Vitalbridge Capital remains firmly wedded to a US dollar-denominated strategy, despite seeing many of its fellow Chinese venture capital firms switch to renminbi funds.

In this sense, the manager is defying two perceived trends: that international LP appetite for China has all but dried up; and that the best way to get exposure to sensitive technologies like semiconductors and artificial intelligence (AI) is through local currency vehicles.

Vitalbridge is currently soft-marketing its third fund – four years after closing Fund II on USD 280.5m – so it will soon have a clearer picture of LP interest. The firm is returning to market amid tough conditions, with China-focused US dollar VC funds raising less than USD 1bn year-to-date across a handful of closes.

As to whether China AI remains a realistic target for international investors, Jinjian Zhang, a founding partner at Vitalbridge, is already resolute in his beliefs. A division between China and the US is likely, but it will be nuanced – and this will be reflected in the investment landscape.

“Large-scale AI models will remain the US-led, while hardware and robotics will be China-dominated. Since robotics and hardware are less dependent on massive models, they can use cloud-based US models or smaller local ones,” he said. “China and the US will eventually achieve a relative balance in hardware and software, driving forward the opportunities in AI-powered robotics.”

Vitalbridge targets three core domains: AI models and agent applications; embodied AI, which combines machine learning and computer vision to facilitate machine collaboration with humans; and AI-for-science, specifically biology and materials science applications.

These focal points emerged from a decision to pivot to AI in 2022, only three years after the firm was founded. However, the strategy did not emerge fully formed. Vitalbridge has shifted in response to market developments: what was a broad response to the potential of artificial neural networks has been tempered by issues ranging from regulation to cost structures.

For example, the firm’s position in large language model (LLM) developer MiniMax – one of 10 AI start-ups backed across six months from October 2022 – doesn’t fit easily into the current rubric. This is because the deal happened before the announcement of restrictions on US investment in China-based semiconductor, quantum computing and AI assets.

One of Vitalbridge’s LPs observed that they require all GPs to avoid restricted sectors and observe standard protocols if portfolio companies end up on sanctions lists. That said, there are plenty of ways to play into the AI trend without incurring such risks.

“One good thing about Vitalbridge is that the fund size is relatively small, which offers greater flexibility to invest in permissible areas,” the LP noted.

Exit options

Zhang established the firm in 2019 after a seven-year stint at Trustbridge Partners. Part of that name was carried over to the new firm as a sign of respect and gratitude to Shujun Li, Trustbridge’s founder and managing partner, who participates in Vitalbridge’s funds as an LP.

There have been more than 50 investments across two funds and five liquidity events. IPO remains the preferred exit channel, and Zhang is bullish about the prospects for the Hong Kong Stock Exchange, citing Unisound AI achieving a market capitalisation of HKD 60bn (USD 7.7bn) following its recent debut.

He backed the voice recognition start-up and Cloopen, a cloud communications developer, during the same week in 2015 while at Trustbridge. One of Vitalbridge’s first investments was a pre-IPO round for Cloopen, which subsequently listed in the US, reaching a peak market capitalisation of USD 6.7bn.

“Cloopen listed in the US, while Unisound listed in Hong Kong – yet the latter’s valuation was by no means low, showing what’s possible regarding exits,” Zhang said.

“In the past, the market perception in Hong Kong was that a valuation below HKD 500m was manageable, but for anything above HKD 1.5 bn, there’d be no liquidity. Now, even for a market cap of HKD 10bn, people feel things can easily move forward.”

MiniMax has reportedly made a confidential IPO filing in Hong Kong and is targeting a valuation of USD 4bn-USD 5bn. This is likely one of five exits Vitalbridge claims to have in the pipeline. Long term, Zhang expects a 60%-30%-10% split in China VC exits across IPOs, M&A, and sponsor-to-sponsor sales.

M&A exits include the sale of Chi Xiao, an advanced plasma device maker, in mid-2023. Six months earlier – but after one year spent researching the segment – Vitalbridge paid USD 4.8m for a 20% stake, becoming the largest external shareholder. It generated a 1.6x multiple and a 194.3% gross IRR when Cosmoplat, Haier Group’s industrial internet of things platform, completed a USD 7.8m acquisition.

Chi Xiao’s founder is now head of digitalisation at Cosmoplat. However, reaching this outcome wasn’t straightforward. Vitalbridge helped move the process along by leveraging a drag-along right built into its investment structure. Downside protection is a recurring theme in the portfolio: taking large stakes to maximise influence, clear liquidation terms, and strong founder relationships.

“You have to realise that you and the entrepreneurs belong to the same new generation – we’re growing together and responsible for each other. We need to work together to make this endeavour succeed, “Zhang said.

“It’s a trust-building process. They are willing to consult with you, and with legal safeguards in place. So the relationship could be healthier.”

Young dynamic

Vitalbridge positions itself as a younger generation investor. Its entire 20-person team, including 10 investment professionals, are younger than the 37-year-old Zhang. This ability to connect with founders of similar age was part of the selling point when the firm closed its debut fund on USD 152.2m in 2019, supported by corporates, entrepreneurs, fund-of-funds, and family offices.

