A brief look at the data suggests US HealthTech investment has been less impacted by Covid-19 than the APAC region, but drill down into the detail, and the story becomes more nuanced.
The headline numbers are clear enough. The Asia Pacific (APAC) region suffered a significant hit on investment in the first half of this year. By contrast, the US seems to have witnessed a strong performance. So suggests Galen Growth’s latest Asia Pacific HealthTech Investment Landscape report for the first half of 2020.
In fact, investment in HealthTech during the period was around 75 per cent greater in the US than in the corresponding period in 2019. Yet, in APAC, investment roughly halved.
It is when we drill down into the detail that things become less clear.
Two distinct themes emerge.
The first can be described as followed:
- the breakdown in HealthTech investment between Q1 and Q2,
- how this breakdown in the data in the APAC region compares with what happened in the US,
- and also how the investment contrasts with the relative economic performance of the two regions.
The second theme relates to the influence of China on the APAC region because if we review the data, excluding China, we get quite different results.
Let’s look deeper and begin by looking at how investment changed between Q1 and Q2 and see how there is a curious discrepancy with the relative economic performance of the two regions.
Q1 to Q2: The Economic Data And Investment Divergence
It is well known that the US and APAC region, especially China, have experienced COVID-19 quite differently.
In the first quarter of the year, the performance of HealthTech investment in the APAC region relative to the US reflected this. But in Q2 things looked different.
In the US, during the January to March period, investment into HealthTech quadrupled, while in APAC it halved.
Official data on the Chinese economy suggested that China’s GDP contracted 6.8 per cent in Q1 relative to the year before. By contrast, US GDP contracted 5.0 per cent in Q1, on an annualised basis, according to the BEA. However, most of the contraction in the US economy occurred in the last week of the period.
Of course, investment is not like GDP. One terrible week for the economy can drag GDP down. But for investment, one bad week does not have much impact on the quarter’s total. So far then, the economic data and data on investment in HealthTech in the US and APAC, seem correlated.
In Singapore, year on year growth in GDP was minus 3.3 per cent in Q1. In Australia, GDP also contracted in Q1, but to a much lesser extent. The official data records a 0.3 per cent contraction, although this data relates to the quarterly growth rate — year on year, the economy still posted growth.
By Q2, the relative performance of HealthTech investment in the US and APAC seems to have no longer been correlated with the spread of the virus.
In the US, investment was flat compared to Q2 2019, in APAC it was down by around 40 per cent.
Yet, China’s GDP expanded by 3.2 per cent in Q2, according to official data, but in the US, Q2 looks likely to suffer a far more severe knock — with some economists projecting an enormous 53 per cent contraction in US GDP in Q2.
China And APAC
Five years ago, for investment into HealthTech, China dwarfed the rest of APAC.
Between 2015 and 2020, cumulative investment into China’s HealthTech sector was $19.6bn, while total investment into HealthTech businesses in Japan, Australia, Singapore and India was only around $5 bn.
But in the first half of this year, this was no longer the case. China’s HealthTech companies were still collectively the biggest recipients of investment, with a 28.8 per cent share, but India, with 25.5 per cent share was not far behind. Between them, Australia, Singapore, and Japan held a similar percentage to India.
China exerts a massive influence on the overall HealthTech investment numbers, but this influence is much less than it was a few years ago.
And the crash in HealthTech investment that occurred in 2020 in China seems to have been part of a more significant trend. Between 2015 and 2020, the compound annual growth rate (CAGR) in HealthTech investment in China was just two per cent. In the US, it was 27 per cent.
However, other regions in APAC saw faster growth than the US. India, for example, saw CAGR in investment grow by 38 per cent. Northeast Asia and Southeast Asia were not far behind.
In short, if you exclude China from the data, then overall HealthTech investment in APAC in the first half of 2020 was comparable to the levels seen in the same period last year.
In China, on the other hand, the slowdown in HealthTech investment predates COVID. Although, 2018 was an exceptional year for HealthTech in investment in China, but then that year saw a major investment outlier, namely the Ping An Good Doctor IPO, which accounted for around a fifth of total fund-raising that year. Without that particular example, 2018 would not have been significantly different from 2017, and the slowdown in 2019 less dramatic.
