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This VC firm will invest up to $100K in students who want to take a gap year to build a company

Contrary Capital plans to back five teams of students who would rather use a year to start a company than take remote classes.

Eric Tarcyznski, founder of Contrary Capital.

"We do believe pretty deeply in universities, but primarily when they are in person," says Eric Tarcyznski, founder of Contrary Capital.

Photo: Courtesy of Eric Tarcyznski

The coronavirus pandemic has made returning to the classroom less appealing to many students. Contrary Capital founder Eric Tarczynski sees that as an opportunity.

"Perhaps obviously, paying $50,000 to take classes online is just not appealing to anyone," Tarczynski said. Students headed to elite schools such as Harvard seem particularly troubled by the situation. Instead, Tarczynski's venture firm is making a different offer: It will invest up to $100,000 in exchange for a small slice of ownership in startups created by five different students (or student teams) who are willing to take a gap year to build a company.

The idea of a gap year isn't new. Neither is the idea of investors paying kids to drop out of college: Peter Thiel has been doing it for years. But Contrary's experiment is a bet on the pandemic being a good time for students to start companies — and on there being more of an interest in leaving college, on a temporary basis, to do it.

It's an interesting move for a firm like Contrary, which has been traditionally cozy with colleges. Part accelerator, part venture firm, Contrary's business has been to scout college campuses for the next generation of entrepreneurs and give them support and access to Silicon Valley funding networks. Now, the gap year experiment is encouraging founders to take a year away from school.

"We do believe pretty deeply in universities, but primarily when they are in person," Tarczynski said.

It's also a different approach than the Thiel Fellowship, which offers the money as a grant and pays students to drop out of college entirely to pursue their company. But the precedent the Thiel fellowship has set is an inspiring one to Tarczynski. Billion-dollar startups like Oyo Rooms and Figma were born out of Thiel Fellowships, and Ethereum's co-creator, Vitalik Buterin, was also a Fellow.

For Contrary's program, groups have to commit to working on the project full time, but otherwise the firm is open to backing entrepreneurs at any education stage, from undergraduates to doctorates. Contrary is also open to backing immigrant founders, especially since some international students may be sent home if schools don't have in-person classes. The hope is to help college students looking for an alternative path during the time of coronavirus to be able to focus on a company without the distractions of school for a year.

"We pretty strongly believed that the limiting factor for young people when it comes to company creation is just bandwidth," Tarczynski said.

Paying founders to take a year off is an easy way to clear their plates.

Biz Carson

Biz Carson ( @bizcarson) is a San Francisco-based reporter at Protocol, covering Silicon Valley with a focus on startups and venture capital. Previously, she reported for Forbes and was co-editor of Forbes Next Billion-Dollar Startups list. Before that, she worked for Business Insider, Gigaom, and Wired and started her career as a newspaper designer for Gannett.

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Protocol | China

Everything you need to know about the Yuanxin Technology IPO

Image: Yuanxin

Yuanxin Technology doesn't hide its ambition. In the first line of its prospectus, the company says its mission is to be the "first choice for patients' healthcare and medication needs in China." But the road to winning the crowded China health tech race is a long one for this Tencent- and Sequoia-backed startup, even with a recent valuation of $4 billion, according to Chinese publication Lieyunwang. Here's everything you need to know about Yuanxin Technology's forthcoming IPO on the Hong Kong Stock Exchange.

What does Yuanxin do?

There are many ways startups can crack open the health care market in China, and Yuanxin has focused on one: prescription drugs. According to its prospectus, sales of prescription drugs outside hospitals account for only 23% of the total healthcare market in China, whereas that number is 70.2% in the United States.

Yuanxin started with physical stores. Since 2015, it has opened 217 pharmacies immediately outside Chinese hospitals. "A pharmacy has to be on the main road where a patient exits the hospital. It needs to be highly accessible," Yuanxin founder He Tao told Chinese media in August. Then, patients are encouraged to refill their prescriptions on Yuanxin's online platforms and to follow up with telehealth services instead of returning to a hospital.

From there, Yuanxin has built a large product portfolio that offers online doctor visits, pharmacies and private insurance plans. It also works with enterprise clients, designing office automation and prescription management systems for hospitals and selling digital ads for big pharma.

Yuanxin's Financials

Yuanxin's annual revenues have been steadily growing from $127 million in 2018 to $365 million in 2019 and $561 million in 2020. In each of those three years, over 97% of revenue came from "out-of-hospital comprehensive patient services," which include the company's physical pharmacies and telehealth services. More specifically, approximately 83% of its retail sales derived from prescription drugs.