All these LPs re-upped for Fund II – which exceeded its hard cap of USD 275m – and they were joined by the likes of foundations and insurance companies as the institutional share of the corpus rose from 50% to 80%. Adams Street Partners and Group Health Foundation are known to be investors. US-based LPs account for 30%-40% of Fund II, with most of the rest of the capital coming from Europe.

Zhang was arguably best known at Trustbridge for investments in children’s storytelling start-up Kaishu Story and flower shop chain Beast. He didn’t hesitate in excluding education platforms and emerging retail brands from the Fund I mandate, partly because of concerns about high valuations and high-cash-burn business models, and focused on digitalisation.

“You’ll find that in this game, everyone knows it’s wrong, yet everyone is caught up in it.  Otherwise, you can’t explain to your line managers or LPs why you didn’t invest,” Zhang said.

“It’s not that complicated, just do what’s right and don’t compromise. The only hard part is controlling yourself. It feels terrible. You see others struggling, valuations rising, revenues growing. You know it’s wrong deep down, but sticking to your conviction. That’s what’s truly difficult.”

Valuations ultimately started rising in the digitalisation space as well, and Vitalbridge made no investments in 2021. LPs asked questions about the firm’s strategy until conditions eased in 2022.

AI opportunities began emerging at the same time. However, Vitalbridge initial flurry of investments was followed by 18 months of inactivity from June 2023. Unsustainable cost structures were the issue. The firm reengaged once it recognised improving economic feasibility; new talent entering the space and breakthroughs like DeepSeek were also contributing factors.

This thematic approach to investing – inspired by Trustbridge – is based on identifying key structural shifts, deriving investment theses to access them, and building a team capable of acting on relevant opportunities as they emerge.

The Vitalbridge LP observed that Vitalbridge’s top-down research and ability to analyse long-term trends is impressive, setting it aside from “many investors who rely mainly on network relationships or market deal flow to make decisions.”

However, the process of developing investment opportunities based on those trends must be refined over time, especially when it comes to selecting specific sub-sectors and assessing founders. In this sense, though the firm has a relatively short track record by Chinese VC standards, the learning curve has been steep.

“From Fund I to Fund II, the most significant progress in that ability to translate top-down research into actual investments,” the LP added. “As the firm’s reputation has grown, it has been able to engage with increasingly higher-calibre founders.”

Ahead of trend

Ivy Li, a partner who joined Vitalbridge from Australian Capital Equity in 2019, has evolved professionally in line with this top-down approach. Having started out with a focus on evidence-based technology, media and telecom (TMT) investments, she began making early-stage bets on founders, and she now leads Vitalbridge’s embodied AI coverage.

Within this segment, the firm claims unrealised returns of 8.4x on Encos, a joint module solutions provider, and 5x on Spirit AI, a humanoid robotics developer. Other outperformers include AI infrastructure platform Qingmao Intelligence and synthetic biology platform Yixi on 3.8x and 2.3x, respectively. Vitalbridge was the first external investor of all these companies.

Fengtao Han, a co-founder of Spirit AI, which received its first funding round from Vitalbridge and Shunwei Capital, noted that most Chinese VC players missed the first wave of robotics investments in early 2024. Others – typically the larger platforms – backed a wide range of early-stage start-ups and later revisited the most promising ones.

“Their timing in making investments has been very well-judged, whether in large models or certain smart hardware products,” Han said. “Almost all the embodied AI start-ups they’ve invested in excel in both software and hardware. They reviewed a large number of projects, and when it came to ours, the investment decision was made very quickly. “

Zhang believes Vitalbridge stays ahead of the trend partly because of its deep roots in China. While the firm tracks innovations by Chinese founders overseas, these deals make up only a small part of its flow. It identifies as a China-focused VC and operates solely out of Shanghai and Hong Kong.

“The most challenging year was 2022. We are likely the only US dollar fund in Shanghai that held its AGM [annual general meeting] offline, while many other funds relocated to Singapore, Germany, or Silicon Valley,” Zhang said.

“Our view was that the next generation of Chinese entrepreneurs leveraging China advantages to go global represents a fundamental shift. That’s why we remained firmly committed to investing in China.”

Moving to earlier-stage rounds to secure reasonable entry valuations brings greater risk, but Vitalbridge claims a 95% survival rate across its portfolio of 50-odd companies. According to Li, this is because the team prioritizes founder resilience.

For example, an enterprise services company in Fund I – in which Vitalbridge remains the sole angel investor – ran into trouble when investors backed away from software-as-a-service (SaaS). With only a handful of employees and a first contract worth just a several hundred thousand dollars, the odds were against its survival. But the team endured.

The company has now reached breakeven, operates sustainably, and is on track to generate USD 70m-USD 80m in revenue this year. “They’ve attracted acquisition interest recently,” Li said. “Maybe they never will receive new funding, but they’ve managed to survive and grow steadily.”