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ChinaBio: China's policies to attract innovators effective, but not perfect

? VC investment in life sciences has tripled in 2016

? Chinese government incentives to attract life science startups are working

? Lack of local investors close China markets to foreign-funded companies

Greg Scott founded angel investment collective ChinaBio Group in 2007 and has helped over 30 U.S., European and Asia-Pacific life science companies seek partnerships, acquisitions and funding in China.

Scott spoke to S&P Global Market Intelligence about recent Chinese government initiatives to attract life science startups into the country and the challenges that lie ahead. Answers are edited for brevity and clarity.

S&P Global Market Intelligence: Why did you move to China from the U.S. to start another angel investment group?

Greg Scott: We started ChinaBio in 2013 to specifically focus on U.S. companies and technologies that were a good target for the China market.

When I first came to China I had a government official tell me it's a good thing you're in biotech, because the government really likes the industry and if the day comes when the government changes its mind, you should either change industries or get out of the country! There's real truth in that.

China is focused on being a leader in key technologies, and life sciences is one the country wants to participate in. The government has placed lots of incentives and those have trickled down to the provinces, cities and even the individual science parks. The local councils can take advantage of the incentives provided by the central government and multiply that by adding their own.

What kind of incentives can a startup expect in China?

Companies come to China for the government and quasi-government funding, which provide soft incentives such as free rent, free lab space and funding PhDs at one point. Matching investments funds is a big one. Though it's considered on a case-by-case basis, it's been known that the investment vehicles have matched anywhere from 20% to 100% of startup funds brought into China.

What sort of companies are attracted by these perks?

You see a lot of activity in the pharmaceutical space because there are a lot of incentives for developing new drugs in China. Anything related to metabolic diseases such as diabetes, which is a major concern here. Central nervous system diseases is one of the fastest growing areas where there is a lot of opportunity right now.

What part does angel investment play in the success of a startup there?

I've always enjoyed angel investing. I see it as an opportunity to see early-stage companies and technologies grow and participate in its development and maybe, give a little bit back to the industry. Venture capital money comes in after us if they see potential and VC investment in life sciences within China is at an all-time high. In 2016 alone VC investments tripled to $5.3 billion in life sciences. In the first quarter of this year we are already seeing $2.5 billion of VC investment and we're projecting an 86% year-on-year growth in 2017.

With so much potential, what are the challenges?

You exit an investment by either selling to a company with deep pockets or by an IPO. But if your company has non-Chinese investors, most of the Chinese boards are closed to you. Then you have to look outside China to IPO.

High-net-worth individuals in China like to remain under the radar and tend not to congregate and join groups. Whereas our U.S. group Life Science Angels had over 120 members including some of the top VCs and family funds, and everyone brought in deal flow and shared ideas. It was a very positive experience where we would bounce ideas off of each other and be a source of validation. ChinaBio in Shanghai didn't get as many individual angel investors as we did in the U.S. Most of our members here are venture capitalists who want to see the early-stage companies coming down the pipeline. Life Science Angels had about 80% individual investors and the rest was made up of VCs and family funds, whereas here in China I would say those numbers are flipped.

What do China's regulatory changes in healthcare mean for startups wanting to come to the country?

The government has made a lot of regulatory changes, which allow companies to bring in technologies from the West and develop them more rapidly in China. There is a lot of discussion about how the regulatory changes are impacting particularly on the biologics space. There's a huge boom in biologics and immuno-oncology in China because of the investment from the government. If you're a company in either of those fields, you're more likely to get a higher valuation for your company in China than anywhere else in the world.