Survival of the Fittest | Dalton Venture 2022 Annual Partners Meeting (Part One)

道彤投资·December 22, 2022·0·0

Xiangxin — it's both "sunflower" + "heart," and the idea that following your inner passion lets you always grow toward the sun.

"The domestic and international environment has shifted significantly this year, and the composition of primary market capital has changed as well — state capital now dominates absolutely. Market rules long shaped by foreign investors are gradually giving way to government and state capital-driven norms, and this trend will only intensify. As they say, 'money talks.' So investment logic will change dramatically too. The rules themselves aren't inherently good or bad — what matters is evolving in time. Survival of the fittest. Making money for LPs is what counts."

On December 21, 2022, Dalton Venture held its 2022 Annual Partners Meeting in Shanghai. This year's gathering, themed "Natural Selection, Survival of the Fittest," drew investors who attended despite busy schedules and illness — our sincere thanks for your unwavering support and trust.

The meeting opened with founding and managing partner Qi Sun delivering the keynote address. Below are selected highlights:

PART 01 Strategic Evolution — Riding the Wave

Staying the Course — Further Concentrating on MedTech Innovation, Heavy Bet on Devices

Looking back at our strategy from last year — "further concentrate on medical innovation technology, heavy bet on devices" — this proved correct, and we will continue. This year's market downturn hit devices far less severely than innovative drugs. When the water rises, big fish thrive; when it recedes, they're the first to suffocate. Compared to innovative drugs, device financing has been relatively resilient. Moreover, in late September the government introduced a 200 billion RMB subsidized loan policy specifically for devices, further benefiting the sector. Device companies in the secondary market performed strongly in Q4 overall. Mindray has risen over 30% since late September, with Hong Kong-listed device companies seeing even larger gains.

Adjustments

This year, the confluence of US-China relations, pandemic controls, and domestic economic cycles has made capital markets as bleak as anticipated, healthcare included. Beyond slowing our investment pace, we've made several adjustments.

Strategy: Breaking deals into smaller, more distributed payments to further control capital risk. Against a broadly decelerating market, rather than passively lying flat, we've doubled down on incubation — a sound approach for team-building and proactive positioning.
Direction: Greater focus on sectors and projects closer to revenue and commercialization. For portfolio management, we advise companies to moderately align pipelines toward products with faster certification, quicker monetization, and political alignment. Aging-related products, for instance, involve technical barriers and don't rely on sustained fundraising to survive. With short-term market confidence low, investors care less about how "sexy" a project is and more about revenue and profit. For portfolio companies, the imperative is returning to business fundamentals quickly — calculating product costs, pricing, projected revenue and cash flow. Our invested companies are doing this homework now.
Stage: Accelerating investment in earlier, smaller deals. Over the past four to five years of capital abundance, mature healthcare tracks have been thoroughly mined; the low-hanging fruit is largely gone. Technologies that could be bought into existence have emerged; those that haven't suggest inherent technical constraints requiring time to accumulate and mature — perhaps another two to three years of patience. So we're actively responding to national policy by investing smaller and earlier, riding the trend. Dalio said "investing is betting against consensus." Dalton will consciously position in non-consensus projects, discovering and backing "future consensus" — requiring our team to maintain more open mindsets and more forward-looking vision.

What Changes, What Doesn't

Having covered adjustments, let's address what remains constant. Maintaining devices as our priority, pursuing differentiated strategies, keeping a proportion of incubation and self-built projects, and staying focused on mid-to-early stage investments — these are unchanged. In a volatile external environment, excessively frequent or large strategic shifts resemble constantly changing lanes in heavy traffic — even skilled drivers face elevated risk. Better to consciously restrain instinct, or moderately slow reaction speed, maintaining calm and steady progress in your lane, changing only when the moment is right. Conversely, if a lane is blocked by an accident, we absolutely will switch lanes to get around it.

PART 02 Philosophy: Openness

Dalton's organizational culture rests on six words: "Integrity, Diligence, Professionalism, Focus, Openness, Excellence." Starting this year, I want Dalton to establish an annual theme word. For 2023, that word is "Openness." Openness toward China's future and capital market direction; openness toward frontier medical technology. The more difficult the present moment, the more we need confidence and openness.