But the company hasn't made a profit. Yuanxin's annual losses grew from $17 million in 2018 to $26 million in 2019 and $48 million in 2020. The losses are moderate considering the ever-growing revenues, but cast doubt on whether the company can become profitable any time soon. Apart from the cost of drug supplies, the biggest spend is marketing and sales.

What's next for Yuanxin

There are still abundant opportunities in the prescription drug market. In 2020, China's National Medical Products Administration started to explore lifting the ban on selling prescription drugs online. Although it's unclear when the change will take place, it looks like more purely-online platforms will be able to write prescriptions in the future. With its established market presence, Yuanxin is likely one of the players that can benefit greatly from such a policy change.

The enterprise and health insurance businesses of Yuanxin are still fairly small (accounting for less than 3% of annual revenue), but this is where the company sees an opportunity for future growth. Yuanxin is particularly hoping to power its growth with data and artificial intelligence. It boasts a database of 14 million prescriptions accumulated over years, and the company says the data can be used in many ways: designing private insurance plans, training doctors and offering chronic disease management services. The company says it currently employs 509 people on its R&D team, including 437 software engineers and 22 data engineers and scientists.

What Could Go Wrong?

The COVID-19 pandemic has helped sell the story of digital health care, but Yuanxin isn't the only company benefiting from this opportunity. 2020 has seen a slew of Chinese health tech companies rise. They either completed their IPO process before Yuanxin (like JD, Alibaba and Ping An's healthcare subsidiaries) or are close to it (WeDoctor and DXY). In this crowded sector, Yuanxin faces competition from both companies with Big Tech parent companies behind them and startups that have their own specialized advantages.

Like each of its competitors, Yuanxin needs to be careful with how it processes patient data — some of the most sensitive personal data online. Recent Chinese legislation around personal data has made it clear that it will be increasingly difficult to monetize user data. In the prospectus, Yuanxin elaborately explained how it anonymizes data and prevents data from being leaked or hacked, but it also admitted that it cannot foresee what future policies will be introduced.

Who Gets Rich

  • Yuanxin's founder and CEO He Tao and SVP He Weizhuang own 29.82% of the company's shares through a jointly controlled company. (It's unclear whether He Tao and He Weizhuang are related.)
  • Tencent owns 19.55% of the shares.
  • Sequoia owns 16.21% of the shares.
  • Other major investors include Qiming, Starquest Capital and Kunling, which respectively own 7.12%, 6.51% and 5.32% of the shares.

What People Are Saying

  • "The demands of patients, hospitals, insurance companies, pharmacies and pharmaceutical companies are all different. How to meet each individual demand and find a core profit model is the key to Yuanxin Technology's future growth." — Xu Yuchen, insurance industry analyst and member of China Association of Actuaries, in Chinese publication Lanjinger.
  • "The window of opportunity caused by the pandemic, as well as the high valuations of those companies that have gone public, brings hope to other medical services companies…[But] the window of opportunity is closing and the potential of Internet healthcare is yet to be explored with new ideas. Therefore, traditional, asset-heavy healthcare companies need to take this opportunity and go public as soon as possible." —Wang Hang, founder and CEO of online healthcare platform Haodf, in state media China.com.

Zeyi Yang
Zeyi Yang is a reporter with Protocol | China. Previously, he worked as a reporting fellow for the digital magazine Rest of World, covering the intersection of technology and culture in China and neighboring countries. He has also contributed to the South China Morning Post, Nikkei Asia, Columbia Journalism Review, among other publications. In his spare time, Zeyi co-founded a Mandarin podcast that tells LGBTQ stories in China. He has been playing Pokemon for 14 years and has a weird favorite pick.
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Protocol | Workplace

How to make remote work work

Hofy made an early bet that COVID-19 would have a long-term impact on workplaces. The company recently raised $15.2 million for its remote workforce equipment management solution.

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Protocol | Policy

Tech giants want to hire Afghan refugees. The system’s in the way.

Amazon, Facebook and Uber have all committed to hiring and training Afghan evacuees. But executing on that promise is another story.

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Photo: Andrew Caballero-Reynolds/AFP via Getty Images

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But nearly two months since U.S. evacuations from Kabul ended and one month since the companies' public commitments, efforts to follow through with those promised jobs remain stalled. That, experts say, is partly to do with the fact that the vast majority of Afghan arrivals are still being held at military bases, partly to do with their legal classification and partly to do with a refugee resettlement system that was systematically dismantled by the Trump administration.

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N26's monster $900 million funding round announced Monday underlined the German startup's momentum in the digital banking market.

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