Total investment into HealthTech in China:
Maybe then, COVID-19 compounded what was already a problem in China.
APAC Without China
Maybe then we should look at what has been happening in APAC, excluding China.
The data reveals that investment into the APAC region, excluding China had been steadily growing right up to a few months ago. Q1 of 2020 saw more investment than Q1 of 2019, which exceeded investment in Q1 of 2018.
So maybe the sharp slowdown in HealthTech investment is a Chinese phenomenon.
How the rest of the APAC region is affected may be dependent on how reliant the countries that make up this block are on China.
However, in Q2 of this year, even APAC excluding China saw a sharp slowdown in HealthTech investment of around 40 per cent, roughly the same as China.
The Economic Divergence
To put it briefly: in Q1, the performance of HealthTech investment in the APAC region relative to the US correlated reasonably well with the relative spread of Covid-19 in the two regions and the performance of the economies, but by Q2, when the US economy was seeing far more extreme contraction than APAC, HealthTech investment performed worse in the APAC region.
Why Is The APAC HealthTech Investment Performing Worse?
It is unlikely that there is one answer. The slowdown in HealthTech investment into the APAC region can be attributed to multiple factors.
Furthermore, as this slowdown in investment into the APAC region, excluding China is such a recent occurrence, it may be that the data is misleading — a statistical blip.
We need to look at factors that may specifically explain the slowdown in China and then look at other factors that may apply to the region as a whole.
One plausible explanation for the slowdown in investment into HealthTech in China is the growing trade rift with the US. If this is correct, then recent escalation in the dispute between China and the US does not bode well.
There is a certain logic to this possible cause. After-all trade disputes between China and US predates COVID.
One factor at play in the US has been what one could describe the dry powder argument. Venture Capital firms have funding in place and are often obliged to invest it within a certain time period. The surge in US investment in HealthTech in Q1 of this year may be a consequence of this dry powder consideration, investment was high in the quarter, because the money was there, and VCs were obliged to invest it. Although, this does not seem to explain the differential with APAC, after-all the same considerations should apply in both regions.
The Timing of COVID-19
Or maybe, the difference between APAC and the US can be explained by the difference in how the two regions reacted to COVID-19, and the associated cultural response.
Much of the Asia region, especially Northeast and Southeast Asia, seemed to have responded a lot more quickly to the threat of the virus than the US. With their experiences of SARS still influencing attitudes towards COVID-19, much of the APAC region seemed to become aware of the dangers presented by the virus much sooner than the US. This may have affected investment.
Words spoken by John O’Sullivan, General Partner at Act Venture Capital, at a recent Galen Growth webinar, may have summed up the reason for this well. He said: “Venture capital, even venture capital targeting techs, is quite old fashioned in one key respect — it likes to get close to the companies it invests in. That means face to face meetings, working with the team from the company they are looking to invest in, really getting to understand its DNA.” He went on to argue that Zoom calls are not enough, that it is hard to make an investment decision based on meetings held remotely.
Maybe, with respect to investment in HealthTech, the APAC region, with its different response to the virus was more heavily impacted by this constraint imposed on investing than the US.
However, in the same webinar, other investors argued that during lockdowns, VCs are more likely to focus on investing in companies that they had invested in previously during earlier fund-raising rounds. Given this point, if the APAC region was more heavily affected by remote working that the US, one would expect to see the APAC region to be more heavily skewed towards early-stage investing, but in fact there is little evidence of this.
A broader point is that COVID-19 had less of an impact on the US psyche than it did in APAC.
What Other Factors Could Be At Play – The Last Crisis
What happened in the last major crisis influences policy. The US was hit especially hard by the 2008 crash. Many US venture capitalists in the game today, lived through that experience, and their views on how to deal with challenging market conditions helped mould their opinion on how to deal with the next crisis.
Maybe this has, in turn, made US venture capital more resilient.
The APAC region was not hit so hard by the 2008 crash and certainly saw more rapid recovery. Southeast Asia suffered a more severe crisis in 1997. This helped form economic policies in the region, with a shift towards export-led growth, and less reliance on borrowing from overseas. Although China was not so harshly affected by the 1997 Asian crisis, much of its economic policy since then was also fashioned by its observations of that crash.
