It’s a gloomy time for venture capital in China, with the amount the industry invested in Chinese firms falling to a five-year low last year, according to market intelligence firm S&P Global.

Amid the negative sentiment BAI Capital, part of the German media conglomerate Bertelsmann, has gone against the grain by promising millions of dollars of investments in Chinese start-ups over the next four years.

At The Wire, we periodically focus on prominent firms investing in China, introducing them to our readers and mapping their corporate and shareholding structures. So far, we’ve featured Qualcomm Ventures, Yunfeng Capital, and ZhenFund. This time, we take a closer look at BAI Capital.

BAI CAPITAL’S MANAGEMENT TEAM

Bertelsmann may be best known in Europe for owning several prominent media and publishing companies, but it’s also become a force in venture capital through its Bertelsmann Investments arm, which holds more than 350 active investments worldwide through a set of regional funds.

In Asia it operates through BAI Capital, which was set up in 2008 and is based in Beijing. Its founder and managing partner is Annabelle Yu Long, who spent nine years working for Chinese broadcasting networks in Sichuan and Chengdu before joining the firm.

Over the years, BAI has followed the example of its German parent by investing in education and media companies. Its first investment was in China Distance Education Holdings, which has become one of China’s leading online learning platforms. More recently, it led a 100 million renminbi ($15 million) funding round in an online social platform for elderly Chinese called Colorful Pines (also known as Hongsong Club), which connects its users with others that have common interests.

By now it has invested in more than 200 companies either headquartered in China or established abroad by Chinese entrepreneurs, and has more than $3 billion of assets under management, according to research firm Global Capital Ventures. BAI claims that about a fifth of its investments have achieved unicorn status — that is, they are valued at over $1 billion.

MAJOR INVESTMENTS

Prior to 2022, BAI had mostly raised capital from its German parent company. But in July that year it raised $700 million in a fundraising round, drawing backing from unnamed sovereign wealth funds, large insurance companies and Internet giants for its first dollar-denominated fund. BAI said that the funds would go towards investing in the international expansion of Chinese industries in fields such as electric vehicles, autonomous driving and software for industrial upgrading.

With firms that do USD or U.S.-derived investments, you’ve seen a bit of a delinking of operations, so they put in essentially a firewall between what’s going on here and what they have State-side…

Nicholas Omondi, director at financial data analytics firm Z-Ben Advisors

Indeed, one of BAI’s most recent investments was in automotive tech company ClearMotion, which raised $39 million in February 2023, according to PitchBook. ClearMotion focuses on advanced chassis systems in cars, and the company signed a cooperation agreement with the German luxury manufacturer Porsche in April this year.

Observers say that while Chinese companies going overseas these days may try to downplay their origins to navigate a more challenging political environment in the West, venture capital firms like BAI still hold their industry knowledge in high regard.

“They are likely changing the corporate structure or establishing foreign entities to look less “Chinese,”” says Wenchi Yu, a fellow at Harvard Kennedy School’s Ash Center for Democratic Governance and Innovation. “However, the know-how and operational excellence are still quite investable in the eyes of investors.”

In August last year, Bertelsmann Investments chief executive Carsten Coesfeld told the FT that BAI planned to invest $700 million by 2028 in Chinese companies and companies founded abroad by Chinese entrepreneurs.

“With firms that do USD or U.S.-derived investments, you’ve seen a bit of a delinking of operations, so they put in essentially a firewall between what’s going on here and what they have State-side,” says Nicholas Omondi, director at financial data analytics firm Z-Ben Advisors. “That has opened up a bit more room for European firms coming in on the dealmaking end, just because they can tap the expertise of these firms that have been here for a while.”

ONE INVESTMENT: MOGU

Mogu Inc is a fashion-focused ecommerce company founded in Hangzhou in 2011, which provides an online platform for women to discuss fashion and beauty topics. Today, Mogu describes itself as a key opinion leader (KOL) driven ecommerce platform, where a small number of online personalities attract most of the platform’s active buyers through their livestreams. Those active buyers, referring to users who placed at least one order after watching a livestream, totalled 1.6 million between March 2022 and March 2023.

In February 2011, BAI Capital and Shanghai-based VC firm Trustbridge Partners provided $1 million of angel financing to Mogu. BAI went on to participate in three more funding rounds between 2011 and 2015, during which Mogu raised over $400 million in total. BAI’s Annabelle Long joined Mogu’s board in October 2012.

In December 2018, Mogu launched its initial public offering on the New York Stock Exchange, during which it raised $66.5 million and was valued after the offering at $1.33 billion, according to PitchBook. BAI’s Long resigned from Mogu’s board once the company was listed, but Bertelsmann still retains a more than 8 percent stake.

Last May, Mogu launched an AI photography tool known as WeShop AI, promoted as the first tool of its kind in China to help ecommerce merchants develop AI-generated photos of their fashion products. This saves time and money for merchants who would no longer need to arrange photoshoots and find models for their products. WeShop charges almost 30 renminbi ($4) for a monthly subscription covering 200 generated images.

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