If the five-year dividend return model covers the entire fund, it is almost zero probability, and it cannot be achieved in practice.
Text: "Chinese Entrepreneur" reporter Liang Xiao
Edited by Mina
Header image source: Respondents
Zhang Ying, the founding managing partner of Jingwei Venture Capital, who has always been quick to talk, still has something to say this time.
In the period after lunch on April 16, he saw an interview with Zhu Xiaohu (managing partner of GSR Ventures) by ChinaVentures - "GSR Zhu Xiaohu: Don't get off the table, don't get off the table, don't get off the table".
In the interview, Zhu Xiaohu revealed a new operation: asking for dividends has become the consensus of the vast majority of early VCs (venture capital institutions), and in the case of unclear exit, his expectation for LPs (the group that provides a source of funds for investment institutions) is to get back the principal in five years.
Zhang Ying forwarded this article in the circle of friends, and also half-sharply and half-politely, with a paragraph, "I think many of Boss Zhu's views are quite good, and I also agree that don't get off the table, consumption can't give up, but the five-year dividends have to be taken back from the fund scale, and I don't agree with it at all, it's a very unreliable view, haha." ”
In less than ten minutes, the second circle of friends followed. A total of 479 words, there is underlying logic, and there is also data deduction - for Zhang Ying, who has a science and engineering background, this is not a difficult task.
But there is still no end to the words, Zhang Ying reissued another article, "A real US dollar LP will not accept or believe that a fund can return its capital through dividends within 5 years......"
Within an hour, Zhang Ying posted three moments in a row, which was just a contest in front of the stage. The story behind the scenes is that almost at the same time, he sent the same content to Zhu Xiaohu, "We know each other very well, and what we say will not affect the relationship."
Zhu Xiaohu and Zhang Ying are both star investors, and they are well-known in the circle for their equally strong personalities: one has an investment style as his name suggests, and is described by his peers as "a roaring tiger";
But the confrontation between the two tigers is not a simple battle of will and conceptual debate. As one venture capital insider said, the reason why the argument between the two has attracted attention is because they are all at the same crossroads of transformation. The confrontation of the two views also represents the common confusion and collective question of Chinese venture capital institutions:
Has dividends become the consensus of early venture capital? Will this subvert the traditional logic of venture capital? Where should today's venture capital institutions go?
On April 18, China Entrepreneur magazine interviewed Zhang Ying to exchange views on these issues.
The following is a summary of Zhang Ying's views:
Dividends are more like debt investments than venture capital
What is venture capital? It is optimistic about a potential opportunity, taking risks early, and finally reaping returns, the so-called high risk corresponds to high returns. Dividends, on the other hand, are to get back the principal or income after the agreed investment time is over, which is more like a creditor's right and is not VC/venture capital at all.
For example, how can companies like OpenAI and SpaceX, which are oriented to the future of mankind, grow up through the so-called "dividend model", and how can they achieve excess returns corresponding to risks by investing in institutions in this model?
In venture capital, dividends are a very marginal auxiliary means, and Jingwei also has corresponding arrangements in some terms. For this method, everyone discusses and attaches importance to it, and then actively responds to it and implements it in practice, which is a good thing.
Source: Visual China
But the head institutions, whether it is the US dollar or the RMB, none of them will turn dividends into a mainstream channel, if only to get the principal back, what is the point? We still have to believe in the capital market, believe that there will be opportunities like Ideal and Xiaopeng in large fields, believe that there is still the possibility of a big exit, and then have enough mentality to embrace other possibilities, such as mergers and acquisitions. Dividends are only a very marginal auxiliary means, and there is no consensus on this as the main means.
From a practical point of view, the probability of "dividend return" is extremely low
From the perspective of the business logic of investment itself, dividends themselves are also full of contradictions and untenable.