But the Asian crisis occurred 23 years ago, and back in the late 1990s, the Asian venture capital scene was nothing like the industry we see today. Indeed, the venture capital scene in APAC in 2008 was much smaller than today, either.
Maybe there are simply fewer wise heads who have experienced severe economic conditions before, in APAC than in the US and that therefore the reaction to the COVID-19 crisis within the investment community was more extreme.
Lack of HealthTech Speciality
Another factor is at play could be the lack of HealthTech speciality. In the US, there is a distinct and established HealthTech investment scene, with a large number of investors specialising in the sector.
Maybe these specialist investors considered an economic crisis caused by a virus as a reason to increase investment. Healthcare is on the front pages just about every day. Specialist investors may have seen this as an opportunity.
In Asia, there are fewer HealthTech specialist investors and maybe the wider crisis impacted on overall investment decisions, meaning less money in the pot.
There is rarely one explanation for macro trends.
Healthtech investment in the APAC region and especially in China has underperformed relative to the US this year. In China; the underperformance may have begun some time ago. For the rest of the region, the underperformance is more recent.
Trade disputes between China and the US may be a factor which is now affecting not only China but the rest of the region.
Or maybe, the problem has been a lack of maturity in the APAC venture capital scene leading to a less resilient approach to issues created by COVID-19.
Or maybe, lack of speciality in HealthTech, meant that APAC venture capital was less able to capitalise on the unique opportunities for HealthTech, as opposed to tech in general, created by the COVID-19 and related attitude changes.
Or maybe it was a simple case of the timing in the COVID-19 effect.
Perhaps, however, we have simply seen a combination of all these factors.
What’s Next For US and APAC HealthTech Investments?
There is a clear danger that the COVID-19 crisis could escalate in the US. While this danger applies to all countries, it seems to be a more acute risk when applied to the US than say most of the APAC region. There are serious fears that COVID-19 cases will continue to mount in the US, especially as summer gives way to fall and then winter.
There is a real risk that the investment community in the US has not fully accounted for the COVID-19 effect, which may, in turn, affect investment in the second half of this year.
If the US economy suffers a severe slowdown in the second half, which some economists fear is a real possibility in the event of a second wave, investors may become more cautious.
Covid also has a psychological effect, in the midst of a virus spreading rapidly, it is difficult to feel confident about the future.
Against that there is the famous investment adage about investing in a crisis, as a former Lord Rothschild is supposed to have said at the time of the French Revolution: “the time to buy is when there is blood on the streets, even if some of the blood is your own.” Then again, Lord Rothschild made money because he had that rare ability to see above the crisis of the moment –– not many investors have such foresight, and even if venture capital companies can see the opportunity for investing in a crisis, they cannot invest money they don’t have, and they are reliant on their investors. If the COVID-19 crisis does escalate in the US, investors may become more cautious.
By contrast, if, as seems quite probable, APAC suffers a much less severe second wave, and contract tracing reduces the impact of the virus without imposing a second lockdown, then investors’ mood may become more favourable.
There is another way to put this: animal spirits, a phrase coined by the economist Keynes, to describe how emotions can affect investment decisions. In the US, where arguably many were slowed to spot the seriousness of COVID-19, such animal spirits may have remained quite strong until recently but could significantly lessen if COVID-19 begins to spread further in the US. In the APAC region, such animal spirits may return sooner.
It is also possible, that as China and perhaps the rest of the APAC region sees their HealthTech sector move along the Gartner hype curve that investment appetite will return and then exceed the peak levels seen during the last decade.
It is important to recognise that COVID-19, and with it, remote working, has led to an acceleration in digital. Galen Growth webinars have revealed time and time again how VCs and start-up founders alike, see COVID-19 as a catalyst for an acceleration in the shift towards digital health.
Such changes will present significant opportunities for investors, and APAC, seems to be leading the way in how to respond to a pandemic.
Investors from around the world may begin to associate the way APAC dealt with COVID-19 as a sign of its growing maturity and at a time when the US may be grappling with a second wave of the virus, may feel that HealthTech in the APAC region are a better home for their money.