Fund focus: Vitalbridge plays it safe

It took Vitalbridge Capital just two months to achieve a $200 million first close, against an overall target of $250 million, on its second China venture capital fund. Demand was strong and there was talk of increasing the hard cap beyond $275 million. Then fate intervened.

On July 24, four days before the first close, China issued new regulations that seemingly rendered K-12 after-school tuition – until recently a red-hot industry for private equity and venture capital – commercially unviable. Question marks linger over billions in invested capital. Coming on the heels of various measures aimed at reining in the technology sector, Vitalbridge turned cautious.

“Some LPs were interested in investing more capital in Fund II, but they came up against maximum percentage exposure limits, so they suggested that we lift up the hard cap to $375 million,” says Jinjian Zhang (pictured), Vitalbridge’s founding partner. “Given the market uncertainty, we decided to stick to the original $275 million.”

Prior to establishing his own firm in 2019, Zhang specialized in education technology investment at Trustbridge Partners. He backed the likes of K-12 business Puxin Education, storytelling start-up Kaishu Story, language learning app Liulishuo, and IT training platform 51Talk over the course of seven years. Some LPs expected Vitalbridge to follow the same path, but Zhang demurred.

He notes that the returns on education investments had begun to drop as early as 2019 as companies burned through cash ever more quickly in the pursuit of market share.

“They were targeting lifetime value, so they didn’t charge new customers for the first course. Customer acquisition costs were getting high, and everyone’s ROI [return on investment] was below 100%, but their valuations were so high,” Zhang explains. “This was different from earlier years when the ROI was good thanks to the internet effect and high referral rates.”

The decision to avoid education – Vitalbridge has zero exposure across 20 portfolio companies – was also rooted in demographic change. Births have fallen for four consecutive years. The 2018 total of 15 million was the lowest since 1952, but then it slipped to 14 million in 2019 and 12 million in 2020.

Reversing this trend means reducing the cost of raising a child, according to Zhang. Healthcare and education are the key areas. Even as wider medical insurance coverage and price controls on certain drugs have made healthcare more affordable, education was spiraling out of control. "We felt that the regulation would come eventually, but we couldn't foresee when and how," says Zhang.

Vitalbridge focuses on the digitalization of services – backing emerging specialist providers that leverage technological innovation to address untapped demand. It typically particulates in pre-Series A through Series B rounds, committing an average of $5 million per deal.

Enterprise services and healthcare are the major themes. The portfolio includes LM Technology, China’s leading orthodontic institution for children, Maycur, an enterprise reimbursement business, Dustess.com, a social customer relationship management (SCRM) specialist, and Publink, an after-sales service platform.

The firm has 10 investment professionals out of an overall staff of 14. Zhang claims the approach to data is a key differentiating factor. Vitalbridge built its own systems early on and now has a dedicated team of three maintaining a database that plays an integral role in deal sourcing.

“As long as there is a newly established company, you will be able to find data clues through the business registration system or hiring platforms such as Boss Zhipin. These data can be used to capture new opportunities in your selected direction or track,” says Zhang.

The database and associated analytics capabilities also help portfolio companies test and refine business strategies by creating benchmarks based on the performance of comparable leading international businesses.

“A SaaS start-up with a customer retention rate of 130% and a revenue growth rate of 80% may need to decide which aspect to prioritize,” Zhang adds. “We can offer hints by pointing to global companies at a similar stage of development.”

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• Topics
• Fundraising
• Venture
• Technology
• Greater China
• GPs
• Regulation
• China
• Vitalbridge
• TMT
• Education