Dalton Venture's Sun Qi: Prioritize Hard-Tech Sectors That Serve National Needs, Prioritize Solving Supply Chain Security Issues | Dalton Insights

Background

On May 18, 2023, Qi Sun, Founding Managing Partner of Dalton Venture, was invited to speak at the "2023 China Investment Annual Conference," co-hosted by ChinaVenture and supported by ChinaVenture Capital. The China Investment Annual Conference is one of the most influential annual gatherings in the private equity industry and a focal point for VC/PE practitioners nationwide. At the summit, Sun participated in an in-depth discussion with fellow guests on the topic "How Much Longer Will the Window for Domestic Substitution in Medical Devices Last?"

Dalton Insights

On the window of opportunity: Domestic substitution will have — and must have — a window of opportunity for a very long time to come. Medical devices currently have far higher import dependence than pharmaceuticals, with core components and raw materials still unsolved. The "chokepoint" problem is pronounced. From a practical standpoint, domestic substitution remains the dominant theme.

On identifying opportunities: Dalton has invested in multiple innovative technology projects, all representing first-in-China scientific achievements. Policy support is also crucial to enterprise development.

On cross-disciplinary innovation: Medical device innovation is incremental and improvement-based, unlike drug discovery which involves a degree of serendipity. Breakthroughs in medical devices often come from major advances in other fields.

On innovation: Most innovation still happens at the application layer. True innovation must stay anchored to three things: market demand, clinical demand, and national need.

The following is based on conference transcripts:

Domestic Substitution Remains the Dominant Theme

Priority One: Solving the Chokepoint Problem

Dalton is a healthcare investment firm focused on early- and mid-stage companies, with medical devices accounting for over 60% of our portfolio. Over the past two years, the biopharma industry has weathered a brutal winter. While medical device investment and financing data have also declined, the fluctuation has been smaller compared to pharmaceuticals. In this sense, we've been somewhat fortunate — the window for domestic substitution in medical devices remains open.

Currently, medical devices have far higher import dependence than pharmaceuticals. The core component and raw material problems remain unsolved, and the chokepoint phenomenon is quite pronounced. So domestic substitution will have — and must have — a window of opportunity for a very long time to come. This is true for the country, and it's true for investment firms as well.

On another front, the global economy, including China's, is entering an era where geopolitics is the core driver. We must adapt to this trend. From a practical standpoint, while pursuing globally leading independent innovation, we must prioritize solving chokepoint problems. We should focus on the "Technology + Security" theme, prioritize hard-tech sectors that the country needs, and prioritize supply chain security. These are areas we've been deeply researching and deploying capital into over the past period.

"No. 1" Companies in Niche Sectors

Policy Support Is Also Critical

Several of Dalton's innovative technology investments are "first in China." For example, Vitrolife (韦拓生物), a leading assisted reproduction company, is the first and currently only company in China to have obtained all seven required certificates, and is already commercialized. Hanuo Medical (汉诺医疗), the only domestic company with ECMO system R&D and manufacturing capabilities, is China's first approved domestic extracorporeal membrane oxygenation (ECMO) system company, and has already achieved large-scale commercialization with revenues reaching hundreds of millions.

A key precondition here is that policy support has been extremely important. When people talk about policy, many focus on centralized procurement as the big stick. But many companies shouldn't be negatively affected by centralized procurement — they should benefit. Yet much capital simply steers clear. If you can't clearly see the impact, don't touch it. This is also a matter of professional depth for investment institutions.

Take IVF, for example — it's politically correct. Childbearing is such a major issue, yet our domestic substitution rate is currently zero. China relies 100% on imports for related consumables. Worldwide, there are only three giants (now consolidated to two). Against this backdrop, while commercialization for assisted reproduction companies remains relatively challenging, with policy as a catalyst, industry development will accelerate rapidly.

On January 1 last year, China's Ministry of Finance issued a directive requiring tertiary hospitals to purchase no less than 50% domestic equipment. If a particular department hasn't purchased any domestic equipment, other departments are required to compensate by purchasing more.

Beyond Domestic Substitution: Cross-Disciplinary Opportunities

Medical devices are fundamentally an advanced manufacturing industry — cross-disciplinary and cross-material, involving mechanical design, electromechanical control, software algorithms, medicine, and more. Yet truly disruptive innovation within the field itself is rare. Medical device innovation is incremental and improvement-based. Unlike drug discovery, which involves a degree of serendipity, breakthroughs in medical devices often come from major advances in other fields.

As the true AI era arrives, as true digitalization arrives, with the emergence of technologies like ChatGPT, revolutionary changes are coming to many Chinese companies. Dalton has historically invested in three medical AI companies: Landing Med (兰丁医学), a leading medical AI pathology company; Deepwise (深睿医疗), a leading medical imaging AI company; and Dr. Brain (脑医生), an AI diagnosis and analysis platform focused on central nervous system diseases. Previously it was simple image recognition; going forward, it will be complex judgment. There will be many applications in complex judgment, and I believe this trend will accelerate quickly. How can healthcare integrate more effectively with strong AI? How can medical AI evolve from simple judgment to relatively complex decision-making? In the process of cross-disciplinary experimentation and development, new opportunities will emerge.

Innovation Cannot Drift from Three Starting Points

Current device innovation remains primarily at the application layer. We cannot innovate for innovation's sake. Innovation should always follow three starting points: market demand, clinical demand, and national need.

Alongside enterprises' various reflections, practices, and progress in innovation, some are willing to attempt extending into fundamental research innovation. This bottom-layer innovation has faced two problems in the past: the soil for education and the nature of capital. At present, both are improving. The Ministry of Education has gradually emphasized cultivating specialized talent, and the government encourages state capital to move forward — toward investing small, investing early, and investing in hard tech. From this perspective, although import substitution in medical devices still has a long road ahead, the long-term outlook is full of hope.

I'd also like to share Dalton's vision and aspirations. Fundamental research innovation cannot happen without market patience and capital support. At the LP level, this means supporting more source-level, more fundamental innovation. At the GP level, Dalton's angel fund was established precisely with this vision — for fundamental innovation, for non-consensus areas, for more frontier scientific research domains, we will devote greater attention and support.

Thank you all!

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ID: daltonventure

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