From the perspective of enterprises, companies that can pay dividends, focus on a certain industry with high consumption or profit margins, and have good profit income, such good companies will have many investment institutions rushing to enter, whose money do you think the founders will take? Are those investment institutions that focus on the long-term development of the enterprise and do not care about dividends? Or do they want to invest in the form of shares, and at the same time ask for dividends?
That assumes an early cast. At that time, the company did not have revenue and profits, signed a dividend clause, and then after two years, when the company had income and profits, the institution may be able to return some money. But if the company continues to develop and continue to raise funds, the new investors will definitely have an opinion on the dividend clause and demand that the clause be removed. Early-stage investors either give up the dividend clause or have to communicate with new investors at a high valuation point and sell their old shares. This is an extremely special situation, and the actual implementation complexity is very high, and it cannot be considered as a normal consideration for institutional investment.
Moreover, if the general enterprise really develops well, it has reached the stage where it can pay dividends, which also means that it has touched the growth ceiling, and the first thing enterprises need to do is to invest money in business development, why should they pay dividends?
Taking a step back, even if the company agrees to the dividend clause, it is impossible to come up with 100% of the profits, at most 30%, or distribute them to many investors, so what is distributed to the family is just a drop in the bucket, and the money can be repaid in five years? Of course, unless the fund is very small, but what is the point of institutional investment?
So, from a rigorous point of view, it's not that this kind of project doesn't necessarily exist, but it is a low-frequency existence, which is not suitable for institutional play. For an investment institution, assuming an investment period of 3~4 years, you will invest in good apples, or even very good apples, but you also face the possibility that the others are a lot of rotten apples, so you must ensure that the multiple of good apples is high enough to meet the returns of the entire fund.
Therefore, the five-year dividend return model is very unlikely for a single investment, and if it covers the entire fund, it is almost zero probability, which is impossible to achieve in practice.
When we talk about dividends, what are we talking about?
In the current market environment, the term "dividends" is a kind of psychological comfort for many people, entrepreneurs may want to get the investment and can repay the loan through dividends; investors want to find a suitable project and recover the principal through dividends; LP will feel that even if the fund does not exit, the investment principal can be distributed, right? But if you consider the practicality, these are not true.
Perhaps for some relatively small investment institutions that do not have enough ammunition, "dividends" are a lifesaver to relieve the anxiety of the moment, so that they can stay at the table first. That's true, everyone wants to stay at the table, but it's all about building enough capacity. For example, for institutions, the word of dividends may attract the attention of some LPs, but in the end, people still look at the institution's performance, capital investment, and team capabilities...... In the end, it will not be of substantial help to the financing of an institution.
In the end, whether you can make excellent performance must be directly linked to whether you invest in a good company, rather than dividends.
The fundamental thing to break the situation is to invest in a good company
Today's investment has moved from the era of mobile Internet and consumption to the era of investment with the same frequency of science and technology and policies. Investment strategies do need to change, and institutions should also ask themselves, whether they should continue to stick to angels, early stages, tolerate longer waiting, or iterate cognition in the middle and late stages, try to start, or wait and see, these are all decisions, corresponding to different choices and methodologies.
But one thing remains the same, and it's very important: if you want to make an institutional investment, you need to achieve a certain return multiple through a portfolio, and the only possibility is to invest in the right company, and then let the company grow quickly and get the value corresponding to the risk.
Therefore, the fundamental thing to break the situation is to invest in a good company, which is still the most critical of all the keys. For example, in recent years, Jingwei has focused on the layout of new energy, energy storage, advanced manufacturing, robotics, and medical fields along the path of ecological anchor investment.
In addition, giving full play to the advantages of brand funds and empowering these companies not only connects upstream and downstream resources, but also helps them improve their capabilities from the perspective of company management.
Another point, just like Jingwei is a multi-currency fund, there are not only RMB, but also US dollars, which is also a way for platform funds to resist cyclicality.
All in all, as long as your fund has been through several cycles, you will understand that in this situation, you should be more patient, focus on what you should do, and do it well.
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