PART 03 Trends: Dramatic Market Changes, Survival of the Fittest!

Mindset and Expectations: Calm and Optimistic, Lowering Expectations

For pessimists, lying flat may seem the only option. Optimism appears the sole choice in facing turbulence. Pessimism and optimism both connect to expectations. High expectations breed pessimism when unmet. Low expectations — even contingency plans for worst cases — yield optimism when outcomes prove less dire. Pessimism and optimism also connect to social circles. This year I happened into a dual-carbon investment gathering; it felt like chips or pharma two years ago. Water levels have dropped, insufficient to support prosperity across all sectors, but cyclical rotation can still sustain two or three major industries. If selecting three long-term, politically aligned industries, healthcare likely remains among them. Most LPs still maintain 25-30% healthcare allocation. Thus we remain optimistic, expanding our team this year and opening a Shenzhen office.

Investment Philosophy: From Investing in What the Market Wants, Gradually Adding What the State Needs

Against current macroeconomic conditions, priority must go to deploying limited capital and resources toward strategically urgent, hard technology projects. A new phrase circulating is "don't go public unless necessary" — referring to regulatory window guidance on IPOs for certain industries. IPOs are scarce resources; for most investors, IPO guidance is the baton directing the orchestra, with the state channeling funds toward politically aligned tracks first. For us, if fully loaded with ammunition, the second half of next year may present good entry timing, prioritizing excellent projects one step from commercialization. Of course, much repetitive innovation and pseudo-innovation will fall in this wave, while truly excellent companies may also take hits — but they'll be first to rise afterward. Compared to the market's invisible hand, government's visible hand can directly create or suppress demand. Politically incorrect directions, even with current market demand, we approach cautiously or avoid; for existing investments in such areas, decisive adjustment is needed, directing limited resources to serve national strategy.

PART 04 Strengthening GP Core Capabilities

China's capital markets have long operated under foreign investor-dominated rules. As foreign capital recedes, subtle shifts are underway. Today's fund managers, beyond professional and full-cycle investment capabilities, must understand government, policy, and politics, discern trends, and get the timing right. This matters more than ever — requiring proactive study and research now and for the foreseeable future, strengthening adaptability to systems, enhancing ability to dance with government, building deep service capabilities for both market and government.

PART 05 Is the Innovation Source Changing?

We used this same heading last year, when we said: the innovation source remains the United States. Deep roots yield lush foliage; basic research is innovation's source, and we've historically followed "Copy to China." But as we know, once China commits to a direction — say, vigorously developing basic research and cultivating innovation sources — acceleration far outpaces other nations. Give us ten years, and China may cover ground the West took thirty to traverse; give us ten years, and innovation sources may increasingly emerge within China. The soil for innovation is gradually shifting, and we invest not merely in present states or stock, but in futures and flows.

This year, we're seeing innovation sources begin accelerating their shift. The state has once again deployed extraordinary means and intensity to increase basic research investment. China decided to establish nine national laboratories, including a national materials laboratory built on the Gusu Laboratory foundation, and a national quantum laboratory in Hefei依托中科大 — leveraging the University of Science and Technology of China. While soil suitable for source innovation requires time to transform from quantitative to qualitative change, in three to five years we may anticipate progressively higher-level technological innovation emerging.

PART 06 Closing: Confidence!

"Centripetal — both sunflower + heart, and facing toward what you love to always grow toward the sun."

This painting's theme: as long as the heart beats, flowers can bloom from withered branches, strength can emerge from adversity, life can grow from death. It speaks to how preserving original passion prevents being buried by mire. People in different eras and circumstances must maintain their own convictions to avoid drifting with the current.

In such chaotic times, everyone has a heart. Some hearts are hidden by vines, becoming withered branches in the background. But some hearts, even as faint light, even as slight beats, even on the verge of dissolving into darkness, manage to hold their ground and forge their own light.

Finally, I'll close with Schopenhauer: "We should maintain the highest possible health, for happiness is the flower that blooms from health." The world is somewhat chaotic — stay healthy, stay happy!