relevant data continuously / frequently — you cannot manage what you cannot measure. Why is that we know more about our cars than our own bodies? Even measuring just blood pressure, heart rate, activity and sleep can make a huge difference in long term outcomes, let alone the myriad of other biomarkers out there. The more data points, the better, as it helps form your own personalised context and baseline.

2) Separate data collection from interpretation — most of the readings that a doctor will interpret are generated by a medical device (e.g. ECG, MRI, spirometer, microscope) — so why then, does the doctor need to be in the same room (or country) as you? If the scarce resource pool is distributed, you can load balance.

3) Allow doctors to be doctors — the most valuable thing a doctor can do is use their brain, applying their years of training to solve your medical problem, not figure out how to bill your insurance company or take notes — yet more and more of their time is taken up by non-medical activities. The more time a doctor can spend being a doctor, the fewer doctors you will need. The same holds true for nurses and other healthcare practitioners.

4) Familiarity — or, the idea that disruption is a four-letter word. The first job doctors have is to do no harm, and introducing something new that goes against their many years of training opens up the increased possibility (or perception) of harm, so be gradual (unless you’re curing cancer!)

We have developed these principles from decades of interactions with public health experts, medical doctors and administrators across multiple countries, as well from companies we’ve seen do well in the space, including some of our past investments.

You’ll notice I didn’t use the term AI or analytics anywhere in here — I also didn’t mention electricity, computers or The Internet either. We are past that :).

Ok, so we’ve established that we need relevant technologies, but where to find them?

A Global Search

We have 7.7 billion people on this planet (plus a few in orbit), all capable of great innovations, so why limit ourselves to one geography, shaped by one set of serendipitous circumstances or pain points? We should look through as many of the world’s innovations as we can in the search for relevant technologies, as frankly, nowhere in the world have we perfected healthcare.

Granted, there are a spectrum of operational, cultural, and governance challenges, and some places do produce more innovation than others — we wouldn’t be truthful if we said we didn’t have our favourite ‘hunting grounds’. Moreover, if it weren’t for our venture and investment partners around the world, we wouldn’t have the confidence to search as far and wide as we do.

In our experience, the best innovation occurs across two settings — a) cross-disciplinary academic environments that train both creative and highly technical labour; and b) places where you have serious unmet needs with the freedom to try new models. When you have both in the same place, real magic happens.

Not all global innovation can translate well — sometimes what makes a solution powerful is the environment it developed in, and the more unique, specialised or closed a market is, the more difficult it is to expand to new markets effectively (e.g. why haven’t more Chinese or Japanese health tech companies expanded globally?) We find this holds especially true with digital health platforms and healthcare software. Devices and diagnostics generally translate far better across oceans and continents as they are more dependent on human biology than culture or path dependencies.

As an investor, going global also allows you to find some good deals. Valuations face various inflationary forces such as the expectation of high growth from a large market, or a crowded investor community. The caveat, which we’ll touch upon shortly, is that you need to also be early (ideally seed stage) to take advantage of going global.

Finally, a global effort needs a global city, and Singapore is that city for us. With favourable and forward-looking financial regulators, a high standard of living, safety and stability, a well-integrated multi-ethnic society, the best airport in the world, and all of Asia within a 7-hour flight, I honestly can’t think of a better place.

Why Seed Stage

First and foremost, we are seed stage investors because that is what is needed. As former angel investors, entrepreneurs, operators and industry insiders, this is the space we know best and where we can add the most value.

According to both Rock Health and Galen Growth Asia, most healthcare deals are Series A or later, in contrast to other sectors. This leaves a disproportionate amount of seed stage deals to fend for themselves until they hit Series A, boot-strapping to scale, taking on less-ideal investors, or just simply vanishing into the ether before they make it. It makes me wonder, how many good innovations and technologies are just lost?

The quality and number of investors also vary greatly by geography, so if you are for example starting something in an obscure former Soviet republic, it will generally be far more challenging to raise that first capital than if you lived in San Francisco or studied in Stanford. The opportunity, on the other hand, is that the same startup in the former Soviet republic may have a far lower valuation because you are the only one shopping there and their alternatives are a) no investor; or b) uncle Boris whose main business is ‘fixing problems’. Your problem (which Boris cannot fix) is if you wait too long for this exotically domiciled startup to make it to the US or Singapore, the new markets are already reflected in the valuation.

In the days of VC bubbles, people often forget that actually our first job as investors is to ‘buy low’ and ‘sell high’, and we’re not sure how ‘sell high’ will work out with unicorns turning into unicorpses (thank you, WeWork!). By going in at the seed stage we really want to ensure we truly ‘buy low’ to ride out any market uncertainty and allow for more funding rounds should the business need to readjust to new realities — a $50M pre-money pre-A company may not have this luxury.

Finally, a seed stage investment to us is more impactful. It is the most sensitive and crucial time of a company’s existence, and making sure it’s set on the right course can save a lot of downstream pain for both founders and investors. Founders are also generally more receptive to advice and guidance in the early days, as the investor/founder relationship is more collegial due to the more operational nature of the relationship and the fact that you were willing to believe in them in their time of greatest need and vulnerability.

This leads us to our final topic — fund size.

Why A Small Fund

We have established that healthcare is important, technology is at the core of making it sustainable, relevant technologies can be found anywhere in the world and that the seed stage is where the greatest financing need exists (as well as the best deals). What then does a fund need to look like, to do seed stage justice while ensuring the highest possible returns for investors?

If you want to focus 100% on the seed stage and you want to be active in their development, you cannot have too many companies in your portfolio. Your fund size will be the average investment size * number of companies * (1+overhead %), and that overhead is responsible for your team’s salaries, due diligence, operations, administration, compliance, and keeping the lights on. Suffice it to say, the economics are not pretty, unless you do your job really really well and have a stomach of steel that can endure the 8 to 10-year wait. We won’t go into any of our details here, but we believe we’ve found a number that is reasonable.

A larger fund can certainly work, but as an investor, we would feel an uncomfortable pressure to put the committed capital to work rather than the norm of keeping most of it for follow-on investments (which are needed, but that should be maximum 30% of funds in our opinion) — so the alternatives are ‘spray and pray’ or ‘write bigger cheques’, both of which go against our principles as active and return-oriented investors.

The alternative to a larger fund is a number of special purpose vehicles (mini-funds so to speak) whose sole purpose would be to provide follow-on capital to successfully growing investments that were first made by the seed fund. Unfortunately, this approach would not work as well for fund investors that prefer to have a large upfront allocation as the downstream commitments are not predictable as it would be case by case. It does, however work better for strategic investors and individuals.

Concluding Thoughts

We wrote this article more to express why we do what we do, informed by our on-the-ground experiences and the wisdom of our friends and partners. That being said, only time will tell whether our approach will actually outperform. Worse, we may be completely wrong, have the wrong timing, or just be very unlucky. The one thing we can confidently say is that we see a need, we can relate to the need, and we are trying to do something about it.

I hope this article was insightful and we look forward to the continuing journey ahead. You know where to find us.

A special thank you to Carl Ng / Lifetrack Medical Systems for his great suggestions and edits, and to everyone who has supported us in our journey to date.

References

1. https://www.worldbank.org/en/topic/universalhealthcoverage/publication/tracking-universal-health-coverage-2017-global-monitoring-report
2. https://www.worldbank.org/en/news/press-release/2017/12/13/world-bank-who-half-world-lacks-access-to-essential-health-services-100-million-still-pushed-into-extreme-poverty-because-of-health-expenses
3. https://www.nasdaq.com/articles/medical-bankruptcy-killing-american-middle-class-2019-02-14